Section 150 was introduced to combat the so-called 'phoenix syndrome', whereby it was possible for directors of insolvent companies to incorporate and act as directors of other companies without restriction or interference from the courts. The liquidator of every insolvent company is now obliged to bring a section 150 application against the directors as a matter of course. When an application is brought against a company director, the onus is placed on him to:

• establish that he has acted honestly in relation to the affairs of the company,
  
  
• establish that he has acted responsibly in relation to the affairs of the company, and
  
  
• satisfy the court that there is no other reason why he should be subject to restrictions.

If a restriction order is imposed upon a director, he cannot act as director or secretary of any other company for a period of five years, unless that other company has a paid-up share capital of at least €63,486.90. Given the very large number of section 150 cases that have been dealt with by the courts over the years, many judgments have been delivered by the courts. Unfortunately, these judgments are not always easy to reconcile with one another.

In determining the 'responsibility' of a director for the purposes of section 150, the High Court has generally looked at:

• the extent to which the director has complied with any obligation imposed on him by the Companies Acts,
  
  
• the extent to which his conduct could be regarded as so incompetent as to amount to irresponsibility,
  
  
• the extent of his responsibility for the insolvency of the company,
  
  
• the extent of his responsibility for the net deficiency in the assets of the company, and
  
  
• the extent to which he has displayed a lack of commercial probity or want of proper standard.

The courts have generally delivered judgments which recognise that the purpose of section 150 is to protect the public from directors who have, by their conduct, shown themselves to be a danger to creditors and others. However, the winds of change may be starting to blow, especially in so far as non-executive directors are concerned.

It is generally understood that the Companies Acts don't distinguish between executive and non-executive directors. It has also long been the case that the courts have been of the view that there should be no expectation or assumption that a wife or friend who becomes a non-executive director would not be subject to scrutiny by reference to section 150.

The High Court has, however, recently indicated a potentially far-reaching shift in the standards it will require of non-executive directors, in particular, when scrutinising their behaviour pursuant to section 150. This shift (if upheld by the Supreme Court) might also indicate that in future the scrutiny the courts apply in section 150 cases is much broader in focus than simply the protection of the public.

In the case in question (which arose as a result of the insolvent liquidation of Tralee Beef and Lamb Limited), the High Court signalled that in future it would scrutinise the behaviour of directors not only from the point of view of the factors mentioned above but also from the point of view of the common law fiduciary duties and duties of skill and care.

The High Court observed that:

1. directors had, both collectively and individually, a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company's business to enable them to properly discharge their duties as directors,
   
   
2. while directors were entitled to delegate particular functions to those below them on the management chain, and to trust their competence and integrity to a reasonable extent, delegation did not absolve a director from the duty to supervise the discharge of the delegated functions,
   
   
3. no rule of universal application can be formulated as to the duty referred to in 2 above. The extent of the duty and the question of whether it has been discharged depend on the facts of each particular case, including director's role in the management of the company.

If the Supreme Court affirms that this is the approach to section 150 applications in future it will reinforce the onus on non-executive directors, in particular, to be proactive and insist that they place themselves in a position where they can guide and monitor the management of the company.

For further information please contact Hugh Garvey or Jill Callanan.

Spring 2008.