High Court of Ireland Decisions

1. The liquidator of Hunting Lodges Ltd ('the company') has applied to the court for a declaration under s. 297 of the Companies Act, 1963 that Charles Roger Porrit, Joan Porrit, Humphrey O'Connor and Plage Services Ltd should be personally responsible without limit of liability for the debts of the company. The background to the matter is as follows.

2. The company was incorporated on 2 December 1966. The nominal share capital is £20,000 and the issued share capital £12,000. Of this £9,000 are held by Charles Roger Porrit and £3,000 by his wife Joan Porrit. The directors are, and were at all relevant times, Charles Roger Porrit and Joan Porrit. The secretary of the compal1y is Charles Roger Porrit having been appointed on the resignation in October 1981 of Owen Cusack who remained on as book-keeper. Messrs. Coffey, Gubbins & Co. were appointed auditors of the company in 1974, Mr Gubbins being the partner who had dealings with Mr Porrit. Mr Gubbins said he had very little contact between the years 1976 and 1981 with Mr Porrit. During those years Mr Gubbins entered appeals against assessments to tax but no accounts were prepared.

3. A fire took place in the Bunratty Castle Hotel owned by the company in August 1980. A substantial amount of the records of the company were destroyed. The accounts ultimately prepared by Mr Gubbins for the four year period ending 30 November 1980 are reconstructed accounts prepared without the benefit of records.

4. In 1981 the company owed the Revenue over £300,000 in PAYE, VAT, PRSI and to a lesser extent corporation tax. The Revenue commenced investigations into the affairs of the company in October 1981. There were discussions in December 1981 between the Revenue officials and Mr Gubbins on behalf of the company. After Mr Gubbins had negotiated additional credit for the company, Mr Porrit agreed in February 1982 to pay instalments of arrears of tax by nine post-dated cheques between 25 January 1982 and 25 September 1982. The Revenue then threatened proceedings by letter dated 16 November 1982 as current taxes were not being paid.

5. Also in November 1982 the hotel premises were sold, the auctioneer being Mr Kearney of Rooney Auctioneers Ltd. At that stage the company had a trading loss of £209,000.

6. There was contact around this time between Mr Kearney and Mr O'Connor as a possible purchaser for the licensed premises owned by the company known as Durty Nelly's. Nothing came of it at this stage, although Mr O'Connor was, in fact, the ultimate purchaser. On 7 November 1982 Mr Kearney was asked by Mr Gubbins to value Durty Nelly's for bank purposes. He was told everything was in order. In connection with the valuation Mr Gubbins wrote on 23 November 1982 to tell him that the turnover was £1.2 million and later by letter of 7 December that the turnover was £1.248 million.

7. Meanwhile, on 2 December 1982 the matter of arrears of tax owed by the company was referred to the Revenue solicitor. The amounts involved were:

8. PAYE and PRSI + interest: £99,005.65

9. Mr Gubbins on behalf of the company had a meeting in early December 1982 with Mr Thomas Meagher of the Revenue, who told him that they would take a serious view if there was any attempt to dispose of assets without paying the Revenue.

10. On 5 January 1983 Mr Kearney furnished his valuation of Durty Nelly's at £750,000 to Mr Gubbins.

11. The proceeds of sale of the hotel amounting to £100,000 were received and also the insurance paid as a result of the fire amounting to £50,000. Taking these figures into account, this meant that there was an extraordinary loss of £223,905 (net) to the company.

12. It was planned to commence work on the accounts to the end of November 1982 in January 1983. Mr Gubbins said certain work was done but information was not available and his staff were moved elsewhere. Work on the accounts was not resumed until March or Apri11983.

13. On 31 January 1983 a summons was issued by the Revenue claiming £217,625.67 in respect of arrears of PAYE, PRSI and VAT plus interest.

14. At the end of February or beginning of March, Mr Kearney met Mr O'Connor again and Mr O'Connor expressed an interest in buying Durty Nelly's. Mr Kearney put him in touch with Mr Porrit and they met in Mr Kearney's office in March. Mr Kearney was aware that Mr Porrit wanted £200,000 as money on the side and that both parties wanted confidentiality. Mr Kearney said that Mr Porrit and Mr O'Connor took charge of the discussion. £550,000 was the starting price. Mr O'Connor wanted £30,000 off for stamp duty and this was conceded.

