1. CHI
is in compulsory liquidation and Mr. Tom Grace was appointed Liquidator by
order of the Court on 25th May, 1992. By further Order made on 4th August,
1994 the Liquidator was given leave to institute such proceedings as he might
be advised by Counsel against CSZ and CSC in Ireland or elsewhere as he may be
advised in respect of or arising out of any alleged breach of Section 60 of the
Companies Act, 1963.
2. Pursuant
to this leave, the Liquidator applied by way of Notice of Motion dated 30th
January, 1995 for certain declarations in relation to both CSZ and CSC.
Proceedings were brought by both CSZ and CSC to stay the said proceedings and
by order dated 2nd February, 1996 the proceedings were stayed as against CSZ,
but not as against CSC. As the proceedings are now only for declarations as
against CSC, there is little point in setting out the reliefs sought in the
Notice of Motion, which related to both banks.
3. It
was agreed that the proceedings be heard on oral evidence, and therefore I
propose to ignore the affidavits that were originally filed.
5. CSC
is a bank incorporated in Canada which operates as a wholesale bank which deals
primarily in wholesale loans to other banks, insurance companies and corporate
bodies. The transactions it conducts are on a very large scale, and the
average transaction size is in the range of Canadian $25 million - Canadian $50
million. It is a wholly owned subsidiary of CSZ.
6. Castor
is a company incorporated in Canada having its head office in Montreal, which
had been a customer of CSC since the early 1980s. It was primarily a finance
company, providing first, second and third mortgages largely in relation to
commercial real estate, and was funded by a number of banks and investors,
including CSC. Castor also had a number of subsidiary companies in several
countries outside Canada.
7. CHNB
was a company incorporated in New Brunswick in Canada and was effectively a
wholly owned subsidiary of Castor. Its involvement in the present transaction
was largely as a conduit between Castor and CHI.
8. CHI
was a company incorporated in this jurisdiction and was in effect a wholly
owned subsidiary of CHNB. It was again involved in financing the purchase of
properties, largely in the United States of America
9. Before
going into the detailed documentation, and the evidence which was given on
behalf of the parties, I think it would assist to set out in broad terms the
transactions which are alleged to have taken place between the parties, and
which have given rise to these proceedings. These transactions all took place
within the space of a few days in December 1989. They can be briefly described
as follows:-
10. It
is alleged by the liquidator that the monies paid by CHNB to CHI as a
subscription for shares in CHI were deposited by CHI effectively as the
ultimate security for the monies advanced by CSC to Castor, and that this is a
breach of Section 60 of the Companies Act, 1963.
11. As
the meaning of the word "transaction" is to some extent in issue, it may also
be relevant to consider the use of that word in other subsections of Section
60. These subsections provide a mechanism whereby, under certain circumstance,
a company may in fact give financial assistance towards the purchase of its own
shares. In relation to these procedures, the word "transaction" is used in
three subsections.
12. In
addition to the circular transactions referred to above, the liquidator also
submits that a guarantee of 12th August, 1991 given by CHI to, inter alia, both
CSZ and CSC constitutes a breach of Section 60. This document guarantees all
liabilities of Castor to either of the banks in very wide terms, and would
undoubtedly cover the liability of Castor to repay the Stg. £18.8 million
advanced to it by CSC.
13. It
would appear that this loan arose out of proposals made by Castor to CSC,
probably in November 1989. I do not have evidence of any details of these
proposals or of the discussions which took place at that time. However, it is
clear that there was some kind of agreement in principle that a loan would be
made, subject to the approval of CSZ. On
14. Mr.
Stolzenberg, the President and Chief Executive Officer of Castor. While I am
not concerned with the position of CSZ, I am concerned with the knowledge of
CSC of this transaction, and in this regard a memorandum of this meeting sent
by CSZ to CSC is of very considerable importance. The relevant portions of the
memorandum are:-
15. Prior
to this meeting, Mr. McFarland, who gave evidence on behalf of CSC and was the
official in Toronto with primary responsibility for the account of the Castor
companies, had put forward a proposal to the Toronto Credit Committee in
relation to this loan on 5th December, 1989. This proposal is under certain
standard headings and was approved by the Toronto Credit Committee on 7th
December, 1989, and subsequently approved by CSZ on 14th December, 1989. The
approved proposal is headed "credit authorisation" and is for C $35 million as
a five year secured term loan. The relevant extracts from the credit
authorisation are as follows:-
16. For
some reason, presumably at the request of castor, on 14th December, 1989 it was
decided that, instead of advancing a loan in Canadian dollars, CSC would
advance the loan in sterling. A new credit authorisation and proposal was
drawn up, and submitted by Mr. McFarland on 14th December, 1989, which was
approved by the Toronto Credit Committee of CSC on 19th December, 1989, and
ultimately approved by CS Zurich, very much after the event, on 30th January,
1990. The terms of this credit authorisation differ slightly from the earlier
credit authorisation for the Canadian dollars, and is for a
17. Stg.
£19 million committed term loan, stated to be previously C $35 million.
