If a company commits certain breaches of the Companies Acts, the courts can make its officers personally liable for the debts of the company. We look at the basic principles and some examples.
The imposition of personal liability on company officers
Limited liability is a privilege, not a right. The members of a company can obtain limited liability simply by agreeing to be bound by the constitution of a company that they form, or later become members of. However, like all privileges it can only be maintained subject to certain conditions.
Usually, the members of a company delegate the day-to-day management of the company to a board of directors. Accordingly, directors and other officers of the company are the focus of provisions enabling personal liability to be imposed.
Persons who are not nominally directors but in fact direct the affairs of the company may be shadow directors and liability can be imposed on them.
From the perspective of personal liability, some of the key obligations imposed on the directors of a limited liability company are:
- to ensure that the company is operated honestly;
- to maintain adequate accounting records;
- to formally approve certain transactions between the company and directors or persons connected with directors;
- not to trade recklessly or fraudulently, which includes an obligation to wind up the company if it becomes insolvent.
Obligation to ensure that the company is operated honestly
In Aluminium Fabricators Ltd[1], in imposing personal liability on directors, O’Hanlon J. held:
“The privilege of limitation of liability which is afforded by the Companies Act in relation to companies incorporated under the Act with limited liability, cannot be afforded to those who use a limited company as a cloak or shield beneath which they seek to operate a fraudulent system of carrying on business for their own personal enrichment and advantage.”
The obligation extends beyond acting honestly; personal liability can be imposed for failure to investigate and supervise how the business of a company is being conducted.
In Powers v Greymountain[2] David and Jonathan Cartu used Greymountain Management Limited, an Irish limited company, to process payments in perhaps the largest fraud ever before the Irish courts. Almost all of the victims of this fraud were outside Ireland.
The Cartu brothers were shadow directors of Greymountain and installed two Irish directors, one a professional director and the other a business student. The directors signed a power of attorney on behalf of the company in favour of David Cartu. The directors had little idea what the company was doing.
The court had no hesitation in imposing personal liability on the Cartu brothers, as shadow directors, for the debts of the company.
As regards the directors, the court held that while they did not appear to have been aware of the fraud,
“…the fact that a director is legally empowered to grant a power of attorney to a third party does not mean that it is appropriate for that to be done in a particular case. Furthermore, it is not a defence, where in addition to granting the power of attorney, both directors do not oversee, to any degree, the purpose for which the power of attorney was used... “
and imposed personal liability.
Obligation to maintain proper accounting records
In Mantruck Services Limited (In Liquidation)[3] the court decided to impose personal liability in respect of the director/shareholder's failure to keep proper accounting records as such a failure had resulted in substantial difficulty in ascertaining the company's assets and liabilities, and made the winding up of the company more difficult.
As regards the obligation to maintain proper books and records, a defence is available if a director had reason to believe that a reliable and competent person was charged with maintaining such books and records, was in a position to do so and was supervised by the director. Accordingly, it is important that the board expressly appoints such a person, having reviewed their qualifications, CV and references.
Obligation to formally approve certain transactions between the company and directors or persons connected with directors
In Boxer Logistic v Companies Act[4], the directors had caused significant amounts of money to be transferred into accounts in their own names, without explanation, and had misrepresented the company’s financial position to the tax authorities to benefit from COVID-19 employment subsidies.
The High Court made orders making them liable for the debts of the company in the sum of €12.4 million.
Obligation not to trade fraudulently or recklessly
In Murphy v Kelly & Ors[5], the court was satisfied that two directors acted fraudulently and recklessly with a view to defrauding their creditors in relation to the business of Kelly Trucks Limited and it imposed personal liability without limitation.
Comment
There are very few instances where the directors of a company are likely to face personal liability if they pay attention to the affairs of the company, run it honestly and responsibly and do not seek to syphon off funds for the benefit of themselves or connected parties.
That said, anyone taking on a directorship of an Irish company, or anyone in a parent company issuing instructions to the board of an Irish company, should familiarise themselves thoroughly with the duties of a director[6] and the potential risks that arise.
The content of this article is provided for information purposes only and does not constitute legal or other advice.
[3] [1997] 1 IR 340.
[4] Ex tempore, O’Regan J., 13 February 2023
[6] See for instance this guide published by the Corporate Enforcement Authority
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