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McQuillan v. O'Brien [1997] IEHC 193 (22nd October, 1997)

THE HIGH COURT

JUDICIAL REVIEW

1988 No. 12010P

IN THE MATTER OF THE LOCAL GOVERNMENT (IRELAND) ACT 1902 SECTION 20 AND IN THE MATTER OF THE LOCAL GOVERNMENT (IRELAND) ACT 1871 SECTION 12

BETWEEN

MICHAEL FRANCIS MCQUILLAN

PLAINTIFF

AND

JOHN O'BRIEN

DEFENDANT

Judgment of Mrs. Justice McGuinness delivered the 22nd day of October 1997

1. The Judicial Review proceedings before the Court arise from the disposal by Waterford Harbour Commissioners of their shares in a dredging company named Hellebore Limited. The proceedings have been in being for some considerable time, leave to issue Judicial Review proceedings having been granted by this Court by an Order of 19th December, 1988. The Plaintiff herein was at all material times the General Manager of Waterford Harbour Commissioners, but is now retired, and the Respondent is a Local Government Auditor.

2. When the matter came on for hearing before this Court it was pointed out that parallel proceedings arising out of the same facts had been brought against the same Defendant by the Chairman of Waterford Harbour Commissioners, a Mr. Maurice Downey. The matter had been heard and decided by the learned President of the High Court. In a reserved judgment given on 12th April, 1994 the learned President held in favour of the Defendant. This judgment and Order is under appeal to the Supreme Court but has not yet been heard and decided. For this reason it could well have been desirable to adjourn the present proceedings to await the decision of the Supreme Court. However, having heard the submissions of Counsel on both sides, it appeared to me that the position of the present Plaintiff in relation to the facts of the matter was somewhat different from that of the Chairman of the Commissioners, Mr. Downey. It also seemed undesirable that proceedings which had been in being since 1988 should be yet further adjourned to await an appeal for which no date had yet been fixed. This aspect of the matter was rendered the more urgent by the fact that the Plaintiff, Mr. McQuillan, having retired on the 30th November, 1988, is no longer a young man and further delay in the hearing of his proceedings could well cause hardship and injustice to him. Should the outcome of the present proceedings also give rise to an appeal to the Supreme Court, it may well be possible for the two appeals to be heard conjointly. For these reasons, therefore, I decided to hear the matter.

3. In 1983 the Waterford Harbour Commissioners entered into a joint venture agreement with a Mr. William O'Hanlon for the dredging of Waterford Harbour. This agreement provided that a company would be established for the purpose, that the Commissioners would own 51% of its issued Capital and that the company would buy a dredger, the MV Lake Lothing, from Mr. O'Hanlon. Pursuant to this agreement a company was incorporated on the 13th April, 1983 called Hellebore Limited. The Commissioners subscribed for and were allotted 10,002 fully paid up £1 shares and Mr. O'Hanlon subscribed for and was allotted 10,000 fully paid up £1 shares. In addition, the parties agreed to make funds available to Hellebore by means of loans and the Commissioners granted a loan of £84,348 interest free to the company. Mr. O'Hanlon also agreed to lend the company a sum of £80,650 also interest free. It appears that these payments were made by way of loan rather than investment for tax reasons. Three years later the Commissioners decided to sell all their shares to Mr. O'Hanlon (for reasons to which I will refer later) and it is that sale which has resulted in these proceedings. A statutory audit of the Commissioners accounts was carried out by a Local Government Auditor, Mr. John C. O'Brien (the Defendant) in the years 1987 to 1988. On 16th November, 1988 pursuant to Section 20 of the Local Government (Ireland) Act, 1902 he charged the sum of £42,300 jointly and severally on the Plaintiff Mr. McQuillan who was General Manager of the Waterford Harbour Commissioners and on the Chairman of the Commissioners, Mr. Maurice E. Downey. Mr. O'Brien maintained that due to their negligence in selling the Commissioners' shares in Hellebore at less than their true value the Commissioners had suffered a loss of £42,300.

4. With the document of charge he delivered a further document entitled " Reasons for Charge " which detailed the reasons why the charge was imposed. Pursuant to Section 12 of the Local Government Act 1871, Mr. McQuillan, the Plaintiff, appealed by way of an Application for an Order of Certiorari against the charge imposed on him (as did the Chairman Mr. Downey). As I have already said Mr. Downey's proceedings were heard and decided by the learned President of the High Court in 1994.

