How the Irish Courts protect and promote stakeholder interests
By Michael James Boland — 1 July, 2021
Michael James Boland is a PhD Researcher and IRC Government of Ireland Scholar, School of Law, University College Cork, Ireland
Tim Connor and Andrew O’Beid’s hugely interesting analysis of Australian case law in their blog post of 29 April 2021 highlights the topical issue of the interests of the company as the core of the corporate board’s duty. The Irish Courts, much like the Australian Courts, recognise that a whole host of different interests make up the corporate entity. In other words, when the board act on behalf of the corporation, they must take account of employees, other creditors like suppliers, the community in which the company operates, society at large and, yes, also shareholders.
When it comes to stakeholder interests, directors are obliged to pay attention
Far from being an ‘aggregation of natural persons’ or, more specifically, an ‘aggregation of shareholders’ which is how several writers have conceived of the corporation, the Irish Courts recognise the company as a single entity distinct from its shareholders with all the rights and responsibilities commensurate with such status. These include the right to enter contracts on its own behalf, to own property and opportunities, and to “sue and be sued in its own name” as formulated by Professor Margaret Blair.
What is significant is that the conception of the corporate entity in Irish company law goes beyond the one that figures like Professor E. Merrick Dodd endorsed in the 1930s that was based on directorial discretion. While statute gives directors discretion in exercising their duties, the Irish Courts go much further and oblige directors to take account of broader stakeholder interests.
One of the great exponents of Irish company law, Mr. Justice Francis Murphy, made this clear as far back as 1995. In the case of Business Communications Ltd v. Baxter & Parsons he stated:
Since the introduction of legislation permitting people to incorporate with limited liability, it has been recognised that the protection which this conferred on those taking advantage of the privilege had to be counterbalanced by statutory provisions to protect and safeguard the interests of those dealing with them (Emphasis added).
While Mr. Justice Murphy’s judgment is unreported, it has been cited widely in subsequent cases.
One such case is the 2005 Irish High Court decision of Re Swanpool Ltd (in liquidation); McLaughlin v. Lannen. In this case, the Court held that in determining whether a director of an insolvent company ought to be restricted from acting as a director or secretary of a company, the extent to which they complied with their duty to creditors should be taken into account.
The Irish Supreme Court subsequently endorsed this approach in the case of Re Mitek Holdings Ltd; Grace v. Kachkar. The Court opined that compliance with directors’ obligations to creditors is key to determining whether directors acted responsibly for the purposes of restriction and disqualification. These are both quasi-public methods of enforcing directors’ duties provided for in the Companies Act.
Cases dealing with the under-declaration and/or non-payment of tax liabilities by companies and the failure of companies to keep proper books and records also illustrate how highly stakeholder interests are regarded in Irish company law.
While companies are statutorily obliged to declare and pay tax and to keep records, this isn’t the only concern of the Courts when companies fail to do these things. The impact on creditors like employees and wider society is also a central pillar of how the Courts respond to such breaches.
Hence, in Re Noxtad Ltd (in liquidation); Van Dessel v. Esmonde, the High Court issued restriction orders against all of the company’s directors prohibiting them from holding directorships in other companies for five years. The company amassed liabilities to the Irish tax authorities of about €300,000 and more than doubled its indebtedness to trade creditors all in the space of just 14-months. What the Court focused on in making the orders was the respondents’ use of taxes specifically those that companies collect and pay to the tax authorities on behalf of consumers and employees to finance the continued trading of their struggling business.
These taxes have recently been described as ‘fiduciary taxes’ by Mr. Justice Max Barrett in Re Tailored Homes Ltd; O’Donoghue v. Taggart because of the effect on company employees and consumers when companies fail to pay them to the tax authorities.
In a similar case, Mr. Justice Brian McCracken in Re Verit Hotel Ltd (in liquidation); Duignan v. Carway said that ‘[t]o try justify trading by using what is in effect its employees money without their knowledge or consent, is to me a quite bizarre and totally irresponsible attitude’.
The bigger picture: the interests of the company
The above decisions are significant because they recognise that the interests of employees, consumers, wider society and others dealing with the company are part and parcel of the corporate entity.
As we saw, the Courts restricted or disqualified directors for failing to comply with their duty to creditors and for failing to pay “fiduciary taxes” on behalf of employees, consumers and ultimately society at large.
In Ireland, directors owe their duties ‘to the company (and the company alone)’ and must act in the ‘interests of the company’. But deciphering what the ‘interests of the company’ are has divided corporate law scholars in Ireland and around the world. Even a quick perusal of other blog posts will show that this question remains unanswered.
However, in light of enforcement cases, we see that the Courts are showing that the ‘interests of the company’ includes the interests of its stakeholders.
This is also recognised by the Company Law Review Group (CLRG). The CLRG is a statutory body tasked with advising the Irish government on company law reform whose membership includes Professor Irene Lynch Fannon. Professor Lynch Fannon will be known to many readers as a member of the Daughters of Themis and SMART networks but she is also a Ministerial appointee to the CLRG since 2016 and Chair of its insolvency sub-committee.
The CLRG, commenting specifically on the position of employees, said that ‘the interests of employees are encompassed as part of the director’s fiduciary duties to the company’ (Emphasis added).
A legal obligation to take stakeholder interests into account
Another key insight from the decisions of the Courts is that the board is obliged to include stakeholder interests in decision-making. The lesson from the Courts is that in order to avoid restriction and disqualification directors must take account of stakeholder interests. This is in spite of legislative provisions like sections 224 and 228(1)(a) & (h) of the Companies Act giving directors discretion to decide whose interests they will prioritise in decision-making.
Rule of Law concerns
We are at a crossroads in this branch of Irish company law: legislation grants discretion but the Courts impose an obligation on directors to consider stakeholder interests. While this is positive from a stakeholder’s point of view, it creates ambiguity from a director’s point of view. If directors were to read the relevant provisions of the Companies Act in order to get a sense of their prospects in Court, they may well be encouraged by the discretionary language. However, when they reach Court, they will find that the Courts apply more exacting standards that are not necessarily reflected in the Act.
As we have seen, the Courts have been instrumental in the development of company law in Ireland and are rightly credited with eliciting the voices of corporate stakeholders like employees and wider society. However, with the Courts applying a much higher standard to that required by the Act, one is left wondering about the implications for the Rule of Law.
Among the elements that several scholars like Lon Fuller and Joseph Raz consider essential to the Rule of Law is that the law should be reasonably clear so that people can understand and follow the law. Another essential element is that there would be ‘congruence between the word of law and its enforcement’ which is arguably lacking in this branch of Irish company law.
In a country like Ireland where 98% of companies are small and medium sized enterprises (SMEs), the law should be such that it is easy to understand and generally uniform in its interpretation and application. Otherwise our corporate enforcement regime would become a game of gotcha!
Note: This blog is based on the author’s doctoral research which is funded by the Irish Research Council and supervised by Professor Irene Lynch Fannon.
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