This was stated in evidence by Mr. McFarland to be an amendment of the earlier
credit authorisation, but one which nevertheless required new approval because
it was in a foreign currency. The relevant extracts from the sterling
authorisation are:-
18. It
should be noted that neither of these documents makes any mention of CHNB or
CHI, although the dollar authorisation refers to Castor pledging cash
collateral with CSZ for the payment obligation. The sterling authorisation
makes no mention of this, but it was clearly known by CSC that the payment
obligation was going to be backed by a cash deposit.
19. On
15th December, 1989 CSC issued a facility letter to Castor for a loan of up to
Stg. £19 million expressed to be for general and corporate purposes. A
security was again stated to be a payment obligation issued by CSZ and it was a
condition precedent to the facility that there be final approval by CSZ to the
transaction. The terms of the facility letter were signed and accepted by Mr.
Stolzenberg on behalf of Castor on 15th December, 1989.
20. On
19th December, 1989 CSZ issued to CSC what is described as a payment
obligation. It takes the form of a letter, the relevant portions of which are:-
21. If
one goes back to the memorandum of the meeting on 11th December, 1989 in
Zurich, in which it is recorded that Mr. Stolzenberg signed, inter alia, the
order for and the liability under the payment obligation, I think it is quite
clear that the client referred to in the payment obligation as having requested
its issuance was in fact Mr. Stolzenberg, and the only question is the identity
of the company which he was representing. Unfortunately, the documents which
he signed remained in Zurich, and have not been put in evidence, and I think it
is fair to say that they were almost certainly never seen by CSC. However, it
seems to me as a matter of probability that, while he may have considered
himself as acting for the entire Castor Group, nevertheless, in signing the
order for and liability under the payment obligation he was in fact acting for
CHI, as this document was tied in with the arrangement of fiduciary deposits.
for the account of CHI.
22. Following
the receipt of the payment obligation from CSZ, CSC credited the account of
Castor with the Stg. £18,800,000 with a value date of 20th December, 1989.
Thus the transaction between CSC and Castor was put in place.
23. While
the monies were nominally credited to the account of Castor with value 20th
December, 1989, the same sum was debited to Castor's account with value on the
same date. CSC had already received two documents, both dated 15th December,
1989, which were directions to them in relation to these monies. Both
documents were signed by
26. Stg.
£18,800,000 to CHNB's account with CSC with a value date of 19th December,
1989, although ultimately the transfer took place with a value date of 20th
December, 1989. It is of considerable significance that the relevant portion
of the letter ended with the words "reference: capital subscription". The
second letter, signed by Mr. Stolzenberg on behalf of CHNB, directed CSC to
make a transfer, clearly on the basis that the instructions in the first letter
had been complied with, and therefore the monies were now in an account of
CHNB. The transfer directed by the second letter was to pay the Stg.
£18,800,000 to CHI's account with CSZ. The value date is again supposed
to be 19th December, 1989 and was in fact
27. Interestingly,
an internal document of CSC apparently known as an internal loan booking
ticket, on which the loan transaction was recorded, would appear to combine all
these various transactions. It records the loan of the monies and that it is a
new advance, and then records that there is to be a transfer value 20th
December, 1989 of the monies to CSZ for the account of CHI, with the account
number given. It is further stated that this is done by order of CHNB. The
reality is, therefore, that while there may have been nominal cancelling
28. Although
the monies were advanced by CSC, it seems clear that the details of the entire
financial arrangements were hammered out in Zurich between Mr. Stolzenberg and
officials of CSZ. This was confirmed by the evidence of Mr. McFarland, who
stated that Castor's principal relationship was with CSZ, and that generally in
such circumstances CSC were told what they needed to be told by CSZ , but
nothing more. I think it is clear, so far as it is relevant, that CSC were at
all times acting by order of the direction of, or subject to the approval of
CSZ in their relations with the entire Castor Group, and in particular with
CHI. I should add that, on the documents and evidence before me, it appears
almost certain that CSZ were fully aware of all aspects of the financial
arrangements before the loan was advanced by CSC.
29. On
29th December, 1989 CHI executed a deed of pledge in favour of CSZ whereby it
pledged in favour of CSZ all monies which it might have on account with CSZ to
cover all claims which CSZ might have against CHI. In my view this document
makes it quite clear what was meant by "fiduciary deposit" in the earlier
document and was executed as confirmation that CSZ could have recourse to the
monies deposited with it by CHI.