THE LAW

5. In his judgment in Downey -v- O'Brien [1994] 2 IRLM 130 the learned President of the High Court set out the law applicable to this type of proceedings (at pages 134-136 of the Report). Since Counsel both for the Plaintiff and for the Defendant in their submissions to this Court did not appear to differ materially either from each other or from the interpretation of the law set forth by the learned President, and since I respectfully agree with the learned President's clear exposition of this somewhat complex issue, I feel I can do no better than to quote from his judgment. Under the heading " The Law " at page 134 the learned President states:-

"The power of a Local Government Auditor to raise a charge against the Appellant and the Court's jurisdiction to hear an appeal from such a charge are to be found in Section 12 of the Local Government (Ireland) Act, 1871 and Section 20 of the Local Government (Ireland) Act, 1902. Section 20 of the 1902 Act, empowers the Auditor to charge against any member or officer of a Local Authority the amount of any deficiency or loss incurred by his negligence or misconduct and provides that Section 12 of the 1871 Act will apply to every such charge. As the appeal provisions are to be found in Section 12 it is that Section to which attention must firstly be directed. Section 12 of the 1871 Act provides that a Local Government Auditor may examine the matter of every account of a Local Authority and empowers him to disallow any payments which he decides are unfounded and to surcharge the person making or authorising the payments. He is required to certify the amount due by the person charged or surcharged and upon applications stating in writing the reasons for the decision. The Section then goes on to give a right of appeal to a person aggrieved by the charge or surcharge. An aggrieved person may 'apply to the Court of Queen's Bench for a writ of Certiorari to remove into the said Court the said ............. surcharge in the like manner and subject to the like conditions as are provided in respect of persons suing for writs of Certiorari for the removal of Orders of Justices of the Peace', but subject to two exceptions, one being that the notice of the intended application is to contain a statement of the matter complained of. On the hearing of the application for the order of Certiorari the Court 'shall decide the matter of complaint set forward in such statement and no other' and if it appears to the Court that the decision of the Auditor was erroneous the Court is then empowered to remedy the position.

The Court's powers on the hearing of an Appeal under Section 12 have been subject to some debate. The Section and the authorities which considered it were carefully reviewed by a Divisional Court in State (Raftis) -v- Leonard [1960] IR381 whose conclusions were accurately summarised in the head note of the report as follows;

'The Court, in considering an application for Certiorari under the Provisions of Section 12 of the Local Government (Ireland) Act, 1871, to quash a charge or surcharge made by a Local Government Auditor, is restricted to the materials which were before the Auditor at the time of the audit, but is free, on those materials, to come to a conclusion of fact, as well as of law, different from that come to by the Auditor'.

I agree, with respect, with the conclusions of the Divisional Court on the construction of the Section. It follows, therefore, that on this Appeal no fresh evidence can be adduced by either party and that the Court must base its decision on the materials which were before the Auditor, but in order to establish or explain what material was before the Auditor affidavit evidence is permissible. Furthermore, it is clear

(a) that these Certiorari proceedings are not an appeal by way of rehearing but

(b) unlike ordinary Certiorari proceedings the Court may come to a different conclusion on the evidence which was before the Auditor and is not confined merely to considering whether there was evidence to support his findings of fact.

Finally, there is one other point of procedure to be noted. Where the Appellant has filed an Affidavit to support his appeal he may be cross examined on it (see [1960] IR381 at page 420). Where, as in this case, the Auditor does not file an Affidavit but relies on the statement of reasons already given by him it seems to me to be proper that liberty to cross-examine him on that document should, if requested, be granted........

I turn now to the applicable law of negligence. The power to impose a charge on a member of the Local Authority who has acted negligently arises under Section 20 of the 1902 Act. The degree of negligence sufficient to justify a charge under the Section has been considered on several occasions in the Courts in this country and in England, authorities collected in and commented on in Keane, 'The Law of Local Government in the Republic of Ireland' (pages 313-314) and Street 'The Law relating to Local Government' (pages 1263-1264). I accept as correct the statement of the law in Pentecost v. London District Auditor [1951] 2 KB 759 to the effect that negligence which gives rise to a charge under the Section does not involve any element of moral culpability or gross negligence and that the ordinarily principles of the law of negligence apply when a claim under the Section against a member of the Local Authority is made. This means that the Auditor, and now this Court is, required to consider whether the Chairman of the Commissioners, the appellant herein, owed a duty of care to the Harbour Commissioners, the nature of that duty (if it existed), whether it was breached and whether the Commissioners thereby suffered loss".