15. On 16 March Mr Gubbins wrote to Mr Porrit setting out the gross turnover for the previous year at £1,461,132. This letter was for the information of Mr O'Connor and his advisers. There was a proviso to the letter as follows: 'The foregoing has been extracted from the records of the company and has not been audited fully'. On 11 April 1983 a deal was made at £520,000. Mr Sheehy (solicitor for Mr Porrit) of Messrs. Connolly, Sellors & Geraghty was 'phoned on that date both by Mr Kearney and by Mr Hayes (the solicitor for Mr O'Connor), confirmed later by Mr Porrit, to say that the premises were sold at £520,000. Mr Sheehy told Mr Porrit about the difficulty concerning planning permission which had been discussed previously, i.e. that there was no planning permission for any extensions. On 18 April 1983 Mr Sheehy, who was not aware of any title difficulties, sent the title deeds and the map of the property to Mr Hayes. He went to inspect the premises and discovered that there was no title on paper to approximately a 30 foot strip at the rear.

16. On 20 April 1983 Mr Sheehy was told by Mr Porrit that the price was further reduced to £480,000 on the basis of the reduction in area and because where was a question of the purchaser being liable in respect of payments to staff. Mr Sheehy went to Mr Hayes' office on that date and wrote out a contract with 1 May as the closing date. He intended it to a draft contract without binding effect which would ultimately be typed out. It was needed as Mr O'Connor was going to see his bankers on that day. The draft contract was sent to the City of Dublin Bank and a copy to the Investment Bank of Ireland.

17. On 21 April 1983 a meeting took place between the Revenue officials (Mr Mangan and Miss Ryan) and Mr Gubbins and Mr Porrit. While Mr Porrit talked of trading out of his difficulties or getting a large injection of capital, Mr Gubbins said (confirmed by Mr Mangan) that the company was then hopelessly insolvent. The draft accounts for the year ending 30 November 1983 were not finalised at that stage. Anoter meeting in a month's time was planned, the date to be agreed later. Mr Mangan said he would advise the Collector General to liquidate the company if firm proposals were not made within a week of the next meeting.

18. On 22 April Mr Gubbins furnished a second letter concerning turnover to Mr Porrit similar to the first letter but from which the proviso was omitted. The explanation of the omission given by Mr Gubbins was that the field-work on the accounts was done at that stage.

19. Mr Hayes as solicitor for Mr O'Connor was in contact with Mr Lane, the solicitor for the City of Dublin Bank who were considering the title. On behalf of Mr O'Connor he furnished additional security to the bank at their request. Mr Lane returned the contract and Mr Hayes, on his own initiative, added clauses 10 and 11 concerning staff. The contract was signed by Mr O'Connor on 15 or 16 May 1983. On 16 May £48,000 was withdrawn by Mr O'Connor from his bank account. He obtained a bank draft payable to Messrs. Holmes, O'Malley & Sexton (Mr Hayes' firm). On 17 May the contract was sent by Mr Hayes to Mr Sheehy with the bank draft as deposit and with the closing date altered to 20 May, together with requisitions on title. Concurrently with these events, on 9 May 1983 the Revenue sent a 21 day notice requiring payment of the debt of £579,482.74 and threatening to liquidate if the debt was unpaid.

20. On 18 May 1983 the bank facility letter to Mr O'Connor issued. A problem arose concerning VAT. The purchaser, Mr O'Connor, was not registered for VAT and therefore would be liable to VAT on the purchase. To get over the problem, Plage Services Ltd, a shelf company owned by Mr Gubbins' firm, was supplied by him to Mr O'Leary of Messrs. G. M. Power & Co, Mr O'Connor's auditors. This was a company incorporated on 21 October 1980 with the issued share capital of £2. Subsequently a return of directors dated 27 May 1983 and field on 9 June 1983 showed the directors to be Humphrey O'Connor and Pauline O'Connor .

