The Gazette 1995

GAZETTE

MAY/JUNE 1995

that the director is unfit and that is emphasised by the mandatory disqualification . . . to be imposed if that conclusion is reached" M) .

Also of relevance are the comments of Lynch J. in Re Hefferon Kearns (No.2) w , in relation to reckless trading where he held that section 297A, ". . . operates individually and personally against the officers (which includes the directors) of a company and the onus rests on the plaintiff to prove in relation to each of the defendants in this case that his conduct falls within the ambit of conduct prohibited or liable to be penalised . . . " 7<) Therefore a director should escape restriction if he can show responsibility on his behalf, notwithstanding the irresponsible actions or behaviour of the others directors. A failure however to rectify ". . . the first defendant, whilst acting honestly and bona fide in what he considered to be the best interests of the creditors, was in fact party to the contracting of debts by the company at a time when he knew that those debts, together with all the other debts of the company, including contingent and prospective liabilities, could not be paid by the company as they fell due for payment"", i.e. he was a party to reckless trading. There the provisions of s.297A(6) were used to absolve the director from a finding of reckless trading. However while honest conduct may protect a director from liability for reckless trading, it is difficult to reconcile how a director can be both responsible and reckless simultaneously. reasonably' may still, if it feels it is "just and equitable" 74 , restrict the director nevertheless. This might arise for instance where the court takes the view, that though a person has at all times acted properly, they are simply not suitable for company directorships. A court after concluding that a director has acted 'honestly and irresponsible conduct of which a I director is aware of, will itself be deemed irresponsible 71 . On 'honesty' Lynch J., in Re Hefferon Kearns (No. 2) 72 , commented,

Finally in the context of a director seeking to exonerate himself from restriction there arises the question as to whether reliance can be placed on actions that pre-dated the statute. Recently Barron J. 71 stated that: "In relation to the retrospective operation of statutes, two types of situation exist. The first is the enforcement of the terms of the statute to circumstances in existence as of the date of the statute. To do so is to give the Act retrospective effect. The second is the enforcement of its terms in relation to circumstances existing subsequent to its passing but having regard to events which occurred before its passing. To do so does not give the Act retrospective effect since the right being enforced is one given by the Act. " 76 Lynch J. in Re Hefferon Kearns (No.2) 11 felt that though liability for reckless trading could only be incurred on, or after the 29th of August 1990 (the operative date of S .297A), it did not follow that, "... I cannot have regard to acts done or omitted or knowledge acquired by the defendants before the 29th August, 1990 in deciding whether or not acts done or omitted between the 29th August and the 11th October, 1990, constituted reckless trading"." In imposing liability for reckless trading the court has a discretion, whilst under s.l50 there is no such option. A Court only has to evaluate the actions of a director prior to August 1, 1991 (if at all), from the perspective of whether the restriction should not be imposed. It is not concerned with whether the actions of that time justify restriction, merely whether they are capable of excusing the director from restriction. Consequently it would seem that directors will be able to point to their actions of pre-August 1, 1991 in establishing to the Court that they were acting "honestly and responsibly".

There it was found that while,

"imprudent and indeed improper in part although I think the directors' conduct to have been, . . . " 6I

a disqualification order would not be imposed.

Hoffmann J. in Re CU Fittings Ltd 62 said that,

. . directors immersed in the day- to-day task of trying to keep their business afloat cannot be expected to have wholly dispassionate minds. They tend to cling to hope. Obviously there comes a point at which an honest businessman recognises that he is only gambling at the expense of his creditors on the possibility that something may turn up. Consequently a director who admits to, or is shown to have, entered into the realm of hazarding creditors' property should be more liable to restriction than one who at all times he attempted to preserve that property. In Re Cargo Agency M , a disqualification order was made where it was felt that the directors' remuneration was unreasonably high during the period of trading by the company when it was hopelessly insolvent. Cynical exploitation of the privilege of limited liability or gross incompetence would also constitute disqualification. 61 Factors that have also militated against disqualification have been where a director has shown that he was acting on professional advice which was bona fide and proper 66 ; that he has himself incurred personal losses in attempting to keep the company solvent 67 or that the company was insolvent only for a short period of time 6 ". Though the cases relate to disqualification rather than restriction they express standards by which directors of insolvent companies should be governed.

Sub-section 2 however excludes the provisions from directors appointed

169