Judgment Title: Bloxham (In Liquidation) -v- The Irish Stock Exchange Ltd
Neutral Citation:  IEHC 93
High Court Record Number: 2013 2682 P
Date of Delivery: 13/02/2014
Court: High Court
Composition of Court:
Judgment by: Charleton J.
Status of Judgment: Approved
Neutral Citation:  IEHC 93
THE HIGH COURT
BLOXHAM (IN LIQUIDATION)
THE IRISH STOCK EXCHANGE LIMITED
Judgment of Mr Justice Peter Charleton delivered on the 13th day of February, 2014.
1. ‘Chrysalis’ bears this dictionary definition: the state of “a quiescent insect pupa, especially of a butterfly or moth” (Oxford Dictionary online). It can reference a state of waiting whereby a particular form of being is primed to turn into another. Originally, one reads, the word comes from хρυσός,meaning gold, apparently because often pupae in Greece are of that color. Historically, gold is closely allied to money. This case is about ‘project chrysalis’; which was a plan to take about €26.25 million in reserves built up in the Irish Stock Exchange (hereinafter “the ISE”) and to distribute it to the 7 guarantor members of that company, limited by guarantee, by the device of liquidating it and passing its responsibilities to a new entity that thereby would take over the running of and become the national stock exchange. Originally, the plaintiff stockbroking firm Bloxham was one of those seven members of the defendant Irish Stock Exchange and it is pleaded that it could expect a return of about one seventh of that sum; dependant on other factors not now important. Unfortunately, Bloxham is in liquidation and has been expelled from the ISE. Bloxham has not gotten any return and project chrysalis has not yet come to pass: wrongly, the plaintiff claims, because on being precipitated into liquidation the ISE, firstly, wrongfully suspended it then, secondly, schemed to delay the anticipated date for the fulfillment of project chrysalis from the third quarter of 2012 to beyond today’s date and, finally, terminated its membership on the 19th December, 2012, thus illegally cutting it out from its anticipated share. These decisions were made, Bloxham pleads, illegally and in breach of the duties of the directors of the ISE. Hence, in this action the reversal of the decision to expel Bloxham from the ISE is sought by its liquidator; whereupon, it is hoped, project chrysalis will complete this year with an appropriate yield to all seven members of the ISE. The current members of the ISE are the stockbrokers J&E Davy, Goodbody, Investec (formerly NCB), Cantor FitzGerald (formerly Dolmen), Campbell O’Connor, Royal Bank of Scotland and, to make up for the absence of Bloxham, Davy Corporate Finance. At the time of the relevant decisions the last was absent and some others were in a different iteration as guarantor members of the ISE.
2. As to the board of the ISE, the body which made the impugned decision: each guarantor member had a right to nominate a director; in addition the chairman of the board Pádraig O’Connor sat with the chief executive Deirdre Somers as organisational directors; and there were four experienced external directors. That makes 13. The actual decision was not made by the board but was delegated to the head of regulation Daryl Byrne and this delegation was made in the absence of the guarantor directors because conflict of interest issues led them to be advised to absent themselves so that the disinterested directors would act alone.
“To define in advance exact limits beyond which directors must not pass is, in the Lordships’ view, impossible. This clearly cannot be done by enumeration, since the variety of situations facing directors of different types of company in different situations cannot be anticipated.”
8. By what standard is the discharge by any director of the triple responsibility, of acting in good faith and within the scope of the relevant power and in the interests of the company as a whole, to be judged? In this case extremes have been argued. For the ISE, Howard Smith Ltd v. Ampol Petroleum Ltd  AC 821 at 835 is cited for the proposition that having analysed the relevant power that is in issue in a case, the court must “give credit to the bona fide opinion of the directors” and where this is present must “respect their judgment as to matters of management”, ultimately concluding “as to the side of a fairly broad line in which case falls.” The test is said to be entirely subjective. This approach would appear at odds with other branches of the law concerned with commerce. A commercial contract has to be construed against the background into which it was entered in accordance with the meaning of its words interpreted so as to give to that contract the business efficacy that the parties intended. This seems to rule out subjectivity. In many branches of the law of contract, what a reasonable person would have concluded from a term or condition or from a particular representation or situation is the touchstone from which the law proceeds. Yet, the case of Regentcrest plc v. Cohen & Another  B.C.L.C. 80 is cited in favour of an entirely subjective approach to scrutinising the discharge of directors’ responsibilities as follows:
11. Thus, it seems that the test for the exercise of directors’ duties must involve a scrutiny of the relevant power in the context of the broad limits within which it can be exercised; the interests that from a business point of view that are involved in a particular decision; and whether the presence or absence of reasonable grounds enables what is said subjectively to be an honest decision to stand as being in the best interests of the company as a whole.