21. On 18 May 1983 the replies to the requisitions were furnished. Prior to them being sent out, there was a meeting in Mr Sheehy's office between Mr Sheehy, Mr Porrit and Mr Murphy, another solicitor in the firm, to go through the replies to the requisitions. Mr Murphy was asked to take over the closing of the sale as Mr Sheehy's holidays were planned for the time of closing. Mr Sheehy told Mr Porrit it was necessary to have a resolution of the directors to approve the sale. He went through the replies with Mr Porrit. On 19 May 1983 rejoinders to the replies to requisitions were sent to Mr Sheehy by Mr Hayes. They were furnished at the request of Mr Lane acting for the City of Dublin Bank.

22. On 20 May 1983 Miss Ryan, one of the Revenue officials, arranged a meeting with Mr Porrit for 26 May. On 24 May, Mr Porrit met Mr Gubbins and told him he was going to England. In fact he never went. On 25 May the replies to the rejoinders were sent to Mr Hayes. On 26 May the meeting with the Revenue officials was cancelled by Mr Gubbins telling them that Mr Porrit was in England. On 27 May Mr Hayes was in contact with Mr Lane by telex. He wrote to Mr Sheehy concerning the replies to the rejoinders and the acts disclosed by searches.

23. On 30 May the contract for sale was signed by Mr Porrit, witnessed by Mr Murphy and sent to Mr Hayes. A copy was sent to Mr Gubbins' office. Mr Porrit called Mr Gubbins and told him the sale was going through. Mr Gubbins provided him, at his request, with a typed copy of a resolution of directors approving the sale with the name of the purchaser left blank. There was a telex from Mr Hayes to Mr Lane suggesting a completion date on Wednesday 1 June. The details were arranged on the 'phone and the closing agreed for that date. On 1 June a representative from Mr Gubbins' office applied in person to the Revenue office in Limerick for a capital gains tax exemption certificate for the sale, the consideration being stated to be £480,000. The certificate was issued and collected by hand a few hours later. Mr O'Connor withdrew from his bank £120,000 being £12,000 in cash and three bank drafts for £35,000, £30,000 and £35,000 made payable respectively to P. Rogers, C. Hunt and R. Charles.

24. Prior to closing Mr O'Connor met Mr Hayes and Mr Lane in Mr Hayes' office. Mr Lane went through the documents and Mr O'Connor executed a mortgage in favour of the City of Dublin Bank. The actual closing, other than payment of money, took place in Mr Murphy's office. Mrs Porrit and Mr Porrit countersigned the affixing of the seal of the company to the conveyance and Mrs Porrit left after that part of the transaction. The financial part of the transaction took place in the Allied Irish Banks, who were one of the debenture holders, the other being Allied Irish Finance. The City of Dublin Bank who were providing 100% finance insisted on paying Allied Irish Banks and Allied Irish Finance themselves. The bank draft for the deposit of £48,000 which had not been cashed was returned to Mr O'Connor endorsed by Messrs. Holmes, O'Malley & Sexton.

25. During the course of that day Mr O'Connor gave to Mr Porrit £12,000 in cash and £100,000 in the drafts payable to Messrs. Hunt, Charles and Rogers together with the draft for £48,000 endorsed by Messrs. Holmes, O'Malley & Sexton. The total was £160,000. The financial details on closing were £315,668.35 paid to Allied Irish Finance on foot of a debenture and also £13,689.36 paid to Allied Irish Banks in respect of the personal liability of Mr Porrit to the bank.

26. From the documents available to me, the basis for this payment out of the company funds appears to have originated from a resolution dated 7 March 1983 altering the memorandum of association to allow the company to guarantee (inter alia) the payment of money by any person, followed by a subsequent resolution dated 26 April 1983 authorising the company to guarantee Mr Porrit's debt to the Allied Irish Banks, not exceeding £20,000. The balance of £150,642.29 was paid to Mr Murphy. Out of this Mr Murphy paid £20,664 to Rooney Auctioneers Ltd and retained £9,286.50 for fees due to his firm and £77.50 for sundry outlay. The net proceeds of sale after payment of expenses was £120,614.29 which was lodged to the credit of the company's account.

27. Mr O'Connor took over the running of the business on the day of closing. The same day Mr Porrit asked Mr Kearney (the auctioneer) to be put in touch with a building society. Mr Kearney rang the Irish Permanent Building Society (IPBS) branch at O'Connell Street and asked the manager, Mr Dundon, to see a client but gave him no name. Mr Porrit went to Mr Dundon identifying himself as being recommended by Mr Kearney and gave his name as Michael Atkinson. He opened 13 accounts in the name of Michael and Joan Atkinson and lodged the four bank drafts given to him by Mr O'Connor. He furnished no address. Mr Dundon wrote in the address of the IPBS's solicitors as 'Mr Atkinson's' address. Mr Porrit was given 13 mandate documents to take away and get the signature of 'Joan Atkinson'.