30. In
the middle of 1991 CSZ and CSC became somewhat concerned as to the position of
the Castor Group of companies, and in order to try to protect themselves they
took a guarantee from each of the companies in the Castor Group which
guaranteed in very wide terms the indebtedness of Castor to, inter alia, CSZ
and CSC. The guarantee given by CHI was dated 12th August, 1991, and was again
signed by Mr. Stolzenberg. It is not necessary to go into details, as it does
not make any specific mention of the loan of Stg. £18.8 million with which
this case is concerned. I accept that it was not entered into by specific
reference to that loan, but by way of a general security for all advances which
had been made to Castor.
31. In
February 1992 it became clear that Castor and its subsidiaries were in very
serious financial difficulties. Again, the initiative for action came from
CSZ, and on
32. This
Action arose because on 25th February, 1992 Castor had sought the protection of
the Quebec Superior Court under the Companies Creditors Arrangement Act, 1985,
which was a step which gave rise to an immediate liability on the part of
Castor to repay the loan to CSC. Accordingly, immediately on receipt of the
memorandum, on
33. I
think it is quite clear that the only or main purpose of CHI depositing monies
with CSZ was to ensure that CSC, effectively on the direction of CSZ, would
advance monies to Castor and then to CHNB to enable it to purchase the shares
in CHI. In my view this was clearly the giving of financial assistance within
the meaning of Section 60. I believe that, had the deposit not been made, no
monies would have been advanced by CSC to Castor and through it to CHNB, and
therefore CHNB would have been unable to purchase the shares in CHI.
34. On
the other hand, I do not think that the only or main purpose of the guarantee
of 12th August, 1991 was to give financial assistance for the purchase of
shares. This was a guarantee given in relation to the very considerable
indebtedness of the Castor Group to the Credit Suisse Group, and was one of a
series of guarantees given by all the subsidiaries of Castor. I believe its
principal purpose was to try to ensure continued financial support for the
entire Castor Group, which had very large borrowings from the Credit Suisse
banks.
35. A
transaction is only voidable under subsection 14 against any person who had
notice of the facts which constitute the breach of Section 60. The onus is on
the Liquidator to prove that CSC had such notice. However, while the onus is
undoubtedly on the Liquidator, and while it has been said that this is a penal
section, the fact remains that I still only have to decide this question as a
matter of probability.
36. This
whole question of notice was considered by the Supreme Court in
Bank of Ireland Finance Limited -v- Rockfield Limited
(1979) IR 21. At page 37 Kenny J. said:-
39. In
my view, therefore, CSC had actual notice, in the sense that that phrase is
explained in the Rockfield case, that the monies they were advancing were going
to be ultimately used by CHNB to acquire shares in CHI, and that those monies
were being secured by a payment obligation or guarantee by CSZ which was
countersecured by the deposit of the same monies by CHI with CSZ.
40. As
probably the most important link, or perhaps as it would be put by CSC as the
weak link, in this argument, was the reference to capital subscription in the
payment directions, I should comment on this further. The evidence of Mr.
McFarland was that as far as he was concerned this was simply a note put into
the request by Castor and by CHNB respectively for the purpose of giving
information to their auditors, and that it was of no relevance to CSC.
However, even if one accepts that that was what Mr. McFarland thought at the
time, that does not take away from the fact that it is a clear statement of
fact which directly informed CSC that the money was going to be used to
subscribe for shares. I can appreciate that Mr. McFarland may not have thought
this was of any relevance, as of course I fully accept that Mr. McFarland was
totally unaware of the provisions of Section 60 of the Companies Act, 1963.
However, what Section 60(14) relates to is a person having notice of the facts
which constitute the breach of Section 60. It does not require that the person
who had notice of the facts also had notice that it was in law a breach of
Section 60, or indeed that such person was aware of the existence of Section
60. I am quite satisfied that CSC had notice of the facts which constituted
the breach, and no doubt had they been aware of the provisions of Section 60,
they would have been aware that there was a breach of that Section.
41. Under
subsection (14) it is avoided against any person who had notice of the facts
which constituted a breach. However, I fully accept Mr. Fitzsimons' argument
that I cannot make an order declaring a transaction void as against a person or
body who is not a party to these proceedings. In particular, while I have no
real doubt but that CSZ were aware of all the facts, I cannot make an order
against them, as these proceedings have been stayed against them. I can in
fact only make an order as against CSC declaring void the transaction, which in
my view is the deposit of the monies by CHI with CSZ as security, and the
consideration for that deposit, which was the giving of the payment obligation
by CSZ to CSC. Accordingly, I will make the relevant declaration as against
CSC and with regard to that transaction only. I am not sure what practical
effect this will have, but that is a matter for the parties to consider,
possibly elsewhere.