Rulings on Irish directors’ obligations should give directors ‘pause for thought’

Neil Keenan of Pinsent Masons said that the rulings demonstrated that directors “should not take on such a role without a full understanding of what is occurring in the business”. He added that the cases showed how directors, or those considering becoming directors, must exercise control and oversight of the company in question – irrespective of whether their role is executive or non-executive. “If not, they could face catastrophic personal liabilities,” Keenan said.

In the first case, known as the Greymountain case, the Court held that two non-executive directors of a company, one of whom was a student with little understanding of the business, were personally liable for the liabilities of the company after it had been used as a vehicle for a fraud in which members of the public lost millions of euros. The Court set aside limited liability and held both directors, along with two other individuals who were deemed to be shadow directors, fully accountable despite the fact that they had no knowledge of the fraud.

Keenan said the ruling was the first time that the Irish courts have set aside the protections of limited liability in such circumstances. “The Court found that the extent of the fraud against investors necessitated ‘lifting the corporate veil’ to hold the directors personally accountable – despite the fact that they had no involvement with the fraud. It demonstrates the risk in becoming a non-executive director and shows that any director of an Irish company cannot simply fulfil the role passively”, he added.

Separately, in the case of Pat Foynes v Shannon Foynes Port Company, the plaintiff sought a declaration from the High Court that he was entitled to performance related payments (PRPs) from the company for his work as its chief executive. The company, which is state-owned, argued that to make the disputed payments to the plaintiff would be a breach of a government policy that stated PFPs should not be made to chief executives of companies which are semi-state entities.

But the High Court ruled that directors of such companies cannot be obliged to follow government guidelines or policy – even when they are appointed by the relevant minister – because they have a duty to act in the interests of the business. The Court held that doing so is not possible if they must follow the wishes of the state shareholder unquestionably.

Keenan said the Court’s decision could put directors of all state companies in a difficult position. “It is also relevant to private companies too, since the decision makes clear that directors cannot be bound by instructions of a controlling shareholder and must exercise their own judgment to act in the best interests of the company. An unquestioning adherence to the wishes of the shareholders cannot constitute a valid exercise of the directors’ discretion,” he added.

The High Court also held that, even though the legislation establishing the semi-state company requires that the board must “have regard” to government guidelines when determining chief executive remuneration, this was not sufficient to override the directors’ obligation to act in the best interests of the company. It added that a ministerial directive backed by legislation, rather than policy or guidance, would need to be issued to the directors by the relevant government minister in order for them to be obliged to act in a particular way.

Keenan said both cases demonstrated the importance of the obligation on directors to act in good faith in what they believe to be the best interests of the company. “In light of these cases, directors should ensure that they do a thorough due diligence check on any company which they are considering becoming a director of, and that they take an active role in the control and oversight of the business – whether they are an executive or non-executive director,” he added.