Bad news for disqualified directors
On 29 June 2017 the High Court made an order for costs against the three former directors of Custom House Capital (the “Company”) having already disqualified them from acting as directors for periods in excess of ten years. The judgment was unusual because the order for costs was not just in relation to the legal costs but also for the very significant investigative costs of the Official Liquidator.
The Company was incorporated on 28 July 1997 and its principal activity was the provision of financial services, including investment fund management, and the setting up and managing of approved retirement funds, pension funds and personal retirement savings accounts.
It was discovered by court appointed investigators from Central Bank that the directors were deliberately misusing client funds to manage the business of the Company.
On 21 October 2011, the High Court made an order winding up the Company with immediate effect and appointed Mr Kieran Wallace as Official Liquidator of the Company.
On 2 December 2016, the three former directors of the Company were each disqualified from acting as directors by the High Court due to the misappropriation of some in or around €66.5 million in client funds.
The Official Liquidator’s Application for Costs
Having successfully obtained an order disqualifying all three directors, the Official Liquidator made an application to the High Court for his costs and expenses incurred in bringing the disqualification proceedings. The costs were sought on a joint and several basis.
In considering the submissions made by one of the directors, the Court stated that it could not accept any of the propositions underlying in the submissions as “they entirely overlook the grave findings of fraud that have been made against Mr Mulholland” (one of the directors) and that he had “personally benefited from the payment to him of wrongful ‘commissions’ .”
In the circumstances, the Court found the three former directors jointly and severally liable for the Official Liquidator’s costs to include the Official Liquidators’ legal costs, investigation costs and fees for the collection of evidence. The investigative costs were in excess of €200,000.
The Court delivered a detailed written judgment and found the conduct of all three directors to be “deeply dishonest” carried out over a protracted period of time and that their behaviour had a “devastating” impact on innocent investors.
Finally, the Court found that there had been enough evidence to suggest fraudulent conduct on the part of Mr Mulholland and that it found no merit in the submissions put forward by him that it would be “unfair” to fix him with joint and several liability for the costs without assessing the difference between his conduct and the other directors’ conduct.
The Court noted that a “strong analogy” could be drawn between the conduct of each of the directors in this case. It noted that they each were found to have committed fraud upon the Company and its creditors.
The decision is very important in that it has consolidated the principle that directors of insolvent companies can be liable for all investigative costs incurred by a liquidator as well as the legal costs which was traditionally the only recovery available.