JUDGMENT of Mr. Justice Fennelly delivered the 23rd day of July, 2009.
1. By orders of 30th March 1998 and 15th June 1998, the High Court appointed Mr Justice John Blayney and Mr Tom Grace, FCA, pursuant to section 8 of the Companies Act, 1990 to
investigate the affairs of National Irish Bank Limited ("the Bank") and a number of associated companies. The report of the Inspectors was published by order of the High Court dated 23rd July
2004.
2. Following the publication of the report, the Director of Corporate Enforcement ("the Director") made applications to the High Court for the disqualification of a number of persons who had
been involved in the management of the Bank. Some of these applications have been heard in the High Court. The case of the present appellant was one. Several judgments were delivered on the
day of the judgment the subject of the present appeal, which is the first to come to hearing in this Court.
3. It is vital that I emphasise, at the outset of this judgment, that it will concern only the matters which have been alleged against the appellant. There are two reasons for this. The inspectors
concluded that improper practices had been carried on by the management of the Bank under six different headings and made adverse findings against a number of persons whom they found to have
engaged in those practices. The Director applied for disqualification orders in the High Court in five other cases. The appellant is the subject of adverse findings in specified respects under two only
of those headings. This judgment is, therefore, limited in those respects and cannot be read as implying any view concerning different persons, practices or findings.
The proceedings
4. The Director, by a notice of motion dated 20th July 2005 sought an order from the High Court pursuant to section 160 (2) (b) and/or (d) and/or (e) of the Companies Act, 1990
disqualifying the appellant for such period as the court might deem appropriate from being appointed or acting as director or other officer, liquidator, receiver or examiner or being in any way,
whether directly or indirectly concerned or taking part in the promotion, formation or management of any company or any society registered under the Industrial and Provident Societies Acts
1893—1978. The application was grounded on the findings made in respect of the appellant in the Inspector's Report. Section 160(2)(e) permits the court to make the disqualification order where
it is satisfied that:
“in consequence of a report of inspectors appointed by the court or the Minister under the Companies Acts, the conduct of any person makes him unfit to be concerned in the management of a company…”
5. There was an exchange of affidavits and oral evidence, but the application is essentially founded upon the Inspector's Report to which detailed consideration needs to be given.
6. It is right to say, from the beginning, that the Director has consistently stated at all times that he does not allege that the appellant has been guilty of any dishonesty.
7. The application was heard by Murphy J, who delivered judgement on 26th May 2008. He found, pursuant to section 160 (2) (e) of the Act, that the appellant had displayed a lack of
commercial probity and was, for that reason, unfit to be concerned in the management of a company. In a separate judgment delivered on 31st July 2008, the learned judge determined that the
period of disqualification should be four years. It will be necessary, at a later point, to consider the judgment of the High Court in some detail. Before doing so, I will outline the findings relevant to
the appellant in the Inspector's Report and outline the legal principles.
The Inspector’s Report
8. The period covered by the report was from 1988 to 30 March 1998. The appellant did not join the Bank until April 1994. He left in 1998. The inspectors made a number of findings at a
general level before proceeding to assign individual responsibility.
9. They found that improper practices had been widespread in the bank under six general headings. Only two are relevant to the appellant:
· bogus non-resident accounts were opened and maintained in the branches, enabling customers to evade tax through concealment of funds from the Revenue Commissioners;
· Special Savings Accounts had DIRT deducted at the reduced rate, notwithstanding that the applicable statutory conditions were not observed.
10. The first heading arose from the tax known as DIRT (deposit interest retention tax) which required the bank to deduct and to return and pay to the Revenue Commissioners a fixed rate of
tax from the interest paid to holders of deposits in the Bank. Deposits of persons not resident in the State are exempt from DIRT. This all takes place under a strict legislative scheme. The key
provision is section 32 of the Finance Act, 1986, which provides:
“(1) Where a relevant deposit taker makes a payment of relevant interest it shall deduct out of the amount of the payment the appropriate tax in relation to the payment; and the person to whom such payment is made shall allow such deduction upon the receipt of the residue of the payment; and the relevant deposit taker shall be acquitted and discharged of so much money as is represented by the deduction as if that amount of money had actually been paid to the person.
(2) A relevant deposit taker shall treat every deposit made with it as a relevant deposit unless satisfied that it is not a relevant deposit; but where it has satisfied itself that a deposit is not a relevant deposit it shall be entitled to continue to so treat the deposit until such time as it is in possession of information which can reasonably be taken to indicate that the deposit is, or may be, a relevant deposit.”
11. The “deposit taker” is, of course, the Bank and “the appropriate tax” is deposit interest retention tax, known as DIRT. The second heading related to Special Savings Accounts, which
were subject to DIRT at a reduced rate, provided certain conditions were met. One of these was that thirty days notice had to be given of any withdrawal of funds from such an account.
