High Court: Company director disqualified after siphoning €1m from company accounts

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Alan Barrett and Ron Downey were the directors of Eventelephant Limited – which operated a self-service online event registration website allowing customers to use the site to create their own web pages to advertise and sell tickets for events; Eventelephant processed ticket payments and received a commission for the same.

The responsibilities of the directors were split as follows: Mr Barrett was the financial controller and primarily responsible for financial administration while Mr Downey, based in the UK, was responsible for sales.

Joseph Walsh and Neil Hughes were appointed joint liquidators by order of the High Court on 9th August 2013.

A “mareva type injunction” was made on 23rd August 2013 freezing the accounts and assets of Alan Barrett.

Fraud

Alan Barrett did not dispute any of the facts asserted by the liquidator.

Ron Downey in his replying affidavit recognised his obligation to satisfy the Court that he acted responsibly from an objective viewpoint at the times relevant to the Court’s consideration - no allegation of dishonesty was levelled at Ron Downey.

Alan Barrett “siphoned off significant portions of the income destined for the customers” of Eventelephant to a paypal account of Eventelephant which he then transferred to a PTSB account in his own name and control.

The software developed for Eventelephant should have been intended and designed to direct payments to a trust account or the actual account of the event organiser.

The first incident of wrongful diversion as detected by the liquidators occurred in 2009 which was within a year of the commencement of business and incorporation of Eventelephant. Joseph Walsh and Neil Hughes identified that a total of €967,276.71 was transferred from 8th May 2009 to 6th August 2013 to the paypal account controlled exclusively by Alan Barrett.

Counsel for Mr Downey fairly acknowledged the per se omissions which could be attributed to MR Barrett like the failure to prepare and swear a statement of affairs and the filing of the statutory return for the year ended 30th June 2012.

He stressed the undisputed fact that Alan Barrett’s conduct hindered compliance by Ron Downey.

The evidence is that Mr Downey was as shocked as most people were to learn of the egregious wrongs perpetrated by Mr Barrett.

Justice O’Connor cited Director of Corporate Enforcement v.Walsh IECA 2 at para. 60 explained:

“The whole thrust of the legislative provision is to ensure that all directors of all companies comply with their obligations. It matters not that they be directors of family companies, or be at the helm of large or quoted enterprises. Neither do the qualifications of the directors or the economic challenges that the companies may be facing affect the obligations of directors to act responsibly in respect of an insolvent company.”

There was no question that Eventelephant was insolvent for a number of years prior to the appointment of the liquidators.

Irresponsible Conduct

Justice O’Connor stated that the assessment of irresponsible conduct of a director was not a formulaic process, although the practice is for applicant liquidators to highlight the areas of concern which in this case were identified as:

(a) Failure to maintain proper books and records of Eventelephant which is a requirement of s. 202 of the Companies Act 1990 (now s. 281 of the Companies Act 2014);

(b) Failure to prepare and swear a statement of affairs;

(c) Failure to cooperate with Joseph Walsh and Neil Hughes in the liquidation;

(d) Failure to file a company’s registration office return.

Undoubtedly, the horror of discovering the deception together with the loss of his investment, job, and reputation would affect many directors in the aftermath of the liquidation.

However, there was no evidence that Mr Downey alerted the auditor or the independent accountant to the chargeback problems that were becoming more common.

The repeated vacuous excuses offered by Mr Barrett by referring to “chargeback difficulties” that gave rise to a media expose in 2013 prior to the appointment of the interim examiner were accepted by Mr Downey without delving further.

Justice O’Connor stated that “naivety and total ignorance of potential deception does not excuse the necessity for directors” like Mr Downey from seeking more than just an oral assurance without further enquiry.

Accordingly, Mr Downey was not satisfied that Ron Downey “acted as responsibly in the period 2011-2013 having regard to the necessity to prepare proper books, records and returns in view of the continuing significant losses” which Eventelephant was incurring according to the information available.

Justice O’Connor stated that Mr Downey “ought to have asked harder questions and sought more corroborating evidence for assurance beyond that which he mentions in a general way”.

In making this assessment, Justice O’Connor emphasised that he was looking at matters objectively at the period from 2011-2013 and when Ron Downey ought to have known the extent of sales generated by Eventelephant.

Conclusion

Under section 819(3) of the Companies Act 2014, Mr Downey was ordered be restricted from involvement in a company for five years unless such a firm has a share capital of not less than €500,000 as a public liability company, or €100,000 as any other company.

In the absence of aggravating circumstances or future risk to the public, Justice O’Connor made a declaration restricting Mr Barrett from being appointed or acting as a director under section 842 of the Companies Act 2014 in view of the undisputed wrongful actions of Alan Barrett in relation to Eventelephant and its creditors. Mr Barrett was therefore disqualified for the minimum period of 5 years.