28. The next day the Revenue officials were in touch with Mr Gubbins about the sale but could get no information. The following day, 3 June 1983, application was made to the High Court by the Revenue solicitor for the appointment of a provisional liquidator and Mr Hugh Cooney was appointed.

29. On the same day Mr Porrit returned to Mr Dundon the mandate documents signed by Mrs Porrit as Joan Atkinson and signed by himself as Michael Atkinson. The existence of the building society accounts was discovered as a result of an examination of Mr Porrit, Mr O'Connor and Mr Kearney under s. 245 of the Companies Act, 1963 on 30 June 1983 before Barron J.

30. With regard to directors' drawings, the minutes do not disclose any annual general meetings after 9 May 1973. Accordingly, there are no resolutions authorising payment by way of remuneration to the directors. The reconstructed accounts prepared by Messrs. Coffey, Gubbins for the four years to 30 November 1980 show that during the previous accounting period the loans to the directors as of 30 November 1975 were £3,020. The drawings during the years 1975/76 amounted to £29,111 and the amount allowed as remuneration was £10,350; so that at 30 November 1976 the loans to the directors stood at £21,781.

31. For the four year period the advances to directors amounted to £113,889. Mr Gubbins allocated £100,000 of this to remuneration leaving a balance due at the end of the period of £35,670. According to him, basically remuneration would be a reflection of drawings.

32. For the two year period ended 30 November 1982 (which are draft accounts) the directors' drawings are shown at £45,927. In this case Mr Gubbins allowed £50,000 for remuneration for the two year period, thus reducing the. loan account to £31,597.

33. The draft profit and loss account for the period from 1 December 1982 to 3 June 1983, that is the date of the appointment of the provisional liquidator, taking the balance of the directors' loan account at the figure of £31,597, shows that at the end of the seven month period the amount of cash drawings or money paid to the use of the Porrits after allowing for goods supplied by or money received from Mr Porrit amounted to approximately .£30,000. Mr Farrell, the manager of the liquidation, estimates that the net amount due on the directors' loan account, including arrears of PAYE and PRSI, is £199,036. It must also be noted that during a period when the company was insolvent the monthly standing order payable to Mr Porrit was increased from £1,000 to £2,000.

34. On 20 June 1983 the company was wound up and Mr Cooney was appointed official liquidator. The amounts claimed due to the Revenue at the date of the hearing were as follows:

35. Employees PAYE and PRSI ........................£132,280.45

36. Corporation Tax .......................................£345,923.87

37. There may be some adjustment on corporation tax but that is a matter for the liquidator and the Revenue to resolve.

38. If in the course or the winding up or a company it appears that any business of the company has been carried on with intent to defraud creditors or the company or creditors of any other person or for any fraudulent purpose, the court on the application of the liquidator or any creditor or contributory of the company, may, if it thinks proper so to do, declare that any persons who are knowingly parties to the carrying on or the business in manner aforesaid shall be personally responsible, without any limitation or liability, for all or any or the debts or other liabilities or the company as the court may direct.

39. On the hearing of an application under this subsection the liquidator may himself give evidence or call witnesses.

40. The following issues are raised: 1. Can a single transaction be described as 'carrying on business' with the meaning of s. 297? 2. Was any business carried on with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose? 3. Was each one of the persons sought to be made liable, 'knowingly' a party to the carrying on of such business with such fraudulent intent?

41. I am satisfied that carrying on business is not synonymous with trading: see In re Sarflax Ltd [1979] Ch 592. In my opinion it is not necessary that all the company's business should be carried on with fraudulent intent nor is it necessary that there should be a course of dealing or series of transactions before the section can be called into operation.