6. The learned President's summary of the law reflects two passages from the judgment in State (Raftis) -v- Leonard [1960] IR 381. At page 411 of the Report the learned Davitt P. states:-

"In my opinion this Court is confined to a consideration of matters which were brought to the attention of the Auditor during the course of his Audit, or of which he became, or made himself, aware before he made the charges or surcharges in question. In order to establish or explain what matters were before him it may be necessary for the Auditor and for the Applicant to file Affidavits; but neither are entitled to adduce evidence of matters which were not before the Auditor".

7. At page 419 the learned Murnaghan J. states:-

"On this basis, what facts are this Court entitled to consider? In my view only those facts which were before the Auditor. The proceeding is by Certiorari, not by way of appeal or by rehearing, but though by Certiorari, on the view I now take, the Court may on those facts come to a different conclusion to that arrived at by the Auditor, and if it does it must proceed accordingly. Difficulty may arise in a particular case in ascertaining what facts were before the Auditor. This is a difficulty inherent in the view I have taken, but it must be resolved on such evidence as is placed before the Court. None of the decisions to which I have referred goes to the extent of laying it down as a considered opinion that the Court should consider evidence which was not before the Auditor".

8. In the instant case the Plaintiff was the General Manager of the Waterford Harbour Commissioners. His duty, under the law, was somewhat different from that of the Chairman and of the Commissioners themselves, since it did not fall to him to make the decision to enter into the Agreement from which the Auditor's charge arose. The General Manager had, however, a duty to advise the Commissioners and, under Section 174 of the Harbours Acts, 1946, he had a statutory duty to raise an objection (giving grounds for his objection) where the Commissioners were embarking on a course of action which in his belief was illegal or likely to result in financial loss.

9. It seems to me, therefore, that the issues before the Court are:

(a) Did the Commissioners suffer a loss in the disposal of their shares in Hellebore Limited?

(b) Did the Plaintiff raise any objection to the agreement to dispose of the shares

in Hellebore Limited at the time, and did he give grounds for such an

objection?

negligence on his behalf?

10. At the hearing before me the Plaintiff Mr. McQuillan had sworn a very full Affidavit on 19th December, 1988. He had also sworn an Affidavit of Discovery and a considerable amount of discovered material in the way of correspondence and other documentation was before the Court. The Plaintiff was cross-examined at length on his Affidavit and the discovery material by Counsel for the Defendant and was re-examined by his own Counsel. From time to time it seemed to me that there was a tendency to wander outside the material which would have been available to the Auditor prior to his imposing the charge, but by and large the evidence was kept within the proper bounds. The Defendant did not swear an Affidavit but relied on the very full reasons for his charge which he had presented. As in Downey -v- O'Brien I permitted him to be cross-examined on these reasons. However Mr. Peart, Senior Counsel for the Plaintiff, confined himself to a very brief cross-examination of Mr. O'Brien.

THE FACTS

11. The Plaintiff is a Chartered Civil Engineer by profession. For eighteen years, up to his retirement in November 1988, he was General Manager of the Waterford Harbour Commissioners. His duties in general involved the day to day business of the Harbour Commissioners, to whom he was responsible. He had no voting rights at the meetings of the Commissioners but attended the meetings where he gave information and advice.

12. Among the statutory responsibilities of the Harbour Commissioners was to provide navigable waters within the Harbour and Docks at Waterford Port and Estuary. To do this, regular dredging was necessary. For many years the Harbour Commissioners had owned and operated a steam vessel called the Port Láirge, which was built in 1907. It is accepted by all parties that by the early 1980's this vessel was obsolete and unfit to carry out proper dredging. It was extremely expensive to run. According to the Plaintiff this was in part because the vessel was, at the insistence of the Trade Union involved, grossly over-manned. By 1983, according to the Plaintiff, dredging costs for the year had reached £187,000 plus the additional labour costs. Even at this, dredging was so unsatisfactory that at one time in 1983 five ships in the Estuary were stuck in mud. The Commissioners were exposed to possible financial and other penalties due to their failure to carry out their statutory duty. An urgent solution to their problems was necessary.

