The Irish High Court (Court) has pierced the corporate veil in Powers v Greymountain Management Ltd [In Liquidation] & Ors [2022] IEHC 599, to hold passive resident directors and non-resident shadow directors personally liable for funds lost to investors
The Irish High Court (Court) has pierced the corporate veil in Powers v Greymountain Management Ltd [In Liquidation] & Ors [2022] IEHC 599, to hold passive resident directors and non-resident shadow directors personally liable for funds lost to investors as a result of fraud.
The Facts
The plaintiff, Mr Powers, believed that he was investing in binary options through an Irish registered company, Greymountain Management Ltd (Greymountain). It transpired that the investment was, in fact, part of a fraudulent scheme operating through Greymountain. Greymountain went into liquidation in 2017. Mr Powers lost $124,027. He instituted proceedings seeking an order making the directors personally liable for the fraud committed by the Company. Mr Powers was one of several other investors who claimed to have lost money from the scheme.
Two of Greymountain's directors, Mr Coates, and Mr Grainger, were Irish resident, and both claimed to have had no knowledge of the alleged fraud which comprised the payment by investors for binary options, which were never actually purchased on their behalf. Instead, the monies invested were allegedly converted for the use of the third and fourth defendants, Mr David Cartu and Mr Jonathan Cartu (Cartu Brothers). The Cartu Brothers were shadow directors of Greymountain and resided in Dubai and Israel. The Court described the "engine" of the fraud as the veneer of legitimacy provided by Greymountain's Irish incorporation. This deceived the investors into believing that their funds were in the hands of a company apparently subject to Irish and EU regulation.
Mr Coates was a college student when he became director, and claimed he was director in name only and that he had no role in the company. Mr Grainger described his role as administrative only.
Decision
No Irish court has previously lifted the veil of incorporation of a company to hold directors personally liable for its acts or omissions. This is because of the well-established principle from Salomon v. Salomon [1897] A.C 22 that a company is a separate legal person from its directors, a fundamental principle of Irish company law.
The Court noted however, that previous cases indicate that the Irish courts are of the obiter view that if there is impropriety in the conduct of the affairs of the company, the corporate veil may be lifted.
Whilst acknowledging that this would not be done lightly, the Court in this case was strong in its view that "if the circumstances of this case do not justify piercing the corporate veil and affixing the directors and, in particular, the shadow directors, with personal liability, then it is difficult to think of other circumstances which might justify making directors liable for the acts/omissions of their company."
The Court ordered that the Cartu Brothers were personally liable to Mr Powers for the return to him of the $124,027 because of their role in knowingly syphoning-off funds from Greymountain, which resulted in Greymountain not being able to discharge its liabilities to Mr Powers.
The Court also found that Mr Coates and Mr Grainger were in complete dereliction of their duty as directors to be aware of the company's activities. It found that they had abrogated their responsibility, as directors, to the Cartu Brothers. This impropriety and dereliction of duty justified the Court holding them personally liable to Mr Powers for the return of $124,027.
Lessons Learned
This case illustrates the exceptional circumstances in which a court may decide to pierce the corporate veil. Whilst the decision is very fact specific, it serves as an important reminder for directors that a court may go behind the separate legal personality of a company in cases of fraud.
Defences such as ignorance of the law or being a director "in name only" will not succeed. Directors must be aware of their duties and responsibilities to a company and the need to engage with those duties. They must also acquaint themselves with the affairs of the company, and exercise appropriate supervision and oversight at board level in respect of the discharge of delegated tasks or functions.
Published by William Fry LLP on 5 December 2022