12. The Inspector's Report uncovered a widespread practice in the branches of the Bank of false non-residence claims. These came to be known as “bogus non-resident” accounts. A large
number of deposits were treated as exempt, even though the holder was resident in the State. This unlawful practice was effected by means of false non-resident declarations.
13. The Inspector's Report made important findings at a general level regarding the engagement in improper practices in the Bank to the following effect:
1. Bogus non-resident deposit accounts were opened and maintained by the Bank and were widespread in the branch network during the period, the subject of the investigation.
2. The opening and maintenance of such accounts by the Bank constituted an unlawful and improper practice which served to encourage the evasion of Revenue obligations by third parties
both on the funds deposited and on the interest earned.
3. At branch level the Bank failed to deduct DIRT from bogus non-resident accounts and from non-resident accounts where a properly completed declaration in a form prescribed or
authorised by the Revenue Commissioners was not held by the branch.
4. Although senior management was aware of the existence of bogus non-resident accounts, the Bank failed to account to the Revenue Commissioners for the DIRT properly payable on the
interest paid or credited on such accounts.
5. The Bank failed to account to the Revenue Commissioners for DIRT payable on the interest paid or credited on non-resident accounts where the Bank did not hold a properly completed
declaration in a form prescribed or authorised by the Revenue Commissioners.
6. The Bank failed to deduct DIRT at the standard rate from interest paid or credited on accounts designated as Special Savings Accounts where the branch did not hold a properly completed
declaration in a form prescribed or authorised by the Revenue Commissioners or where there had been a breach of the statutory requirements relating to withdrawals.
7. Other senior management was aware of the breaches of the relevant statutory requirements. The Bank took no steps to calculate and remit to the Revenue Commissioners arrears of DIRT
due, being the difference between tax at the standard rate, which ought to have been deducted, and tax at the reduced rate actually applied.
14. The management structure of the Bank, as described in the Report, may be summarised as follows. There was a chief executive later called the Executive Director to whom the General
Manager in charge of banking reported. The latter was responsible, inter-alia, for the retail branch network. The branch managers reported to regional managers, later called area managers, who
reported, in turn, to the General Manager—Banking. The report does not suggest, nor has the Director contended, that the appellant had any executive or managerial responsibility in respect of the
branches.
15. The Inspectors’ description of the management structure also describes the Financial Advice and Services Division but does not mention either the appellant, or his predecessor, or their
titles.
16. Prior to the appellant’s appointment, Mr Gerry Hunt had been Chief Accountant from 1988. His title was changed successively to Head of Financial Control, Head of Finance and head of
Finance and Strategy until he ceased to hold that position in 31st December 1993. The appellant commenced employment at the Bank on 11th April 1994, initially as Head of Finance. Shortly
afterwards his title changed to Head of Finance and Planning. Initially, he reported directly to the Executive Director, Mr Seymour and, from July 1996 to Mr Philip Halpin, the Chief Operating
Officer.
17. One of the duties of the appellant, as Head of Finance, was that of ensuring that the bank made returns of DIRT to the Revenue Commissioners within the prescribed time limits.
18. During the period from 1988 to 1997, 202 internal audits of branches were conducted. The Inspectors found that these reports were consistently critical of the standard of compliance within
the Bank with legislative provisions regarding DIRT. The Inspector's Report gives detailed consideration to a number of these reports. It is neither necessary nor appropriate to discuss them here for
the simple reason that, as found by the inspectors, neither the appellant nor his predecessor Mr Hunt were on the circulation list for those reports. The inspectors therefore concluded that "neither
was aware through this medium of the extent of the deficiencies or "irregularities" in the declarations held by branches in support of claims for DIRT-exempt non-resident status."
19. In December 1994, Mr Paul Harte, Head of Audit, selected the area of DIRT compliance for its first Theme Audit for the stated reason that DIRT compliance issues continued to be
reported in branch and other audits on a regular basis. The appellant was on the circulation list for the draft of this report and received the final report dated 24 January 1995. It was the fact that he
was aware of the contents of the DIRT Theme Audit Report that led the Inspectors to make virtually all of the criticisms of the appellant which became the subject matter of the Director’s
application for his disqualification and, ultimately, of this appeal.
20. As noted by the Inspectors, the DIRT Theme Audit Report disclosed extensive irregularities at branch level in respect of the declarations which were essential if a deposit-account holder
was to be entitled to claim exemption from DIRT. Some 40% of declarations selected contained some errors or omissions and, the report stated:
“1. Non-resident declaration forms were not sighted for 12% of accounts.
2. 21% of the declarations had an incorrect account number.
3. 13% of the declarations were not dated.”