13. The first solution sought was the building of a new smaller oil powered vessel - the Port Láirge II. State grants were availed of and the construction of the vessel began but unfortunately before it was completed it became strike bound and further difficulties arose with the Trade Union in regard to the proposed level of manning. It proved financially impossible to complete the Port Láirge II and the incomplete vessel was eventually sold to the Harbour Authorities in Londonderry. It appears that at this time the Harbour Commissioners were aware that a larger vessel, the MV Lake Lothing, was available for purchase but because of the likely expense of manning it to the level demanded by the Union it was not a viable project for the Harbour Commissioners to run themselves.

14. The Commissioners then considered and embarked upon a different policy - the pursuing of a joint venture with Mr. William O'Hanlon who was, it appears, knowledgeable and skilled in dredging and who, by this stage, owned the MV Lake Lothing. Accordingly in April 1983 it was agreed between the Commissioners and Mr. O'Hanlon that a new company would be incorporated which would purchase the MV Lake Lothing from Mr. O'Hanlon for the sum of £185,000, that the Commissioners would obtain 51% of the shares and Mr. O'Hanlon 49% of the shares in the new company, that they would contract with the new company to dredge the harbour and that the company would enter into a management contract with Mr. O'Hanlon and that both the parties would lend a sum of money to the company in addition to subscribing for shares. Pursuant to this agreement the Commissioners funded the new company to the extent of £94,350. In July 1983 they paid in a cheque for £9,435 and received 10,002 £1 fully paid up shares and they made an interest free loan to the company of £84,915 Mr. O'Hanlon subscribed for and obtained 10,000 £1 shares and also made an interest free loan of £80,650 to the company. In addition to purchasing the dredger the company also effected two contracts of Life Assurance on the life of Mr. O'Hanlon's son Martin (who was the Captain of the vessel) at a cost of £40,000. These were purchased as an investment fund which on maturity after 10 years would provide funds for the replacement of the dredger. These policies were entered in the company's Balance Sheet as an asset valued at their cost price of £40,000. The Commissioners had two Directors on the Board of Hellebore, one of whom was the Plaintiff, and the Commissioners also ensured that Hellebore Limited employed the same firm of Accountants as did the Commissioners themselves. These Accountants were in fact the firm in which the Chairman of the Harbour Commissioners was a partner.

15. For the first three years the venture was a successful one. According to the Plaintiff the annual cost of dredging the harbour was reduced to somewhat below £100,000 for the year. During that period a new bridge was under construction at Waterford Port and the company obtained additional and lucrative dredging work in connection with the bridge construction. A reasonable profit was made and a portion of the loans were repaid both to Mr. O'Hanlon and to the Harbour Commissioners. A total of £30,000 was repaid to Waterford Harbour Commissioners, leaving a sum of £54,348 outstanding in 1986.

16. Not everything ran smoothly, however, and by 1986 the Waterford Harbour Commissioners decided to sell their shares in Hellebore Limited to Mr. O'Hanlon. A number of factors played a part in this decision. The reasons were set out in summary form at paragraph 7.3 of a letter dated 10th December, 1987 sent by the Chairman, Mr. Downey, to the Plaintiff. This letter as a whole consisted of comments on queries raised by the Defendant Auditor in the course of his Audit. Paragraph 7.3 reads as follows:-

"There were a considerable number of reasons why the Commissioners decided to dispose of their interests in the company and these may be summarised as follows ;

(a) The ship was not in Class. Indication had been received by the company that a deposit of £25,000 would have to be paid for a survey and there was a possible additional cost for remedial work resulting from that survey. [This ship was licensed only to sail and work within the Waterford Estuary area].

(b) Failure of the company to get a sub-contractor's certificate from the Revenue Commissioners due to the arrears of taxation position of Mr. O'Hanlon and members of his family. There had been informal indications from the Inspector of Taxes that they believed it could be several years before a certificate could be issued to the company. Consequently, no public authority work could be undertaken by the company outside its work for Waterford Harbour Commissioners.

(c) Due to the ship not being in Class and the completion of the work on the bridge at Waterford, the only source of income to the company for a number of years looked likely to be the Waterford Harbour Commissioners. At the rates agreed and being charged by Waterford Harbour Commissioners indications were that the company's profits would decline and on the basis of this income that it would eventually lose money.