12. With that in mind, the Court, turns to the relevant rules, to a general chronology, to project chrysalis and then to the circumstances surrounding the suspension and termination of Bloxham’s membership of the ISE.
The articles and rules
16. The articles of association were adapted later by special resolution in 2007 and 2009. Trading member of the exchanges defined as “any person who has been admitted to any class of membership” of the exchange and “such membership has not been terminated.” Article 2 (a) provides:
(i) if it resigns by giving not less than three months’ notice in writing or such shorter period as the board may agree of its resignation to the board and such resignation is accepted by the board;
(ii) if it ceases pursuant to the rules to be a trading member of the exchange; or
(iii) in such other circumstances as may from time to time be prescribed in any proceedings adopted the board pursuant to article 7 above…
(a) restrict the scope of [ISE] business conducted by the member firm, or
(b) suspend the membership of the member firm, or
(c) terminate the membership of the member firm.
Action may be taken under this rule without prior notice being given to the member firm concerned.
22. As of April 2012, in addition, the Bloxham accounts to the 31st December, 2011 had been signed off. These show financial assets available for sale in a sum of €6.25 million. That, in fact is the figure that Bloxham thought to be their surplus accumulated within the ISE. In fact, the sum available on distribution would be about half of that. The difference arises from the necessity to properly capitalise the new company. That is not important. In addition, however, trawling through the accounts, one may see payments to directors and profits; pretty ordinary financial positions, one would have thought. As it turns out, these were not. In fact some important figures had been misstated by the then financial controller of Bloxham. Unfortunately nobody within that company noticed, and nor did the auditors. In May, 2012, fiscal disaster struck in such a serious way as to become existential. On Wednesday the 23rd May, Pramit Ghose told the Court, Bloxham’s finance partner Tadhgh Gunnell revealed that there were certain financial irregularities that had been hidden over a stretch of some years. Apparently, to take an example, in the accounts just referred to, payment out to partners had been put in the positive side of the balance sheet and liabilities incurred had been incorrectly credited as opposed to debited. The matter was not gone into in detail during the hearing, but it would seem that positive assets of about €3 million were in fact negative liabilities in that sum; a difference of about €6 million. Crisis meetings took place immediately. It seems fair to overlook as an oversight the fact that Bloxham did not contact the ISE until the following Monday, the 28th May. An investigation was necessary within the company, accounts needed to be checked, verification needed to be sought, the Central Bank had to be contacted. Throughout the weekend the assets of Bloxham, previously sought by Davy, were effectively sold; thus leaving it with no client business. In the negotiations before this crisis, perhaps up to twice the value of what was negotiated in that sale might have come in over time due to a profit sharing arrangement that had previously been proposed by the eventual buyer; but this is uncertain. Blame has been flying around the court as to who should have been contacted in this crisis first and when they should have contacted and that the ISE should have been told as a priority. Since, however, no one has relied on this as a ground for terminating Bloxham’s membership of the ISE, this has actually been pointless. On the Monday, pursuant to rule 2.6.3, the ISE suspended the membership of Bloxham. One hour earlier the Central Bank had imposed a direction to cease all regulated activities. A provisional liquidator was then appointed. He later became the official liquidator and he is the effective plaintiff in this action. A few days later, Daryl Byrne, as head of regulation of the ISE, drafted a letter which was not sent to Bloxham but which noted the appointment of a liquidator and advised that the membership of Bloxham of the ISE “has been terminated… with immediate effect.” Then, within the ISE, consideration was given as to what should happen next. It was thought that “a robust process” was needed and that “clarity of process” was also required. It was thought that there was no “other avenue available within the rules” than, it might be supposed as words are missing, termination and that consideration should be given to “any other knock-on effect of this process.” This has been argued as sinister but it is not. There is, in fact, no evidence of a closed mind. People are entitled to think through their position and this is not necessarily any evidence that their mind has been made up. People are entitled to jot down where they think they might stand or think they actually stand. That, for honest people, is always subject to a rethink or to further information coming along. On the 1st June, the ISE wrote to the liquidator of Bloxham and pointed out that membership of the ISE could not be considered as an asset. On the 13th June, the board considered options in relation to Bloxham, and these included terminating the trading membership, seeking expulsion under a disciplinary process but did not include the continuation of the suspended member until the end of Project chrysalis. The process to consider termination was to be delegated by the board to the head of regulation and this was said to be the process “that most closely reflects what is in rule 2.6.1…”
23. The matter then was made ready for consideration by the board of the ISE. An unfortunate exercise of sanitisation then occurred. Daryl Byrne had drafted a memorandum suggesting that the termination of membership of Bloxham seemed inevitable. The chief executive redrafted the memo and some of the old parts were struck out and in this quote the new parts are underlined:
It should be noted that this paper only deals with the regulatory aspects of terminating the trading membership of Bloxham in accordance with the Rules.
