The recent decision in Powers v. Greymountain Management Ltd [In Liquidation]  IEHC 599 is significant in highlighting the consequences of directors who abrogate responsibility when running a company and who rely on others to fulfil their duties. By failing to carry out their duties, two directors were found liable for loss relating to fraudulent investments which unbeknownst to them, were carried out by the other two shadow directors. This claim was brought by 35 investors for losses totalling over $4m.
The company, based in Ireland, took payments from investors who traded in binary options. Its two directors were based in Ireland. The first director was a student who had been persuaded to take on the role by his mother and received €1,000 per month in return for being a director. He had no role in the day to day running of the business. The second director had a minimal role in the company by signing payment processing agreements with banks and received €10,000 per month for his role. They were unaware that the two shadow directors were committing a large scale fraud. The two shadow directors were based in Dubai (but also in Israel and Georgia). They pretended that the company was a payment processor but instead it was receiving payments in its own right. The company took a 10% commission from investors but the rest of the funds were sent to the shadow directors who syphoned off the funds. Whilst this case concerned the losses of 35 investors, totalling over $4m it is thought that others
also lost money, up to €186m. The fact that the company was based in Ireland with Irish directors was significant as it gave reassurance to investors that the company was subject to EU and Irish regulations.
The two directors argued that they should not be liable because they were directors in name only. However the Court found they had abrogated their duty in favour of the shadow directors and were under a duty to acquire and maintain a sufficient knowledge and understanding of the business to discharge their duties. No other Irish decision has lifted the corporate veil before this one. The Court found both directors and shadow directors to be personally liable as a result of the fraud. Although the Court found the two directors did not have any role in the fraud and was sympathetic to their situation, that this was not sufficient to absolve them of any wrongdoing because directors’ impropriety and dereliction of duty was of such a degree as to justify both the directors being held personally liable to the Plaintiff.
This case is a first for Ireland as the “corporate veil” typically provides strong protections for directors. However it was not sufficient in this instance to prevent the two directors from being found liable. This does not open the floodgates for claims against directors as it was an exceptional set of circumstances but it does serve as a warning shot for all directors that they must make sure that they fulfil their duties owed to the company or otherwise risk being held to account for the decisions of others. Any director who has a claim brought against them should have D&O Insurance in place which may cover the costs of defending proceedings. However like in this case, if fraud is proven to have been committed by that director, Insurers may rely on policy exclusions pertaining to fraud to exclude cover for the claim.