21. Corresponding deficiencies were noted in the area of Special Savings Accounts. For example, 91% of withdrawals breached the notice requirements for these accounts. The conclusion set
out in the management summary of the DIRT Theme Audit Report was:
“The results of this audit are very disappointing and management must take immediate steps to improve the situation. The structure of the whole area can be improved but the level of non-compliance is too high. It appears that there needs to be an organisation-wide change in attitude to the whole area. This is a risk area and the penalties for non-compliance at the level shown in this report would be very significant.”
22. The DIRT Theme Audit report did not allege or even suggest that the underlying problem was one of tax evasion by deposit holders. It made no reference to bogus non-resident accounts.
Its emphasis was entirely on the unsatisfactory state of the Bank’s records.
23. The appellant was heavily involved in the work to follow up the report. He was one of ten people in senior management who attended a meeting on 9th February 1995 attended, amongst
others, by the Executive Director, the General Manager—Administration and the General Manager—Banking. At that meeting, the appellant was assigned responsibility for the preparation of a new
circular to be circulated to the branches. Nobody at the meeting raised any question of potential retrospective tax liability to the Revenue.
24. Part 8 of the Inspector's Report is entitled: “IMPROPER PRACTICES: KNOWLEDGE AND RESPONSIBILITY.” This is where the Inspectors made findings regarding the
responsibility of individuals including the appellant. The findings regarding the appellant fall into three parts, namely:
· Failing to raise an issue of potential retrospective liability for DIRT following the circulation of the DIRT Theme Audit Report or at the time of the meeting of 9 February 1995;
· producing a circular for the branches which was defective in that it failed to draw attention specifically to the statutory provision regarding DIRT, section 32 of the Finance Act, 1986
(quoted above), and to alert the branches expressly that staff at the branches had to satisfy themselves that account holders claiming exemption from DIRT were in fact non-resident and that this
requirement applied to all accounts and not merely to new accounts;
· that he was aware, following the DIRT Theme Audit Report, of the extent of non-compliance in the operation of DIRT-exempt non-resident accounts and ought to have known the
consequences of such non-compliance for the accuracy of the returns of DIRT being made by him, or persons under his control, to the Revenue Commissioners.
25. The Inspectors addressed the first of these issues, retrospective liability, as follows:
“ The corrective action proposed by Internal Audit and accepted by management did not include any proposals to deal with the issue of the Bank’s liability for such arrears of DIRT as might be due in the circumstances. Because of this, the Audit Committee ought not to have accepted the corrective action proposed as being adequate, but should have sought further information as to how management intended to deal with the issue of potential retrospective liability for DIRT.”
26. The inspectors criticised the Audit Committee, the External Auditors and the two General Managers who attended the meeting of 9th February 1995 for this omission. They said that, if the
external auditors had "requested that the potentially material liability he quantified, this would have emphasised its importance to senior management and it is unlikely that they could
have ignored it, as they did.”
27. One heading of the Inspector's Report is: “EVASION OF REVENUE OBLIGATIONS: INCORRECTLY CLASSIFIED NON-RESIDENT ACCOUNTS. Bogus Non-Resident
Accounts.” Under that heading, the Inspectors criticised a number of senior managers expressly for their failure to be aware of the widespread existence of bogus non-resident accounts in the
branch network. No criticism on that ground is made in respect of the appellant.
28. They made the following finding in respect of the appellant under this heading:
“Mr Byrne, as Head of Finance at the time of the DIRT Theme Audit, had a responsibility to raise the issue of potential retrospective liability for DIRT due in respect of interest on accounts wrongly classified as DIRT-exempt, and failed to do so.”
29. The criticism of the appellant in the Inspector's Report regarding the deficiencies in the circular prepared as a result of the meeting on 9th February 1995 was as follows:
“At the meeting on 9th February 1995, Finance & Planning Department was charged with responsibility for drafting revised instructions to staff in relation to the operation of DIRT. These instructions were issued on 8th March 1995 as Special Circular no. S 11/95.
This Circular introduced documentary requirements in relation to the opening of new non-resident accounts, but did not address the position in regard to accounts which had been opened previously, apart from indicating that a valid declaration must be made “which has been signed, dated and in all respects fully completed by the customer”, nor did it inform the branches of the provisions of Section 32 (2) of the Finance Act, 1986.”
30. In addition to these criticisms, counsel on behalf of the Director submitted that the appellant was criticised in the report for being responsible for making false or inaccurate returns to the
Revenue in respect of DIRT. This is based, in particular, on a combined reading of two paragraphs of the report, the first of which is follows:
“The Head of Finance had responsibility for ensuring that the bank made returns of DIRT to the Revenue Commissioners within prescribed limits. The accuracy of these returns was critically dependent on the proper categorisation of deposit accounts at branch level between those exempt from DIRT, and those liable to DIRT at the standard rate of tax, and those liable at a reduced rate.”
31. However, a separate significant paragraph on the same page of the report says of the two General Managers that it was their responsibility "to ensure that accounts classified as
DIRT-exempt non--resident accounts were correctly classified as such and to see that Regional Managers secured full compliance with the statutory provisions relating to DIRT. They
failed to discharge this responsibility.” This finding of actual responsibility for the correct classification of the accounts did not apply to the appellant.