(d) The possibility that if the Commissioners retained a controlling interest in the company, the ATGWU (Amalgamated Transport and General Workers' Union) would force the unionisation of the company's staff with either a consequent reduction in the profits of the company or an increase in the costs of dredging for the Commissioners.

(e) The availability on the market in 1986 of ships similar to the "Lake Lothing" and therefore a consequent decline in the value of the vessel.

(f) Subsequent to the investment by the Commissioners and Mr. O'Hanlon in the company, the purchase of a dredger by a company in which Mr. O'Hanlon and members of his family have 100% interest and therefore the possible conflict of interest by Mr. O'Hanlon with Hellebore Limited.

(g) The Commissioners did not foresee that any dredging contracts could be obtained outside Waterford Harbour for the foreseeable future and it appeared to them that it would be in their best interests if the costs of dredging for a number of years could be stabilised by the disposal of their shares in this company which did not appear to have a great future.

(h) The general difficulty with working with Mr. O'Hanlon in a joint venture operation. Whilst none of the reasons in themselves might be considered sufficient reason for disposing of the share in the company, taken together they were compelling reasons for the sale of the company's shares."

17. With regard to the work available to the company it had been hoped at the beginning that dredging work could be obtained from the New Ross Harbour Commissioners but apparently the New Ross Harbour Commissioners were unwilling to give work to a company in which the Waterford Harbour Commissioners held a controlling interest. According to the Plaintiff bad feeling between New Ross and Waterford dated back to an episode concerning the theft of a mace in 1684.

18. The Commissioners and indeed the Plaintiff were also extremely angry that Mr. O'Hanlon had sailed the MV Lothing (which was not licensed to sail outside Waterford Estuary) to Galway and had undertaken contract work for the Local Authority in Galway. This gave rise to protests from the Department of the Marine.

19. Accordingly the Commissioners decided to sell their shares to Mr. O'Hanlon and to withdraw from Hellebore Limited. Negotiations for this sale were in the main carried out by the Plaintiff who was directed by the Commissioners to obtain the best terms he could from Mr. O'Hanlon. In carrying out the negotiations he had the advice of the Chairman, Mr. Downey, who was of course a Chartered Accountant by profession.

20. Arising out of the negotiations a formal letter of offer dated 12th June 1986 was sent by Mr. O'Hanlon to the Commissioners in the following terms:-

"As per our conversation I, William O'Hanlon of Hellebore Limited, am prepared to offer the value of your shares in Hellebore, £54,348 plus three-quarters of surrender value of the personal insurance policies in force on Martin O'Hanlon.

Payment to be as follows:

Three-quarters surrender value to be asked for and paid as soon as obtained from the Insurance Company. £54,348 to be paid over the next five years in equal lots and with bank interest similar to what I myself pay.

This is subject to you obtaining dumping licence every year for the next five years for a minimum guaranteed 65 loads per year in the Lake Lothing or equivalent rate for any other dredger, and giving us the dredging of this 65 loads at a rate of £15,000 per load to be increased/decreased as official Government RPI."

21. The Commissioners met on 23rd June 1986 and having considered the offer accepted it in the following terms, as is shown in the Minutes of that meeting.

"HELLEBORE LIMITED

Following a discussion the Commissioners , on the proposition of Mr. Brennan, which was seconded by Mr. Hayden, unanimously agreed in principal, subject to the preparation of a proper legal agreement, to sell their shares in Hellebore Limited to William O'Hanlon in accordance with the offered purchase contained in his letter dated 12th June 1986;

1. In consideration of the immediate payment to the Commissioners of 75 per cent of the present surrender value (£27,000.00 approximately) of the personal insurance policies on Martin O'Hanlon.

2. In consideration of the payment to the Commissioners of £54,348.00 together with interest thereon at normal personal bank loan rates in equal instalments over the next five years.

3. The obtaining of an annual dumping licence for the next five years for a guaranteed minimum of 65 loads per year at £1,500.00 per load to be increased/decreased in accordance with the official retail price index. The drawing up of a contract between the Commissioners and Mr. O'Hanlon to cover maintenance dredging at Berths for the next five years but not to include any other dredging that may be necessary during that time. An equivalent rate to be agreed beforehand between the Commissioners and William O'Hanlon for a substitute dredger that may for any reason have to replace the Lake Lothing for dredging operations."