42. The section refers to 'any business'. In the course of the conduct of its affairs, a company will have many different aspects of its business. One single transaction can properly be described as 'business of the company' and so also can constituent parts of a transaction. One single act committed with the fraudulent intent specified by the section can, in my opinion, suffice to ground a declaration under the section. The fact that the piece of business is a transaction which involves the sale of the entire assets of the company does not alter the position in any way: see In re Gerald Cooper Chemicals Ltd [1978] Ch 262

43. In this case, while the sale of the premises with a payment on the side can be viewed as one transaction, it also breaks into different elements. There are the negotiations culminating in the signing of the contract, the closing of the sale and the disposition of the purchase money. Each of these elements can be designated together or separately as 'business of the company'. In particular I include the disposition of the purchase money as part of the business of the company. Unlikely though it was, Mr Porrit could have deposited the £160,000 to the credit of the company, which would have negatived an intent on his part to defraud creditors in respect of that money. Instead he concealed the money under false names in the building society accounts, thus completing the transaction which was part of the business of the company.

44. Having decided that any business of the company includes a single transaction or part thereof I intend to refer to the 'business' in this case as the sale or a constituent part thereof. This is the common denominator between Mr and Mrs Porrit and Mr O'Connor and Plage Services Ltd.

45. I am satisfied that all four parties were 'parties' to the sale within the meaning of the section. The phrase in the corresponding section to the English Act (s. 322 of the Companies Act, 1948) has been defiend in In re Maidstone Buildings Provisions Ltd [1971] 1 WLR 1085, at p. 1092 as indicating no more than 'participates in', 'takes part in' or 'concurs in'. Pennycuick VC added that it seemed to him that invovled some positive steps of some nature.

46. There is no problem in proving positive steps in this case as each of the parties participated in the sale. Mr Porrit participated from start to finish. He was involved in all the negotiations; he required the payment on the side; he produced at closing the resolution of the directors authorising the sale at £480,000; he countersigned the affixing of the seal to the conveyance; he took the additional £160,000 and he opened the accounts with the building society under false names.

47. Mrs Porrit participated in part of the sale. While she denied any knowledge of the resolution of the directors, she attended the closing of the sale and countersigned the affixing of the seal to the conveyance without objection. She signed a false name to the signature cards in respect of the building society accounts. Therefore, she took an active part in the closing of the sale and the disposition of part of the purchase money.

48. Mr Humphrey O'Connor participated in the sale up to and including the closing. He negotiated directly with Mr Porrit and agreed to provide the money on the side. He co-operated by providing the three bank drafts in false names together with cash and the endorsed bank draft for the deposit and handed them over secretly to Mr Porrit without the knowledge of their solicitors or the company's auditor.

49. Plage Services Ltd is the actual vehicle which Mr O'Connor used to take the conveyance. It was therefore a party to the sale at closing.

50. The next issue is whether the sale or individual elements of it were tainted with an intent to defraud creditors (whether of the company or of any other person) or any fraudulent purpose and, if so, did each of the parties knowingly participate.

51. In my opinion, in order for the section to apply, it is not necessary that there should be a common agreed fraudulent intent. If each of the participants acts for a fraudulent purpose then each may be liable. In this case I am satisfied that Mr Porrit intended to defraud the creditors of the company by abstracting money secretly from the company. Insofar as Mr O'Connor is concerned, he was a willing partner in completing the sale by paying part of the purchase money on the side in such a way that it could be concealed. It is irrelevant in my opinion whether he knew or did not know that the company was insolvent. He made the payment on the side in circumstances which could have had no purpose other than a fraudulent one. Either the creditors were going to be defrauded, if the company was insolvent, of the Revenue Commissioners were, if the company was solvent. The false names of the bank drafts were indicative of Mr O'Connor's guilty participation in Mr Porrit's scheme.

52. In addition both Mr Porrit and Mr O'Connor had the further fraudulent purpose of defrauding the Revenue of stamp duty on the full consideration. While it appears to me that the evidence of stamp duty was not their primary concern, it was nevertheless the necessary consequence of the secret payment. Since every person is deemed to intend the natural and probable consequences of his acts, so Mr Porrit and Mr O'Connor must be deemed to have intended the avoidance of stamp duty and thus added an additional fraudulent intent to their actions.

53. Plage Services Ltd has the knowledge of Mr O'Connor as a director imputed to it. It therefore participated in the closing of the sale with the same guilty knowledge of Mr O'Connor.

