High Court decision in DQ Entertainment Ltd by Mr Justice Sanfey

In a landmark ruling, the Irish High Court ("the Court") has imposed personal liability of $30,800,238.92 on a joint and several basis on three directors of DQ Entertainment (Ireland) Limited for inter alia, fraudulent and reckless trading and other breaches of company law. The three directors, Rashida Adenwala, Tapaas Chakravarti and Sanjay Choudhary (together the "Respondents") who were made personally liable, were all based in India and did not ultimately contest the hearing of the application. The two Irish based directors had no order made against them, and the application was struck out as against them.

The application was the first of its kind in that it was brought by the Receiver and Manager, Patrick Bance, appointed to DQ Entertainment (Ireland) Limited (the "Company") together with the secured creditor and not a liquidator. As a result, it was necessary for the applicants to first prove that the Company was unable to pay its debts and that the reason for it not being wound up was the insufficiency of its assets.

Simmons & Simmons acting on behalf of the applicants, Powerkids Entertainment (Singapore) PTE. Limited ("Powerkids"), Patrick Bance (Receiver and Manager), and Madison Pacific Trust Limited ("Madison") (together the "Applicants"), sought various reliefs under the Companies Act 2014 against the Respondents, all of whom were directors of the Company. In particular, declarations were sought regarding the following:

1. reckless trading;

2. fraudulent trading;

3. the company not keeping adequate accounting records in contravention of sections 281 -- 25 of the Companies Act, 2014;

4. that the said directors misapplied money or property of the Company and were guilty of misfeasance and breach of duty in relation to the Company; and

5. that the directors made a declaration of solvency without reasonable grounds.

Facts

The Company's principal business was the provision of animation and live action production services for television shows and motion pictures. It was part of the DQ Entertainment group with its immediate parent company being DQ Entertainment (International) Limited ("DQE India'), an Indian company listed on both the national stock exchange and Bombay Stock Exchange of India.

The first named applicant, Powerkids, is an investment company owned by OCP Asia (Singapore) PTE Limited, an investment manager that operates in the Asia Pacific region. The second named applicant, Mr. Bance, is an accountant and a managing director of Kroll, who was appointed as Receiver and Manager over the assets and undertaking of the Company. The third named applicant, Madison, is a trustee company which holds the legal interest in certain bonds and security on trust for Powerkids.

OL Master Limited ("OLM") was the secured creditor before its interest were assigned to Powerkids. OLM and the Company's ultimate parent, DQ Entertainment (Mauritius) Limited, ("DQE Mauritius") entered into a bond purchase agreement for the sale and purchase of up to $50m senior secured convertible bonds. On the same date, DQE Mauritius and the Company entered into an identical bond purchase agreement. Pursuant to these bond purchase agreements, OLM entered into two separate $50m bond instruments with (1) DQE Mauritius and (2) the Company. The Company provided security over all of its undertaking and assets to OLM as consideration for the obligations of DQE Mauritius. This security was ultimately assigned to Powerkids. The Company also provided further security to Madison and a guarantee for all of the obligations of DQE Mauritius.

When concerns arose regarding the financial position and solvency of the Company and the DQE Group, OLM engaged Borelli Walsh (who later became Kroll) as an independent financial adviser due to concerns about the manner in which the Company and DQE India were run and the credibility and reliability of the financial information provided by those entities. Despite measures to limit risk and exposure, further misapplication of the Company's money occurred.

OLM thereafter proceeded to issue a redemption notice and enforce its security by appointing Patrick Bance as Receiver and Manager to the Company.

The evidence presented in the case showed that the Company's accounts significantly overstated the value of its assets. Many of the Company's "trade receivables" were not genuine, and the value of many of its intangible assets were artificially and misleadingly inflated. The Company's balance sheet for the year ended 31 March 2014 is estimated to have been overstated by €17m. The decision to lend was based on inaccurate financial information provided to it.

Conclusion

The Court in its conclusions found:

(A) the Company consistently overstated their intangible assets, so that, as of 30 September 2019, their intangible assets were overstated in the Company's accounts by €31.7m;

(B) three purported co-production agreements were not genuine and the Company had included expenses on its balance sheet in relation to these agreements that did not exist;

(C) numerous instances of misappropriation or diversion of assets from the Company was established, such as the payment of €1.5m to DQE India of funds from the cancelled Method co-production agreement in 2017; and

(D) that the Company had been insolvent at least since 31 March 2017.

There was evidence that board minutes furnished referred to fictitious meetings that never occurred and were prepared with a view to retrospectively validating the actions of the Company.

The Court was satisfied that the evidence presented to them, which was not only uncontested by the Respondents, but which was thorough, forthright and compelling meant that personal liability should be imposed on each of the Respondents in respect of their conduct as directors of the affairs of the Company. The Court was satisfied that they were each knowingly a party to the carrying on of the business of the Company in a reckless manner, and had been knowingly a party to the carrying on of business of the Company with intent to defraud creditors.

The Court found that the totality of the egregious conduct of the Respondents -- including in particular the soliciting of investment on the basis of falsified and utterly unreliable books and records at a time when the Respondents must have known that the Company's solvency was seriously in doubt -- suggests that imposition of personal liability on each of the Respondents in the sum of $30,800,238.92 is just and proportionate in all the circumstances.

This case demonstrates that the Irish Courts are willing, when the circumstances justify, to lift the corporate veil and impose personal liability on directors where their conduct merits same. While the Court will not make the decision to lift the veil lightly, it is willing to do so when the facts show that the directors are guilty of offences such as fraud, fraudulent or reckless trading, misapplication of monies etc.

For further information on directors duties or actions seeking to impose personal liability, please contact Andrea Brennan in our Dublin office.