The developed process
25. On the 1st August, the official liquidator wrote to the ISE with an assurance that he would do everything that would reasonably be required “to facilitate the restructuring of the company.” By this he meant to advance project chrysalis and to obtain for the benefit of the liquidation whatever was due as a result to Bloxham. This was completely correct of him. On the 16th August, the ISE wrote back and said that the completion of the project depended on certain external approvals. In the board minutes of the 5th September it is noted that project chrysalis “remains subject to uncertainty.” In the board minutes of the 18th October, the chairman of the board noted that Bloxham and the ISE were to meet on a “without prejudice” basis. By December, since no decision had yet been taken, the redelegation to the head of regulation was sought from the board. In the balance sheet of the ISE setting out the budget for 2013 the available distribution to guarantors is noted as of the end of 2012 as being €26.25 million.
26. On the 7th December, Pramit Ghose wrote to the chief executive of the ISE and to the directors remaining of the other guarantor companies pleading that since Bloxham had been a member of the ISE for over 100 years and that since he had been the driving force behind project chrysalis, the “agreed restructuring deal should proceed with due expediency.” On the 12th December, the ISE board met and, in the same way as previously noted, delegated any decision on termination to Daryl Byrne as head of regulation. Only Ronan Reid of Cantor Fitzgerald replied to the letter of Pramit Ghose. He said that the delay in restructuring was not “in any sense a grand plan to gain from” the demise of Bloxham. Referring to the complexity of the “multiple regulatory steps” he noted that the “Bloxham issue of itself may well have slowed processes external to the ISE.” This letter, one displaying appropriate courtesy unfortunately absent elsewhere among the director guarantors written to, is part of the background and has not been relied on by the Court. It is, of course, hearsay.
27. On the 13th December, Daryl Byrne wrote to the official liquidator of Bloxham stating:
Project chrysalis and its troubles
Answer: That is a very broad observation that I can’t affirm. The insolvency of a member firm always has an impact on the perception of the market that that member firm used to transact on. And their trading capability or lack thereof is something that will always have a reputational impact, that is my experience. Whether that transferred into specific criticism is neither here nor there in my mind.
Question: The fact is nobody has been criticising you at all and nobody was suggesting to you if you don’t act promptly against Bloxham this is going to have adverse consequences for the Stock Exchange in relation to its operations, in relation to its credibility or otherwise?
Answer: Having a firm continue on the role of trading members that has no capacity to trade, will never again have a capacity to trade, has been put into liquidation due to financial irregularities, that is being investigated by the Central Bank and that has already been terminated by the London Stock Exchange was a matter of very significant concern reputation only for the Stock Exchange and therefore I wouldn’t agree with you actually.
Question: Well, nobody was criticising you, nobody was saying anything adverse about you and I have to suggest there was no material impact for you as between having Bloxham suspended and having Bloxham terminated?
Answer: My job is not to respond to criticism. My job is to manage the Stock Exchange in the manner, in a highly professional manner, and in a manner that ensures that these criticisms are never leveled.
31. In addition, the board of the ISE was receiving reports about the progress of project chrysalis and it is fair to say that in the light of all that was going on, the news was generally not good. A briefing was received on the 5th July, 2012, and one paragraph quoted is enough to set the tone of the document:
The decision to terminate
34. In the circumstances, it is very hard to see any other decision being made. Furthermore, the law is clear that the Court has no entitlement to review this decision on the basis of substituting its own view. Even if the Court were to declare the decision unlawful, the decision would simply have to be reviewed by the board of the ISE. That could be done through another delegation but, more probably, the way to go about matters afresh would be for the non-guarantor board to consider all the relevant material afresh, because they had never made any decision to terminate before, and to assess realistically where they might stand. At this stage, there might be room for negotiation between the ISE and Bloxham but it is very hard to see any appreciable measure of strength in Bloxham because of its unfortunate position.