32. The other paragraph of the report invoked by counsel for the Director recalled that the appellant had been on the circulation list for the DIRT Theme Audit report, that he had attended the
meeting of 9th February 1995 and that "he was thus aware of the extent of non-compliance in the operation of DIRT-exempt non-resident accounts and ought to have known the
consequences of such non-compliance for the accuracy of the returns of DIRT being made by him, or persons under his control, to the Revenue Commissioners.”
33. The appellant had failed, in the view of the Inspectors, to appreciate that the returns of DIRT made by him or under his responsibility might be inaccurate. Again, it is important to note that
no dishonesty is alleged in the report or by the Director in these proceedings.
The High Court judgment considered
34. The learned High Court judge considered the Inspector's Report, the affidavits sworn on behalf of the Director and by the appellant as well as the oral evidence of the latter. He noted the
Director’s contention that the findings against the appellant were restricted to two areas, namely non-resident accounts and special savings accounts. The learned judge summarised the findings in
respect of these areas under three headings which I have already mentioned insofar as they are contained in the Inspector's Report.
35. Most significantly, the learned judge conducted a careful assessment of the extent to which the appellant was responsible for the accuracy of the DIRT tax returns made to the Revenue
Commissioners by him are under his responsibility. It is convenient here to interpose reference to a part of the evidence upon which counsel for the appellant placed particular reliance at the hearing
of the appeal. The inspectors communicated provisional findings to the appellant which included the following two paragraphs:
"The Head of Finance had responsibility for ensuring that the Bank made accurate returns of DIRT to the Revenue Commissioners within prescribed time limits. The accuracy of these returns was critically dependent on the proper categorisation of deposit accounts at branch level between those exempt from DIRT at the standard rate of tax, and those liable at a reduced rate. [emphasis added]
As Head of Finance, you had a responsibility to take reasonable care to ensure that all returns of DIRT made to the Revenue Commissioners correctly recorded the Banks liability for the DIRT payable on all interest paid or credited on relevant deposits. In the light of the internal audit reports of deficiencies and "irregularities" in the non--resident declaration is held by branches, it is evident that the returns could not have been correct.”
36. The appellant made detailed written representations to the Inspectors which led them to make alterations in their final report. Counsel for the appellant attached particular importance to the
fact that the second of these paragraphs did not appear at all in the final Inspector's Report and that the word "accurate" was deleted from the first.
37. The learned judge reviewed in considerable detail the extent of the appellant's responsibility in respect of DIRT tax returns. He examined, in particular, exchanges of correspondence by
e-mail and otherwise between the inspectors and Mr Richard Bowden who, according to the appellant, was responsible for taxation and based at the Bank’s headquarters in London.
38. In July 2002, the inspectors addressed an e-mail to Mr Bowden in which they asked his view as to who, during the period 1988 to 1998, had responsibility to ensure that DIRT returns
correctly recorded the Bank’s liability for this tax. Mr Bowden explained that, whilst the Finance Department would have had input into and reviewed the branch procedures, it had no line
management responsibility for branch banking. He said: "In an ideal word those managers would report to the Regional Managers, who in turn would report to the General Manager, Banking that
the procedures had been complied with.”
39. The inspectors at one point suggested in correspondence with the appellant's solicitors that there was an inconsistency between Mr Bowden's statements and those of the appellant. They
said that appellant claimed that he had no responsibility for the accuracy of the returns of DIRT, while Mr Bowden was not so clear on this point. Mr Bowden's reply of 9th January 1993 denied
any such inconsistency. It is quoted in full in the judgment of the High Court. It is as follows:
"I thought I had made it quite clear that the Head of Finance, NIB, be it Patrick Byrne or whoever from time to time, was and could only be held, responsible for the correct completion of the DIRT return and paying over the correct amount of DIRT withheld as recorded in the Bank’s records.
The branches’ operating procedures, to my recollection, were set in regard to DIRT that, if the branch applied the correct systems code, would result in DIRT being withheld in appropriate cases and would be correctly recorded in the Bank’s records.
The line management responsibility for ensuring branch staff implemented Bank procedures ……………… rested with the Branch manager and the Branch manager’s line manager to whom he reported. Neither the Finance nor Tax functions had management responsibility for branch banking. Finance/Tax having ensured that the DIRT procedure were adequate to enable the Bank to fulfil its legal obligations in that regard, it was the responsibility of branch managers to implement those procedures.
In short, ………………… I believe Patrick Byrne and myself are in agreement as to his responsibilities ……………… I can see no inconsistency between what I wrote in response to the Inspectors’ letter ……… and what you report as Patrick Byrne’s contention.”
