Clark Hill Sets Precedent In Fraudulent Trading Action

Feb 12, 2021

In this previous news item, we summarized a recent case victory in a tax fraud claim taken on behalf of our clients Myles Kirby and John Healy of Kirby Healy Chartered Accountants. Myles Kirby is the court-appointed liquidator of Westman Plant and Civils Limited. This company was engaged in massive systematic tax fraud, with a loss to the Revenue Commissioners of €1.2m (exclusive of interest and penalties) on intra-community acquisitions totaling over €8m. The activities of the respondent, Mr. Kevin Rabbitte, were described by the Court as “among the most serious and worrying set of facts to come before the Courts in disqualification applications”. 

Background

Mr. Justice O’Moore in the High Court delivered an ex tempore decision on Jan. 31, 2020, in which he noted the concession (by way of settlement agreement) of Kevin Rabbitte, director of the company, that he was to be declared guilty of the civil offence of fraudulent trading per Section 610(1)(b) of the Companies Act 2014. The settlement reached with Mr. Rabbitte also provided for €1.5m of personal liability for the debts of the company and disqualification from acting as a company officer. The Court decreed that the period of disqualification be a record net term (after discount for mitigating factors) of 14 years and three months. The judgment at the time gained national press coverage.

Mr. Justice O’Moore has now delivered his full written decision which can be reviewed in full here. This is worth a full read but in the meantime, we review some of the key aspects of his judgment given the extreme rarity of written judgments on the offense of fraudulent trading.

Profits of the Fraud

It is noteworthy that Mr. Rabbitte benefited (on his own evidence) by somewhere between €7,000 and €10,000. This was clearly a tiny fraction of the turnover of the company over its lifetime, of circa €8m, but that aspect did not deter the Court in its judgment. The emphasis placed on the clear wording of Section 610(1)(b) of the Companies Act 2014 should send out an appropriate warning signal to those who might try and plead ignorance or lack of participation in the fruits of such fraudulent trading. There is no requirement of profit. The constituent elements of the offence are:  

  • The carrying on of any business of a company
  • With intent to defraud (note: success is not required)
  • Creditors of the company or of any other person or for any fraudulent purpose. 

In this instance, while the respondent Mr. Rabbitte did not personally benefit beyond a small sum and the overwhelming majority of the proceeds of the fraud were spirited away to third parties, Mr. Rabbitte was nevertheless found fully culpable. Specifically, the Court commented that “if anything this heightens the need for a lengthy period of disqualification; the public needs proper protection from someone prepared to allow his company to be used as a vehicle for fraud in return for such inconsequential amounts.”

Mitigation

The Court’s assessment of the worth, for mitigation purposes, of Mr. Rabbitte’s 11th-hour concessions and settlement, makes for some very interesting reading. Of particular note is that the Court gave very little credit for the assumption of personal liability for €1.5m of the company’s debts, in circumstances where on his own evidence Mr. Rabbitte did not have any capacity to discharge that debt.

The primary terms of the settlement being noted by the Court, the Court’s judgment was therefore chiefly focused on the appropriate period of disqualification under Section 842 of the Companies Act 2014 for Mr. Rabbitte from acting as a company officer. The Court placed an emphasis on the fact that the company “never seems to have carried out any legitimate trade…the only trade engaged in by the company has been the business of fraud”. 

The Court appears to have regarded the 11th-hour abandonment of his resistance to the reliefs sought as being somewhat hollow given the steadfast defense of the allegations throughout and with the benefit of legal representation. The Court was also critical of the representation of the company by  Michael Grimes, who presented himself in court as the company’s tax advisor. Mr. Grimes had made “significant efforts to try to dissuade Revenue from reinstating the company to the register or from then liquidating the company.” Contrary to Mr. Grimes’ views, there “has been a sensible purpose served by such actions as the outcome of this motion shows.”

The paucity of evidence presented by Mr. Rabbitte throughout, coupled with having hotly contested this application, was clearly at the forefront of Mr. Justice O’Moore’s mind as he spent a number of pages of his judgment contrasting this case with relevant case law.

Duress is fact specific

In an application made by Robert Dore, Solicitor for Mr. Rabbitte, it was noted to the Court that there was a “particular background” involving a mysterious third party who had caused Mr. Rabbitte to live in fear. It was however the case that any such duress arose after the fraudulent trading, and not at all relevant times. The duress appears to have been focused on ensuring that this unknown third party’s identity was not revealed by Mr. Rabbitte. In respect of the fraudulent trading itself, Mr. Rabbitte was free from intimidation.  This had particular importance given Mr. Rabbitte’s repeated sworn statements to the contrary. The Court was not minded to excuse Mr. Rabbitte from his duty as a citizen to report the matter to Gardaí, a step which Mr. Rabbitte failed to take.

Caselaw

The judgment of Mr. Justice O’Donnell in Re: Kentford Securities Limited was considered and the two-stage test for an order of disqualification was considered. The categories now listed in Section 842 were referenced and notwithstanding Mr. Rabbitte’s late concessions, the Court noted that it would, in any event, have been satisfied to make a disqualification order. 

Re Bovale Developments Limited was also referenced in light of its reformulation of the principles in Re Ansbacher. The objectives of disqualification orders were noted to be:

  1. To protect the public against future conduct of companies by persons who are a danger to creditors and others;
  2. To improve corporate governance;
  3. To act as a deterrent;
  4. To reflect the gravity of the conduct/wrongdoing;
  5. To reserve disqualifications beyond 10 years for the most egregious of circumstances; and
  6. To factor in mitigating factors.

The previous record disqualification of 14 years (net) in Re Custom House Capital had set the previous high bar for disqualifications. Both that case and the present case had common features in terms of “deep dishonesty” and active and ongoing attempts at concealment. 

Takeaways

Such decisions on fraudulent trading under the Companies Act 2014 – and particularly detailed written judgments – are exquisitely rare. For that reason alone, this judgment is to be welcomed for its strong reinforcement of applicable principles. The Respondent’s strategy of resistance has unwittingly led to a judgment that sets a valuable precedent in respect of the usual defenses trotted out by directors or other persons concerned in the carrying on of a business with intent to defraud. Clearly, there will also be direct applicability to directors trading in a reckless manner.

The Clark Hill team was led by Sam Saarsteiner, partner, working with barristers John Kennedy SC and Sally Glynn-O’Neill BL.