Breaking the corporate veil – landmark rulings are a stark warning to directors and “shadow” directors about liability

Two landmark cases recently decided by the High Court have brought into focus the personal risks involved in being a company director.

They address the difficulty of fulfilling a director’s overall duty to act in the best interests of the company while respecting the wishes and interests of a shareholder who appointed him.

One such case was the first time in Irish company law that limited liability protections were overridden to make directors personally liable for the liabilities of a company which was found to be an accessory to fraud.

Mr Justice Twomey lifted the limited liability protections to hold the directors personally liable

The cases should give much pause for thought to anyone who is or is considering a corporate executive role (especially in a non-executive capacity). It also highlights that anyone accepting such a role should conduct their due diligence prior to accepting the appointment.

From today’s perspective, it can be quite difficult for companies to attract good and experienced non-executive directors and these recent decisions will make this task even more difficult.

To summarize the legal position, directors are subject to a number of important statutory duties set out in the Companies Act 2014.

The 2014 Act codified into law the myriad duties previously laid down in common law or jurisprudence.

The most basic of these is acting in good faith, which the director believes is in the interests of the company.

Irish company law does not really distinguish between an executive director and a non-executive director

The Companies Act also provides that a director may have regard to the interests of a particular shareholder of the company where the director has been appointed or nominated by that shareholder pursuant to a shareholders’ agreement or the articles of association of the company, but always without prejudice to the general duty of good faith to act in what the director believes to be in the interests of the company.

It is also important to note that Irish company law does not really distinguish between an executive director and a non-executive director.

While an executive director has additional responsibilities through their employment arrangements, the duties and responsibilities in company law are just as onerous for a non-executive director as they are for an executive director.

One of the directors was a student who had nothing to do with the business at all

In the first case, Powers v Greymountain Management Limited (in liquidation), Mr Justice Twomey lifted the limited liability protections and held two directors (along with two other persons who were deemed ‘shadow directors’) personally liable for the claims of members of the Public who lost money in a system they thought they were binary options trading .

As it turned out, the Irish company involved had been misused as a vehicle in a payment chain that led to a loss of many millions of euros.

Since the company was in liquidation, the plaintiff in this case, who was among the members of the public who had lost their money, applied to the court for the registered directors (i.e. shadow directors who are personally liable for the lost funds.

One of the directors was a student who had nothing to do with the business at all.]

In the Greymountain case, the judge ruled that the sole purpose of the company was to be an instrument of fraud and that the fraud would not have taken place had Irish registered directors taken a more active role in finding out what the company was did .

Although the Irish directors themselves were not aware of the fraud and were unknowingly involved, the fact that they exercised no board-level oversight or oversight led to the court ruling that the circumstances warranted the “lifting of the corporate veil” and that they be held personally liable for the damage caused.

Although the Irish directors themselves were unaware of the fraud, they were held personally liable

In the second case, Pat Keating v Shannon Foynes Port Company, Mr Keating was the CEO of Shannon Foynes Port Company and sought a High Court order that he be entitled to certain performance-related payments.

The company argued that this would be in breach of a stated policy by the Minister for Tourism, Transport and Sport that such payments should not be made to government bodies.

It has been argued that the minister had demanded at a meeting that “bonuses” should not be paid to the CEO and that this would therefore result in a breach of the Harbors Act 1996, which regulated the company. This legislation stipulated that the board of directors must consider government guidelines when deciding on the compensation to be paid to the CEO.

Mr Justice Sanfey ruled that directors have a duty to consider the Minister’s policies but also have a duty to act in the best interests of the company. The judge ruled that “unconditional compliance” with shareholders’ wishes could not constitute a valid exercise of directors’ discretion.

Directors should take a very active role in overseeing the company, even if appointed in a non-executive capacity

The only exception to this would be where there is an order from a minister to the board of a semi-state corporation and there is also a statutory provision authorizing that order. Directors would then be required to follow this policy regardless of whether it is in the best interests of the company to do so.

The conclusions of these cases for directors are that (a) they should conduct a thorough investigation of any company of which they are considering becoming a director; (b) they should take a very active role in oversight of the company even if appointed in a non-executive capacity; (c) they should always put the interests of the company ahead of the interests of a shareholder who appointed them (unless, in the case of a government body, there is a ministerial directive issued under applicable law); and (d) they should ensure that a comprehensive insurance policy is in place to cover the liability of directors and officers

Neil Keenan is a Corporate Partner in Pinsent Masons Dublin office and a member of the Company Law Review Group

https://www.independent.ie/business/irish/piercing-the-corporate-veil-landmark-rulings-a-stark-warning-to-directors-and-shadow-directors-on-liability-42225795.html Breaking the corporate veil – landmark rulings are a stark warning to directors and “shadow” directors about liability

Fry Electronics Team

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