40. The important issue here was, of course, the extent of the appellant's responsibility for the accuracy of the tax returns. The learned trial judge, however, observed that Mr Bowden had not
stated that he had taken over the Bank’s tax function from the appellant and that the written replies of Mr Bowden to the inspectors was not consistent with that view. This is not, in fact, the relevant
issue. The Inspectors’ question to Mr Bowden was expressed in general terms and was not related to the appellant.
41. The judgment concludes on this point as follows:
"What was clear from the correspondence above was that Mr Byrne’s Finance Department and Mr Bowden had an input into and power to review the branch procedures; neither had line management responsibility for branch banking. It does not follow that neither had any responsibility. The responsibility of the Finance management is to control, verify and report. The responsibility of the Head of Finance is to ensure that control is effective, verification is accurate and reporting is timely. The making of accurate tax returns is an integral part of financial reporting.”
42. The last four sentences appear to be an expression of the learned judge’s own views. They are not views expressed by the Inspectors. I have already summarised what the Inspectors said.
43. The judgment then dealt with the DIRT Theme Audit Report, noting that it had made no reference to tax evasion. The learned judge observed that the report should have been of critical
concern to the appellant since it involved the assessment of withholding tax by a bank. He said that the appellant could no longer assume that the returns made by the branch managers were accurate and that:
"Returns made, especially after that meeting [9th February 1995] without verification from the General Managers as to their accuracy, could not have merited the declarations made.”
44. Each of the six-monthly returns of DIRT made by the Finance Department contained the following declaration:
“I declare, to the best of my knowledge and belief, that the correct method of calculation has been applied and that the payment on account is correct and complete."
45. In general terms, the learned judge expressed a number of criticisms of the appellant in line with the Inspector's Report.
46. The learned judge then posed to himself the following questions:
"Did this failure amount to a lack of commercial probity? Does it go far enough that it should be categorised as being grossly irresponsible or being a danger to the public? Or is such failure ordinary commercial misjudgement?"
47. At the same time, the learned judge commented that the appellant's "conduct would appear to be a departure from the ordinary standard of conduct of a professionally qualified
Head of Finance.” He proceeded:
"It is this departure from ordinary standards of conduct, rather than any misfeasance or specific breach of duty to the company, which underlies s. 160(2)(d) and(e) of the Act of 1990 and which renders a person unfit to act as director or other officer of the company."
48. Following reference to authority, the learned judge reached the following conclusion:
"The court finds no evidence of gross negligence or total incompetence, nor a danger to the public.”
49. At a later point, the learned judge said that the question “to be determined by the court here is whether the conduct complained of displays a lack of commercial probity…” He
reviewed a number of French and Latin dictionary definitions of probity. They appear to equate it with, inter alia, honesty. He did not refer to any English dictionary.
50. The Oxford English dictionary (2nd Ed., Vol XII) defines probity as: “moral excellence, integrity, rectitude, uprightness; conscientiousness, honesty, sincerity.”
51. At the end of the judgment, the learned judge concluded that the appellant "in the circumstances, displayed a lack of commercial probity.” he said that he was mindful of making an
order under section 160(2)(e) of the Act. He made no order under any other provision.
The appeal
52. The parties have submitted extremely extensive oral and written submissions to the court.
53. On one issue, there was common ground. The Director insisted that he had never imputed dishonesty to the appellant and did not claim that the Inspector's Report did so. In these
circumstances, it was difficult to stand over the finding of a lack of commercial probity. Counsel for the Director argued for a broad interpretation of the judgment of the High Court. Counsel for the
appellant, on the other hand, contested the finding of a lack of commercial probity and also said that, once the learned judge had concluded that there was no evidence of gross negligence or of total
incompetence and that there was no evidence that the appellant was a danger to the public, the application for a disqualification should necessarily have been dismissed.
54. The parties were in agreement that the inspectors had criticised the appellant in two respects, namely:
· failure to raise the issue of retrospective liability to tax;
· responsibility for deficiencies in the new circular two branches.
55. Counsel for the Director, on the other hand, maintained that the Inspector's Report had also held the appellant responsible for the accuracy of the returns of DIRT which were made under
his responsibility from and after the circulation of the DIRT Theme Audit Report. This in turn led to a debate about the extent of the appellant's responsibility for these returns.
The power to disqualify
56. Section 160(1) of the Companies Act, 1990 deals with the case of a person who is convicted on indictment of any indictable offence in relation to a company, or involving fraud or dishonesty.