22. At the time of these negotiations the Plaintiff was working on a very large new project of the setting up of a container port at Bellevue and his evidence was that he did not wish the dredging work for this major project to be carried out by Mr. O'Hanlon. The reasons for this were not clear in the evidence given before me, other than the general difficulties which the Commissioners had in working with Mr. O'Hanlon. However, it appears that the Plaintiff's view as to the undesirability of Mr. O'Hanlon carrying out the dredging work at Bellevue was a factor in the form taken of the agreement between the Commissioners and Mr. O'Hanlon. The formal agreement for sale was executed on 15th September 1986. It was signed on behalf of the Board by the Chairman and the General Manager.

23. The main terms of the agreement are set out in three paragraphs as follows:-

"1. The Commissioners will -

(a) Sell all their shares in the company to Mr. O'Hanlon for the sum of IR £54,348 and further as hereinafter provided.

(b) Contract with the company for further maintenance dredging at Berths during the next five years for a guaranteed minimum of sixty five full loads (to be certified by the Harbour Master) per year from the dredger Lake Lothing i.e. sixty five loads annually in not more than two dredging campaigns annually.

(c) Pay the company for each load dredged to their satisfaction the sum of IR £1,500 said sum to be increased or decreased in accordance with the then official Government Retail Price Index or nearest equivalent.

(d) Obtain an annual dumping licence for each of the next five years to permit the aforesaid dredging. If the terms of the present dumping licence are altered to the detriment of the company then the price per load shall be reviewed by the Commissioners and the company having regard to the present pricing structure.

2. Mr. O'Hanlon will -

(a) Purchase the said shares and pay to the Commissioners the said sum of IR £54,348 by way of ten equal half yearly instalments of £5,434.80 each together with interest on the balance of the said sum of IR £54,348 outstanding from time to time on a daily basis at the Irish clearing banks minimum lending rate category "A". The said half-yearly payments of £5,434.80 together with interest thereon as aforesaid shall be due and payable on 25th March and 30th September in each year.

(b) Until such time as the said sum of £54,348 shall have been paid in full to the Commissioners with interest as aforesaid,

Mr. O'Hanlon shall provide the Commissioners with good and proper security for the balance thereof outstanding from time to time, such as a fixed charge on the said Lake Lothing.

(c) Pay to the Commissioners on the date of the signing hereof an additional sum equal to 75% of the present surrender value of the life assurance policy no. 2556552-05 dated 1st June, 1984 already effected on the life of Martin O'Hanlon (son of

Mr. O'Hanlon) with the Irish Life Assurance Company, and of a similar Policy No. F9400382 dated 3rd July, 1984 effected with standard life assurance company.

3. Both parties agree that:

(a) The completion date of this agreement shall be the first working day one month subsequent to the date hereof.

(b) All disputes arising out of or relating to this agreement shall be referred to the arbitration of two persons (one to be appointed by each party hereto) or their umpire in accordance with the provision of the Arbitration Act, 1954 as amended.

(c) They will do all things and execute all documents which may be necessary to give full legal force and effect to the true intent and meaning of this agreement"

24. It will be seen from the text of this agreement that it is somewhat ambivalent in meaning. There is no mention in the actual agreement of the fact that the sum of £54,348 was in reality the repayment of the outstanding loan made by the Commissioners to Hellebore Limited and to a person reading the agreement without any knowledge of the background it would appear that Mr. O'Hanlon was paying this sum in addition to the 75% of the surrender value of the life assurance policies for the Commissioners' actual shares in the company. When Mr. O'Brien, the Local Government auditor, was carrying out his audit in the years 1987 and 1988 this was one of the matters about which he raised a query. The same ambivalence applies to the letter of offer sent by William O'Hanlon and to the account of the matter in the minutes of the Commissioners' meeting of 23rd June, 1986. Indeed an ordinary construction of all of these documents would be that the meaning of the offer, the acceptance and the written agreement was that Mr. O'Hanlon would purchase the Commissioners' shares for the sum of £54,348 plus three-quarters of the surrender value of the insurance policies referred to. However it is an undoubted fact that the agreement which Mr. Downey and

25. Mr. McQuillan had made with Mr. O'Hanlon was an entirely different one in which the consideration for the shares was merely the 75% of the surrender value of the life assurance policies and the £54,348 represented the repayment of the outstanding loan which was already due to the Commissioners. The Defendant raised queries with the Commissioners as to:-

(a) How the Commissioners' shares came to be sold for £19,960 (which was 75% of the surrendered life assurance policies) and

(b) Why the correct consideration had not been shown on the contract document.