54. As far as Mrs Porrit is concerned I am satisfied that she did not know of the payment of money on the side as part of the agreement with Mr O'Connor but that does not absolve her from liability under the section, She knew about the sale itself and she countersigned the affixing of the company's seal to the conveyance to the purchaser without demur. When her husband brought home th signature cards from the IPBS she signed a false name. On her own evidence she assumed the money was part of the purchase money (which it was). It therefore belonged to the company. She assisted in the concealment of that money by signing a false name. That could have had no purpose other than a fraudulent purpose. It is therefore immaterial as far as she is concerned that she did not know of the payment of money on the side. She was prepared to conceal and did assist in concealing the company's money arising from the sale of the property.

55. I am satisfied, therefore, that it is proper to make a declaration under s. 297 of the Companies Act, 1963 that Charles Roger Porrit, Joan Porrit, Humphrey O'Connor and Plage Services Ltd to be personally responsible for the debts of the company.

56. The last remaining question is the extent to which each of them shall be liable. In this regard it is important to look to the entire circumstances.

57. In my judgment that section [ referring to the corresponding section in the English Act ] is deliberately framed in wide terms so as to enable the court to bring fraudulent persons to book. If a man has carried on the business of a company fraudulently, the court can make an order against him for the payment of a fixed sum...The sum may be compensatory. Or it may be punitive.

58. I am inclined to take the view that s. 275 is in the nature of a punitive provision, and that where the court makes such a declaration in relation to ‘all or any of the debts or other liabilities of the company’, it is in the discretion of the court to make an order without limiting the order to the amount of the debts of those creditors proved to have been defrauded by the acts of the director in question, though no doubt the order would in general be so limited.

59. In the case of Charles Roger Porrit I am satisfied that at the time he entered into negotiations with Mr O'Connor the company was insolvent and that all his efforts were directed to getting as much money out of the company as he could before the Revenue moved against it. His personal drawings doubled; his personal overdraft at Allied Irish Banks was discharged out of company's monies. He deliberately deceived the Revenue officials about going to England in order to avoid a meeting, when in fact he did not go. In my opinion it is entirely proper that Mr Porrit should be personally responsible without any limitation of liability for all the debts of the company. The benefit of limited liability should, in my opinion, be totally withdrawn and he should be put in the same position as if he were a trader carrying on business personally.

60. In relation to Mrs Porrit, the case has been made on her behalf that she played no part in the running of the company. The day has long since passed since married women were classified with infants and persons of unsound mind as suffering from a disability so far as responsibility for their acts was concerned, or since a married woman could escape criminal responsibility on the grounds that she acted under the influence of her husband. Mrs Porrit cannot evade liability by claiming that she was only concerned with minding her house and looking after her children. If that was the limit of the responsibilities she wanted, she should not have become a director of the company, or having become one she should have resigned.

61. Any person who becomes a director takes on responsibilities and duties, particularly where there are only two. The balance sheet and profit and loss account and directors' report for each year should have been signed by her. A director who continues as director but abdicates all responsibility is not lightly to be excused. If she had reasonably endeavoured to keep abreast of company affairs and had been deceived (and there is no such evidence) it might be possible to excuse her.

62. Mrs Porrit was concerned with the concealment of £148,000 all of which has been recovered, therefore no loss arises. In deciding whether to make Mrs Porrit liable for debts where nothing was lost through her actions, it is necessary that there should be ‘real moral blame’ attaching to her. In my opinion this does not arise because Mrs Porrit took all the advantages and none of the responsibilities connected with the company. I consider that she should be personally liable without limitation of liability for all the debts of the company not exceeding the amount or value of any advancement from her husband since 1 December 1976. I have chosen that date as it is the start of the four year period when the accounts had to be reconstructed. I direct that Mrs Porrit make discovery on oath of any such advancement. She is already liable to the company on foot of the directors' loan account.

63. So far as Mr O'Connor and Plage Services Ltd are concerned, I have decided that their liability should be limited to the sum of £12,000. This was the cash sum given to Mr Porrit which has disappeared and has not been accounted for. Mr O'Connor and Plage Services Ltd are jointly and severally liable for this amount. I make this liability a charge on any debt or obligation due from the company to either of them. Mr O'Connor is already liable to the company in respect of the balance of monies due for the stock-in-trade.