57. Although only one paragraph, paragraph (e), of Section 160(2) is directly relevant to the issues on the appeal, it helps to set it out in full. The following is the text as amended by section 41 of the Company Law Enforcement Act, 2001:
2) Where the court is satisfied in any proceedings or as a result of an application under this section that—
( a ) a person has been guilty, while a promoter, officer, auditor, receiver, liquidator or examiner of a company, of any fraud in relation to the company, its members or creditors; or
( b ) a person has been guilty, while a promoter, officer, auditor, receiver, liquidator or examiner of a company, of any breach of his duty as such promoter, officer, auditor, receiver, liquidator or examiner; or
( c ) a declaration has been granted under section 297A of the Principal Act (inserted by section 138 of this Act) in respect of a person; or
( d ) the conduct of any person as promoter, officer, auditor, receiver, liquidator or examiner of a company, makes him unfit to be concerned in the management of a company; or
( e ) in consequence of a report of inspectors appointed by the court or the Minister under the Companies Acts, the conduct of any person makes him unfit to be concerned in the management of a company; or
( f ) a person has been persistently in default in relation to the relevant requirements; or
(g) a person has been guilty of 2 or more offences under section 202(10); or
(h) a person was a director of a company at the time of the sending, after the commencement of section 42 of the Company Law Enforcement Act, 2001, of a letter under subsection (1) of section 12 of the Companies (Amendment) Act, 1982 , to the company and the name of which, following the taking of the other steps under that section consequent on the sending of that letter, was struck off the register under subsection (3) of that section; or
(i) a 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 the court is satisfied that, if the conduct of the person or the circumstances otherwise affecting him that gave rise to the said order being made against him had occurred or arisen in the State, it would have been proper to make a disqualification order otherwise under this subsection against him;”
the court may, of its own motion, or as a result of the application, make a disqualification order against such a person for such period as it sees fit.
58. In the present case, the Director claims that the Court should, in consequence of the Inspector's Report be satisfied that the appellant is, pursuant to section 160(2)(e), “unfit to be
concerned in the management of a company.” Counsel for the Director correctly submitted that, although this provision (“paragraph (e)”) or its English equivalent has been the subject of
interpretation for a number of years, the Court must ultimately apply the section itself. This submission is well founded. It needs to be borne in mind when interpreting the authorities.
59. The use of the term “unfit” requires some consideration. Paragraph (e) does not refer to any act or even series of acts by the person, but rather to the quality of the person. Paragraph (e)
thus contrasts with paragraphs (a) and (b) which refer respectively to some act of fraud or breach of duty of which the person has been guilty. Paragraph (f), as amended by section 42 of the
Company Law Enforcement Act, 2001, refers to persistent failure in compliance requirements.
60. Under paragraph (e) the court must be satisfied that the person is in a state or condition such that he can properly described as “unfit” to be involved in the management of a company. The
question is one of suitability or capacity.
61. The following propositions do not appear to be disputed and are well grounded in the case-law:
1. The court has no power to make a disqualification order unless it is satisfied that at least one of the paragraphs of section 160(2) applies. (Re Readymix Limited (in liquidation); Cahill v
Grimes (“Readymix”) [2002] 1 IR 372, per Murphy J at page 381; In re Wood Products (Longford) Limited; Director of Corporate Enforcement v McGowan [2008] IESC 28, per
Fennelly J);
2. The Director bears the burden of establishing the ground for the making of the order, in this case that the person is “unfit.” (per Murphy J, ibid.)
3. The primary purpose of a disqualification is not punitive, but protective, though there is usually a deterrent element. (per Murphy J, ibid.; per Fennelly J, ibid.).
62. The debate, in the present case, has centred on the meaning of “unfit.” The following passage from the judgment Browne-Wilkinson VC in Re Lo-Line Motors Limited (1988) BCLC 698
has been cited with approval in a number of cases:
“'What is the proper approach to deciding whether someone is unfit to be a director? The approach adopted in all the cases to which I have been referred is broadly the same. The primary purpose of the section is not to punish the individual but to protect the public against the future conduct of companies by persons whose past records as directors of insolvent companies have shown them to be a danger to creditors and others. Therefore, the power is not fundamentally penal. Ordinary commercial misjudgment is in itself not sufficient to justify disqualification. In the normal case, the conduct complained of must display a lack of commercial probity, although I have no doubt that in an extreme case of gross negligence or total incompetence disqualification could be appropriate.”
63. Murphy J, in his judgment in Readymix, with which Murray J (as he then was) and McGuinness J agreed described that as a correct statement of the law and as representing a proper
approach to the application and interpretation of section 160. He cited several cases where it had already been followed. It has been treated as a useful point of reference in several later cases. It is
obvious, however, that Browne-Wilkinson VC was not propounding an exhaustive definition. His use of expressions such as, “in a normal case,” and “primary purpose,” show that. No doubt,
unfitness could encompass physical or mental incapacity, though not mentioned. So also might irresponsible behaviour, total neglect or a high degree of carelessness. All would depend on the
circumstances.
64. Dillon L.J., in his judgment in Re Sevenoaks Stationers Ltd. [1991] Ch. 164 at 176 deplored the tendency to treat these statements as “judicial paraphrases of the words of the statute,
which fall to be construed as a matter of law in lieu of the words of the statute.” He went on to state the “the true question to be tried is a question of fact.”