26. Considerable correspondence ensued between the Defendant and the Plaintiff.

27. The Plaintiff's letters were written on behalf of the Commissioners and it is clear from the discovery documents that, as far as the financial and accounting considerations were concerned, the Plaintiff's letters were by and large drafted by the chairman Mr. Downey. There was considerable discussion as to whether the agreement quoted above should be corrected by a Deed of Rectification between the Commissioners and Mr. O'Hanlon but in the event no Deed of Rectification was provided. The Commissioners instead, at their meeting at 7th September, 1988 minuted "a clarification" to the minute of 23rd June, 1986 (which had accepted Mr. O'Hanlon's offer). This provided that the Commissioners had agreed to dispose of their "investment" in Hellebore Limited by the receipt of £19,960 and to repayments of the balance of the loan it had granted for a five yearly period with interest as specified.

28. Mr. O'Brien was not satisfied with the replies which he had obtained to his queries and he concluded that it was his duty to raise charges against the chairman,

29. Mr. Downey, and the general manager, the Plaintiff herein.

30. The Commissioners and the Plaintiff had already been warned by Mr. O'Brien that he might have to impose a charge or surcharge. On 18th May, 1988 the auditor wrote to the Plaintiff attaching a number of letters "expressing my concern regarding certain transactions recorded in the books and records of Waterford Harbour Commissioners". He stated that there was a possibility that he might have to charge or surcharge the members and he asked the general manager to forward copies of letters to them. He also wrote a similar letter to Mr. Downey the chairman. The letters to the members dealt with a number of matters including the Commissioners' sale of their shares in Hellebore Limited and in each letter he referred to Section 12 of the 1871 Act and Sections 20-22 of the 1902 Act. He gave a clear warning that he might have to impose a charge or surcharge on account of the loss which he felt had been occasioned by the sale of the Commissioners' shares in Hellebore Limited.

31. The chairman, Mr. Downey, refused to forward the letters to the individual Commissioners on the ground that they contained defamatory matter. The Plaintiff replied to the letter in general terms on 25th May, 1988 and in greater detail on 2nd June, 1988. However Mr. O'Brien was not satisfied with the explanations given by the Plaintiff and on 14th July, 1988 he wrote to each member of the Board of the Commissioners and again pointed out the possibility of a charge or surcharge being raised on the members of the Board. Further correspondence ensued both with the chairman and with the Plaintiff and also with the legal advisers of the Commissioners Messrs. Nolan Farrell & Goff, Solicitors. However, the Defendant remained dissatisfied with the explanations and replies which he received and on 16th November, 1988 he attended at the offices of the Commissioners and affixed a Certificate of Charge as he was required to do under the statute charging the chairman and the general manager jointly and severally of the sum of £42,300. At the same time he presented a further document containing his reasons for the charge.

32. This lengthy document is quoted in full in the judgment of the learned President in Downey -v- O'Brien at pages 143 - 147 of the Report and it seems unnecessary to repeat it in full here.

In his " reasons for charge " the Defendant sets out the history of the matter and highlights the confusion which was caused by the way in which the offer and acceptance and the document of agreement were drafted. He goes on to state at paragraph 10:

"I was informed that no statement of affairs was drawn up at the date of the agreement but the general manager informed me by letter dated

11th December, 1987:

'It is correct that the valuation (of the shares in Hellebore Limited) was based on the accounts for the year to 31st December, 1985 and the balance sheet at that date'. "

33. Mr. O'Brien goes on to set out the balance sheet of the company as at

31st December, 1985 and points out that the value of the Commissioners' shares based on the net asset value of the company as shown in the balance sheet as at 31st December, 1985 was £62,260.00, exclusive of the balance unpaid on the Commissioners' loan account.

34. At paragraph 14 the Defendant states:

"In a submission to me, dated 8th September 1988, the Commissioners' solicitors informed me that the Commissioners had authorised the general manager to negotiate the sale and refer back to them for final approval. Notwithstanding his knowledge of the details of the negotiations of the sale of the shares, I have been unable to determine the existence of any evidence that the general manager informed the individual Commissioners that the agreement to sell the shares, of 15th September, 1986, was incorrect or open to misinterpretation."

