The Arm of Justice Lifts the Corporate Veil – A Warning for Passive Directors

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The Arm of Justice Lifts the Corporate Veil – A Warning for Passive Directors

Published 23 noviembre 2022

In the exceptional case of Powers -v- Greymountain Management Ltd (in liquidation) [2022] IEHC 599 the High Court has lifted the corporate veil in finding two Irish directors and two shadow directors personally liable in a multinational fraud case. For the first time in Irish company law Twomey J found that in circumstances involving corporate fraud and the syphoning off of funds, justice demands that the protection of incorporation should not operate as a shield to protect directors from personal liability.

The Irish company at the centre of this case, Greymountain Management Ltd (“Greymountain”), was incorporated in, and trading from, Ireland under the directorship of Mr Liam Grainger and Mr Ryan Coates. In the three years before Greymountain went into liquidation, it was discovered that the Irish company was used as an instrument of fraud, with the sole purpose of defrauding unsuspecting individuals of their money. Both Irish directors claimed to have no knowledge of the company’s illegal activity and respectively submitted to the court, that they were directors by name only. The court concluded that the enormity of the scam, facilitated by the two directors abrogating their duties to two shadow directors, necessitated lifting the corporate veil to affix personal liability on all four individuals.

Separate Legal Personality as a Fundamental Principle in Irish Law

The fundamental importance of the doctrine of separate legal personality was acknowledged by the court—the Irish courts have on numerous prior occasions elected not to pierce the corporate veil maintaining that this should be reserved for only the most serious of cases including fraud.

The relief sought by the plaintiff, Mr Powers, was for the High Court to pierce Greymountain’s corporate veil on the basis that he and other investors were deprived of funds which they had invested in the belief that binary option trades would be executed on their behalf when there was in fact no such investment. Mr Powers sought an order making all four individuals (both directors and shadow directors) personally liable for the fraud committed by the company.

The court highlighted a number of obiter dicta comments from prior High Court cases which indicated that the Irish courts would contemplate piercing the corporate veil in the case of:

  • fraud; misapplication of monies or misrepresentation on the part of the directors;
  • directors syphoning off large sums of money out of the company, leaving the company unable to fulfil its obligations; and
  • negligence or impropriety,

provided that the facts are established in a plenary hearing and not on affidavit, with the parties having the opportunity to properly defend themselves.

Twomey J was satisfied that these conditions had been met. Notably none of the directors or shadow directors produced any evidence to contradict the extensive allegations and evidence of fraud produced by Mr Powers.

The court concluded that the extent of the fraud perpetuated against Mr Powers necessitated lifting the corporate veil.

Passive Directors Under Irish Company Law

The court considered in turn the respective roles played by Mr Grainger and Mr Coates as passive directors of Greymountain. Both Mr Grainger and Mr Coates purported to have no knowledge of the fraud perpetrated via Greymountain.

In the case of the two Irish directors, the court accepted that they did appear to be unwittingly involved in facilitating the fraud as a result of abrogating their duties as directors.

Mr Grainger, a seasoned director, claimed that his role had been purely administrative. The court did not accept this and held that Mr Grainger had ample experience as a company director and had chosen—in complete dereliction of his duties—not to acquire sufficient knowledge of Greymountain’s activities.

Mr Coates, on the other hand, had very little experience and had agreed to taking on the role of a director for the sole purpose of the receipt of a director’s payment to fund him during his business studies. While Twomey J was sympathetic to the unfortunate set of circumstances the young “director” had found himself in, he emphasised that ignorance of the law is not a defence.

Both Irish directors had abrogated their duties to the shadow directors who used that opportunity to defraud investors and this enabled Greymountain to be used as an instrument of fraud. The court found the Irish directors guilty of a dereliction of duty regarding the operations of the company—the extent of the dereliction, and impropriety that stemmed from it, merited the corporate veil being pierced.

Conclusion

While the court accepted that the lifting of the corporate veil will only arise in exceptional circumstances, this case is a salutary lesson for directors who take on the role without exercising appropriate control and oversight.

For more information or advice, please contact a member of our Corporate and Commercial team in DAC Beachcroft Dublin.

This article is intended to provide a general overview and guidance on a particular topic. It is provided wholly without any liability or responsibility on the part of DAC Beachcroft and does not replace the necessity to obtain specific legal advice

Authors

Sharon McCaffrey

Sharon McCaffrey

Dublin

+ 353 (0)1 588 2554

John Darmody

John Darmody

Dublin

+353 (0)1 588 2551

Sarah Flanagan

Sarah Flanagan

Dublin

+353 (0)1 231 9695

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