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| Financial Law Update | Back to article summary. |
| Directors responsibilities post-Enron |
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| Joe Beashel writes about the shadow of the Enron scandal and the ways for company directors to ensure that the reoccurrence of a travesty of the magnitude of Enron is averted. |
| The Enron case has been in the news recently as the fall out from that spectacular corporate collapse led to the conviction in the US, of former Enron bosses Ken Lay and Jeffrey Skilling on fraud, conspiracy and other charges which may result in lengthy prison sentences of as much as 45 years and 185 years respectively. A juror in the case, Ms Amanda Perry, is reported as saying ‘it will be their last free summer for a long time which is indeed a very sobering thought for every boardroom’. While we are unlikely to ever see such lengthy prison sentences in Ireland, this case does reinforce the need for boards to continue to focus on governance issues. A number of Irish cases have been reported in recent years which provide guidance to directors, including non-executive directors and boards of subsidiaries of multi-national corporations on the extent of their duties. General duties Generally directors owe duties to a company as a whole not individual shareholders or other stakeholders. A director need not exhibit, in the performance of his/her duties, a greater degree of skill than may reasonably be expected from a person of his/her knowledge and experience, nor is a director bound to give continuous attention to the affairs of the company. While affirming these general principles, the cases outlined below stress that a director must still pay careful attention to the company’s affairs. It means he/she must attend board meetings (though not every meeting), read documents and reports received and take immediate action in cases where, in their opinion, there is an issue requiring resolution. Executive and non-executive directors The case of Tralee Beef and Lamb (High Court 2004) concerned an insolvent company where an application was being made by the liquidator of the company to restrict the directors from being directors of any company as provided for in the Company Law Enforcement Act 2001. In this case there were four directors, the managing director, his wife, who was not remunerated, the former owner of the business, who was also not remunerated and a local accountant who had a board position as part of a Business Expansion Scheme (BES) investment in the company made some years previously. The company experienced financial difficulties in 2000 which continued into 2001. In March 2001 the managing director realised that the company was in significant financial difficulties. He took various steps to find outside investors to save the company but in early October 2001, as the auditors who were auditing the accounts for year ended 30 April 2001 indicated the company’s position was worse that had been thought, steps were taken to appoint a receiver which ultimately led to the company being wound up. The court considered the roles of each director in turn: The Managing Director In the case of the managing director from March 2001 onwards when, the fact of the serious financial difficulties were known, he failed to convene a board meeting for the board as a whole so that it could ‘discharge its duties of supervising and controlling the affairs of the Company’. The court concluded that he did not act at all times responsibly in relation to the conduct of the affairs of the company and as such was disqualified from being a director of any company. The Managing Director’s wife (non-executive) In the case of the managing director’s wife, the court found that ‘even as a non-executive director, without any special business expertise, unremunerated and an agreed limited role it appears to me at a minimum, that having become aware of the difficult financial situation…that she cannot be considered to have acted responsibly in failing to take any step to bring that information to the attention of her fellow two non-executive directors or to insist that a board meeting of the company be held.’ She too was disqualified. The former owner (non-executive) The second non-executive director was the former controller of the company who had sold his interest but who had agreed to stay on as director to foster some key supplier relationships. From early 2000 this non-executive director had very little contact with the company. While acknowledging that non-executive directors are not expected to have an intimate knowledge of a company’s day-to-day affairs, the court stressed that a director’s fundamental duty is to keep himself/herself informed of, and to supervise a company’s affairs and this duty applies to all directors alike. The judge stated that delegation of duties of day-to-day management of a company does not absolve the directors from the duty to acquire information about the affairs of the company and to supervise the discharge of delegated functions. In this case, the court felt that this director too had not discharged the onus of satisfying the court that he acted responsibly in relation to the affairs of the company and he too was disqualified. The local accountant (non-executive) The final non-executive director was a local accountant who was appointed on behalf of BES investors. It seems there were no directors meetings in 2000 and 2001. The court found that in the period January 2000 to September 2001 there was no evidence that he had sought to discharge his obligations as a non-executive director to inform himself about its affairs and to join with his co-directors in supervising and controlling them. He was also disqualified. Directors of subsidiaries The case of re 360 Atlantic (Ireland) Ltd (High Court 2004) illustrates that the principles outlined above also apply to subsidiaries. The court restricted four directors of a wholly owned Irish-incorporated subsidiary of a Danish company, which in turn belonged ultimately to a Canadian group. The Irish-incorporated company was not managed or controlled separately from the overall group of companies nor were the directors permitted to make management decisions or to become involved in the financing of the company. On liquidation, the directors argued that, given their lack of capacity to influence group policy, they should not be held responsible for the implementation of decisions made at a group level that were not in the trading interests of the Irish-incorporated company. The judge had to consider the economic reality of a company’s status as a subsidiary although he held that there could be no modification of the ultimate requirement that directors must act in the interests of their company, stating: ‘... where a group corporate structure exists...and the issue is whether a director of the wholly-owned Irish subsidiary company acted responsibly in the sense of discharging the minimum common-law duties, he must be able to establish, at a minimum, that he did inform himself about the affairs of the Irish subsidiary company as distinct from any other company within the group and, together with his fellow directors, that he did take real steps to consider and take decisions upon at least significant transactions to be entered into or projects undertaken by the Irish subsidiary company’. Summary The board of every company, whether a subsidiary of a multi-national, an investment fund, a special purpose vehicle or any of the many functions assigned to corporate entities in Ireland, should ensure that they are able to demonstrate that they have supervised and controlled the affairs of the company of which they are directors. While the law does recognise the difference between executive and non-executive roles it does not absolve non-executives of this general duty of supervision. Although attendance at all board meetings is not mandatory, frequent attendance is recommended. In the case of any litigation it would be important for directors to be able to demonstrate that they fully discharged their duties on an ongoing basis. In this regard it is important to ensure robust compliance and governance systems are in place which can provide this support should it ever be needed in the future. While the Enron case is not a legal precedent in Ireland, and is somewhat extreme in terms of the consequences of its failure, it does serve as a reminder to all directors of the importance of continuing to develop and maintain robust compliance and governance standards, processes and procedures in the companies of which they are appointed. |
Joe Beashel is a partner in the Banking and Financial Services Department at Matheson Ormsby Prentice and is Head of the firm’s Regulatory Risk Management and Compliance Group. He can be contacted by phone: +353 1 619 9000 or by email: joe.beashel@mop.ie Further information on the firm is available at www.mop.ie |