Directors Beware - Lifting the Corporate Veil

Separate Legal Personality and the Corporate Veil

A central principle of Irish company law is the doctrine of separate legal personality, allowing incorporated entities to enter into contracts, trade, file claims and take on debts in their own name. The separate legal personality creates a shield which protects shareholders and individual directors from being held personally liable for the company’s defaults, debts or bankruptcy. This shield is often referred to as the “corporate veil”.It is a long-established principle in Irish law that directors would only be held liable for the actions of a company in exceptional circumstances. The Irish Courts have recently been asked to consider,  in the case of Powers v Greymountain Management Limited [2022] IEHC 599, whether directors and shadow directors of a company should be able to evade responsibility for the company’s actions by hiding behind the veil of incorporation. The case marks the first time that the Irish Courts have decided to pierce the corporate veil to find its directors personally liable for the actions of the company.

Case Summary

Greymountain Management Limited was incorporated in, and trading from Ireland, under the directorship of Mr. Liam Grainger and Mr. Ryan Coates with two brothers, Mr. Jonathan Cartu and Mr. David Cartu, residing in Dubai and Israel, acting as shadow directors. It was discovered that the company was being used as an instrument of fraud, defrauding members of the public, primarily based in the US, out of millions of euros. The plaintiffs in this case believed that they were trading in binary options, however, it transpired that the trades were never carried out. Instead the Company’s software system was rigged to ensure the money was misappropriated for the personal use of the shadow directors and others. Both Mr. Grainger and Mr. Coates claimed to have no knowledge of the fraud and submitted to the Court that they were directors by name only. Mr. Powers, who was the lead plaintiff among 35 others, sought orders against the Irish directors and the foreign shadow directors to make them personally liable for the actions of the company.Mr Justice Twomey, presiding in the case, concluded that

"the sole purpose of Greymountain was to defraud unsuspecting individuals of their money".

He further concluded that considering the circumstances of the case, the moral responsibility rested with the shadow directors.As previously noted, the Irish Courts had never ruled to find directors personally liable for a company’s actions due to the well-established principle of the separate legal personality which was first set out in Salomon v. Salomon [1897] A.C 22.Nevertheless, from the review of the relevant case law, Mr Justice Twomey found that, even though the principle of separate legal personality should be upheld, the Irish Courts would consider lifting the corporate veil in the face of inappropriate actions of the individuals managing the company. He noted that if the circumstances of this case would not be sufficient to justify piercing the corporate veil to find the directors, especially the shadow directors, personally liable for the actions or omissions of the company it would be unfeasible to find circumstances when the veil should be lifted.The Court ruled that piecing the corporate veil may be considered by the Irish Courts when:

• There is fraud or the misapplication of monies or misrepresentation by the directors;

• The directors have been proven to syphon off large sums of the company’s money resulting in the company being unable to fulfil its obligations;

•  The directors have been negligent or acted with impropriety in the conduct of the affairs of the company;

•  Where the facts had been established in a plenary hearing and not on affidavit; and

•  Where the parties had an opportunity to properly defend themselves.

The Directors

Mr Justice Twomey held that there was no reason to distinguish between the shadow directors and the directors when deciding to pierce the corporate veil. It was clear that the shadow directors were morally liable as they knowingly syphoned off the company’s funds leaving it unable to discharge its liabilities to the plaintiffs.In looking at the role of the Irish directors, Mr. Grainger, who had previously sat on a number of boards and therefore was considered to be an experienced director, claimed that his role in the company was purely administrative while Mr. Coates, who was a student, claimed he only became a director because ‘they needed a local person’ and to use the director’s fee to fund his studies. Mr Justice Twomey did not accept their claims as a valid defence and held, that the corporate veil should be pierced in both cases due to the extent of the dereliction of their duties.

Summary of the Judgement

While the Court had sympathy for the Irish directors involved in this case, the Court ordered that all directors (shadow directors and Irish directors) were to be held personally liable to the plaintiff and were ordered to repay his losses in the total amount of USD124,027. Although it was noted by the Court that there was no evidence that the Irish Directors had any knowledge of the fraud, they had been negligent as to their duty to control and manage the company. The Court noted that the Irish directors should be held liable as they were ‘both in complete dereliction of their duty to be aware of what the company was doing’.

Practical Implications

Although the judgement is clear as to the piercing of the corporate veil only being considered in exceptional circumstances, it sets a precedent that should be observed by any person before they become a company director. It is a reminder that directors must be familiar with their legal responsibilities, obligations and duties attaching to the position and that they must actively engage in all the affairs of the company to exercise appropriate oversight and supervision of delegated functions.Mr Justice Twomey emphasised in this case that ignorance of the law is not a defence nor is being a director ‘in name only’. 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’ personal liability.For more information or advice please contact a member of our Corporate team.This article is intended to provide a general overview and guidance. It is provided wholly without liability and does not replace the need to obtain specific legal advice.

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