65. Nonetheless, having administered those cautions, it is clear that the words of Browne-Wilkinson VC provide some useful pointers to how the court should assess “unfitness.” The drastic
nature of the remedy necessarily implies that the Director should meet a high standard of proof. It is natural to begin by asking whether the person is shown to be dishonest. In that event, it will be
very difficult to show that he should be trusted with the management of a company.
66. Counsel for the Director placed particular reliance on some passages from the judgment of Jonathan Parker J in Re Barings plc and others; Secretary of State for Trade and Industry v
Baker (1999) BCLC 433 ate 483, which were as follows:
“Unfitness may be shown by conduct which is dishonest (including conduct showing a want of probity or integrity) or by conduct which is merely incompetent. In every case the function of the court in addressing the question of unfitness is ‘to decide whether [the conduct………], viewed cumulatively and taking into account any extenuation circumstances, has fallen below the standards of probity and competence appropriate for persons fit to be directors of companies’”
67. Jonathan Parker J went on to say that, where the case is based solely on allegations of incompetence the burden on the Secretary of State is “to satisfy the court that the conduct
complained of demonstrates incompetence of a high degree.” He referred to the various expressions which had been used in the cases, including “total incompetence” as in the judgment of
Browne-Wilkinson VC, before reiterating that the burden in a case based on incompetence is a “heavy one.”
68. I agree that it is correct to examine the question of the fitness of the person by looking at his behaviour and record as a whole (Jonathan Parker J used the word “cumulatively.”) The
question of unfitness must be assessed generally and rigid categories should be avoided. There are degrees of honesty, probity and integrity. In Re Newcastle Timber Limited [2001] 4 IR 586 at
592, McCracken J considered that directors had acted incompetently, adding: “particularly in relation to insolvent trading and preference of trade creditors, I think they behaved
irresponsibly.” Nonetheless, he was not satisfied that they had been shown to be unfit. I do not say that I would necessarily have reached the same conclusion on the facts of that case. I mention it
as an example of an assessment of all the relevant behaviour taken as a whole.
69. One other procedural detail is important. Section 160(7) of the Act obliges the Director to give at least ten days notice to the person of his intention to apply for a disqualification order. This
provides him with an opportunity to respond, as he did in the present case. This provision illustrates the general principle that any person who is to be the subject of an application under the section
must be given clear notice of that fact and of the grounds on which the application is to be made. I emphasise the matter here because it has a bearing on the finding of want of commercial probity
made by the learned trial judge in the present case. The Director, by his notice, stated that he intended to make the application pursuant to paragraphs (b), (d) and (e) of Section 160(2), but also
stated that the application was to be brought having regard to the Inspector's Report. In fact, both the draft notice of motion sent with the Director’s prior notice and the notice of motion actually
sent were based exclusively on the contents of the Inspector's Report.
Conclusion
70. The first matter to be considered is the scope of the present appeal, having regard to the form of application brought by the Director, the Inspector's Report and the High Court judgment.
Although the notice of motion was brought pursuant to paragraphs (b), (d) and (e) of section 160(2), the High Court determined the matter exclusively pursuant to paragraph (e). The court may also
determine that a person is “unfit” to be involved in the management of a company pursuant to paragraph (b) if he commits a breach of duty as an “officer” of a company or pursuant to (d) for his
“conduct” as such an officer. However, the present application was based entirely on the Inspector's Report and it was appropriate that any finding be made by reference to the report. It is true that,
in response to the appellant’s replying affidavit, the Director introduced further evidence which had not necessarily been contained in the Inspector's Report. That did not alter the basic fact that the
entire justification for the Director’s application was to be found in the Report.
71. I have already summarised the elements of the Inspectors’ findings so far as the appellant was concerned. They fell under three headings:
· Failure, following the DIRT Theme Audit Report, to raise the issue of potential retrospective liability:
· Deficiencies in the S11/95 Circular devised by the appellant for circulation to the branches;
· That the appellant ought to have known, following the disclosure by the DIRT Theme Audit Report of the inaccuracies in the branches’ records, of the consequences for the accuracy of the returns of DIRT being made by him, or persons under his control, to the Revenue Commissioners.
72. It is important to emphasise, in the first instance, that the Inspector's Report should be accepted at its face value. To the extent that the Inspectors criticised the appellant, those criticisms
should be accepted, unless they are clearly shown to be incorrect. Counsel for the appellant accepted, when this matter was raised at the hearing of the appeal, that he was not seeking to go behind
the Report or to contest its findings. On that basis, I will comment briefly on each of the three headings.
73. The appellant failed to raise the issue of potential retrospective liability following the circulation of the DIRT Theme Audit Report, especially at the important management meeting of 9th
February 1995. As Head of Finance and as a qualified accountant, he should have realised that there was such a danger if the records at the branches were as poor as was disclosed by the Report.
