Colleary case gives succour to those against Harney's reforms

 

The swathe of company law reforms brought in by the Tánaiste in the wake of the Ansbacher and other scandals got something of judicial duffing up last week.

One of the key changes she introduced in during her tenure as Minister for Enterprise Trade & Employment was in the area of holding directors of failed companies to account.

The Companies Act was changed so that liquidators of failed companies were obliged to apply to the court to have a director restricted unless the Office of the Director of Corporate Enforcement (ODCE) relieved him of the duty. Prior to that it was at the discretion of the liquidator whether or not to bring restriction proceedings. In order to avoid being restricted a director has to show that he acted honestly and responsibly. The new, tougher regime appeared to be paying dividends. According to the ODCE it received reports on more than 1,200 insolvent companies in the last two years and decided that the directors of 300 of these companies should defend their behaviour in the High Court. Around 500 directors were restricted as a result.

The ODCE also points out that in 2003 more than a third of directors of insolvent companies found themselves facing restriction proceedings. Last year the figure fell to around one sixth of directors "which suggests that directors are now more attentive to their duties with respect to creditors and other stakeholders because of the impact of the reporting regime".

Last week Mr Justice Peart delivered a judgement in what is arguably the most high profile restriction case brought since the reforms came in. It related to the directors of the failed Usit group, and primarily Gordon Colleary who was the founder and driving force of the group. The company collapsed into liquidation in February 2002 with liabilities of €180 million.

Ray Jackson of KPMG brought an application to restrict Colleary and others last year. In it he highlighted a number of concerns about the way the company was run prior to its collapse. He said that it had failed to filed audited accounts, not kept proper books and records, not convened annual general meetings. He also concluded that the company traded while insolvent primarily in 2000 and 2001. and that board minutes showed that there were financial problems dating back to 2000.

He also highlighted the company's decision to go ahead with the purchase of 60 per cent of US travel company CTS in September 2001 without having secured the funding for the deal.

It was the decision of the bank providing this finance - Ulster Bank - to pull out of the deal after the events of September 11th that precipitated the collapse of the group.

Mr Jackson gave a number of examples to indicate that the directors were aware of the severity of their compans problems in December but kept trading through to the following February.

He also highlighted the the loss incurred by NIB of €4.6 million, primarily as a result of cheques written by the company on the back of funds lodged from group companies which were not honoured. Such conduct "is neither honest not responsible" he said.

It was pretty serious stuff, but did not amount to grounds for disqualification, in the all-important opinion of Mr Justice Peart. His judgement came to some 120 pages, but would appear to come down to a couple of salient points.

The first is that all the various technical breaches of company law that occurred - such as not holding annual general meetings - did not contribute to the collapse of the company.

Thus - while they are serious matters - they are not particularly relevant.

With regard to the NIB cheques the Judge relied on the assertion by Mr Colleary that because of his relationship with NIB, he he did not think the cheques would bounce when he wrote them.

The more substantive point made by Mr Justice Peart is that while the decisions made by Colleary and his colleagues in connection with the CTS acquisition and what came after proved to be the wrong decisions, it does not follow that they acted irresponsibly or dishonestly.

What they did by proceeding with the acquisition in the manner that they did was take calculated risks , something the judge points out " is the very essence of entrepreneurial endeavour".

"If an entrepreneur were to be obliged, on pain of being found to be irresponsible and of being disqualified under under the section, to avoid taking any decision which at some date in the future might be found to have risk attached to it the business life and a large component of the economic driver of the economy of the state would stultify," he ruled, adding that was not in his opinion the purpose of the legislation.

Mr Justice Peart's judgement is no doubt be studied carefully by many interested parties.

It offers considerable succour to those that have argued the reforms brought in by Harney are anti-enterprise and pose an unnecessary burden.

It remains to be seen whether it is seen as something of a green light for a return to the somewhat a la carte approach to company law that prevailed up until 2002