It is fair to place in the balance the fact, recorded in his favour by the Inspectors, that the appellant, unlike other people in management had not received the earlier internal audit reports on branches.
Perhaps more importantly, the appellant was not alone in this failure. Nobody in the most senior management seems to have adverted to this danger. Nor did the Audit department or, more notably,
the external auditors, a most eminent firm.
74. The Director has at all times treated the deficiencies in the new circular S11/95 as being in a “minor area.” The deficiencies were the failure to draw attention of the branches to ensure that all
accounts, not merely newly opened ones should be accompanied by properly completed and genuine non-resident declarations and failure to send to the branches a copy of section 32 of the
Finance Act, 1986. Counsel for the appellant has taken the Court through the circular and drawn attention, in particular, to a laminated sheet devised by the appellant to be used by branch staff and
which was certainly more explicit than the circular. The terms of the circular were certainly open to some criticism, but, in the end, it is true that this was a comparatively minor element.
75. Counsel for the Director placed most emphasis at the hearing on the responsibility of the appellant, as Head of Finance, to make accurate tax returns and the implications of the knowledge
of non-compliance with DIRT requirements in the branches acquired through the DIRT Theme Audit Report. The Inspectors did not, however, attribute to the appellant any actual knowledge that
false recording of non-resident accounts was taking place (as it undoubtedly was) in the branches. In this context, it is telling that the Inspectors amended their provisional findings in the ways
described above. It is also noteworthy that the General Manager—Banking, but not the appellant, was found to be responsible for the accuracy of the branch records. It seems likely that it was this
aspect of the Inspector's Report that led the learned trial judge to make the disqualification order. It is undoubtedly a potentially serious matter. It is important, therefore, that the Inspectors, by
making the amendments which they did and by not alleging that the appellant knowingly made false tax returns did not allege any dishonesty against the appellant.
76. It is then necessary to consider the conclusions of the learned trial judge in respect of the appellant as summarised above. They fall into three parts. As counsel for the Director accepted in
argument, the judgment presents some difficulties of interpretation.
77. Undoubtedly, the most important finding is that the appellant "in the circumstances, displayed a lack of commercial probity.” The sentence of the judgment which follows that finding is:
“Accordingly, the Court is mindful of making an order under s. 160(2)(e)………………” Although the judgment contains no explicit finding of unfitness, it is plain that the finding of a lack of
“commercial probity” led to the making of the disqualification order.
78. I am satisfied that this finding cannot be permitted to stand. The Director has at all times insisted that he does not and did not allege any dishonesty against the appellant. It is true that there is
a reference to “commercial probity” in the grounding affidavit of Mr Dick O’Rafferty, but no such allegation was made in the prior statutory notice addressed to the appellant. If it were the case that
the Director was making a distinction between “dishonesty” and “want of probity,” he would no doubt, as a matter of fairness, have informed the appellant. The Director has, from before the High
Court hearing, disavowed any intention to ascribe dishonesty to the appellant and has not sought to make any such distinction. In these circumstances, it cannot have been right to make a finding of
lack of commercial probity.
79. The learned judge also found “no evidence of gross negligence or total incompetence, nor a danger to the public.” It might have been thought that a determination by the court that
there was no evidence that the appellant presented a “danger to the public” would, on its own, have concluded the matter in favour of the appellant. At the least, it makes it difficult to understand
how the learned judge decided to consider making a disqualification order without adverting to this problem.
80. The learned judge also found that the behaviour of the appellant “would appear to be a departure from the ordinary standard of conduct of a professionally qualified Head of
Finance” before concluding that it was “this departure from ordinary standards of conduct, rather than any misfeasance or specific breach of duty to the company, which underlies s.
160(2)(d) and(e) of the Act of 1990 and which renders a person unfit to act as director or other officer of the company.” Counsel for the Director has sought to link this finding with the
judgment of Jonathan Parker J in Barings, quoted above. But the reference in that judgment to falling below standards cannot be read in isolation from his further remarks postulating a
demonstration of incompetence “to a high degree.” If the learned trial judge intended to convey that unfitness could be found merely on the basis of a departure from the ordinary standards of
conduct of a person in the position of the appellant, he would have been in serious error. It is not clear that he intended that meaning. His finding that there was “no evidence of gross negligence or
total incompetence” shows that he was applying the correct standard and finding that it had not been met.
81. I think his implicit finding of unfitness flowed from his finding of a lack of commercial probity. Since I do not believe that finding can be allowed to stand, I would allow the appeal and dismiss
the application of the Director.
82. The Director has cross-appealed against the failure of the learned trial judge to make findings under paragraphs (b) and (d). At the same time, he accepted that he was not relying on any
different evidence from that relied on in support of the application under paragraph (e). I believe that the matter has been fully dealt with on its merits under paragraph (e). I would dismiss the
cross-appeal.