35. He then quotes Section 174 of the Harbours Act, 1946 to which I have already referred above which states that whenever a proposal made at a meeting of a Harbour Authority would be likely to result in a deficiency or loss to the funds of the Authority, it shall be the duty of the general manager to make objection to the proposal and to state the grounds of the objection. The Defendant states that he was unable to determine the existence of any evidence that the general manager made any objection to the transfer of the shares for a total consideration of £19,960 or to the agreement to sell the shares or to the proposal to sell the shares for that amount. He makes the same findings in regard to the chairman. He then sets out the loss to the funds of Waterford Harbour Commissioners which he calculates at £42,300 and states that this loss is due to negligence on the part of the general manager of Waterford Harbour Commissioners, Mr. M. F. McQuillan, and on the part of the chairman of the Waterford Harbour Commissioners, Mr. M. E. Downey.

36. In his cross-examination before me the Plaintiff stated, and indeed reiterated on several occasions, that both he and the chairman had made it perfectly clear to the Commissioners that in the agreement to sell the shares the sum of £54,348 represented the repayment of the outstanding loan rather than a separate consideration for the shares. He stated that a number of the Commissioners were accountants by profession and that they had a very clear understanding of what in fact had been agreed with Mr. O'Hanlon. He complained that at no stage did Mr. O'Brien approach him with a view to holding a meeting or an oral discussion of the problems with him as it would have been a great deal easier to explain the whole situation in this way rather than in protracted and complex correspondence.

37. However, it was clear both from Mr. McQuillan's own oral evidence and from the submissions made on his behalf by Mr. Peart, Senior Counsel, that Mr. McQuillan did not consider that the agreement with Mr. O'Hanlon was one which caused a loss to the Commissioners. His view was that as a result of the agreement the Commissioners received £19,960 in return for the £10,002 which they had invested by way of shares, that they were having their loan repaid with reasonable interest, and that they would have their dredging work carried out reliably for the coming five years at a price of under £100,000 per year. When it was suggested to him that a better bargain would have been for the Commissioners to buy out Mr. O'Hanlon's shares and take over the Lake Lothing, he replied that if that had been done the Trade Union would have insisted on a level of manning of the vessel (which would then be owned by the Commissioners) which would mean that the entire project would not be financially viable. He pointed out that already the particular members among the Commissioners who were appointed to represent the Trade Union interests were extremely disturbed that a company in which the Waterford Harbour Commissioners had a controlling interest was operating a vessel on which the manning levels did not come up to Trade Union standards. Whatever one may think of the philosophy which lay behind this argument on behalf of the Plaintiff and on behalf of the generality of the Commissioners, it would have to be admitted that it probably had a certain financial reality.

38. Another area of controversy which had arisen in the correspondence between the Plaintiff and the Defendant and which arose again in the Plaintiff's oral evidence was the question of the proper valuation of the motor vessel Lake Lothing at the time when the Commissioners sold their shares in Hallebore Limited to Mr. O'Hanlon in 1986. Mr. O'Brien, from his point of view as an auditor quite correctly, relied on the book value of the vessel which was stated in the balance sheet as at 31st December, 1985 at £142,795. This allowed for depreciation from the original purchase price of £185,000. Mr. McQuillan's attitude was and remains that this valuation had little or no connection with reality. He pointed out both to Mr. O'Brien and to the Court that by 1986 a shipbuilding firm in Holland had produced a large number of dredging vessels and that there was a glut of these vessels on the market. According to him the MV Lake Lothing by 1986 was worth well under £100,000 and perhaps as little as £50,000. He therefore considered that in transferring full ownership of the Lake Lothing to Mr. O'Hanlon the Commissioners were not conferring a particularly valuable benefit, especially in the circumstances where the company was unlikely to make anything like the same profits as it had made in the three years between 1983 and 1986. Unfortunately there is no possibility of this argument being resolved by the Court as neither the Commissioners nor Mr. O'Hanlon nor Mr. O'Brien obtained any estimate from an expert neutral party as to the actual current value of the MV Lake Lothing in 1986. It seems to me that Mr. McQuillan in negotiating with Mr. O'Hanlon accepted Mr. O'Hanlon's argument that the vessel was worth very little without fully considering that Mr. O'Hanlon was not necessarily going to sell the vessel and that the vessel had the inherent value for

39. Mr. O'Hanlon that it enabled him to carry out a valuable contract for the dredging work of the Waterford Harbour Commissioners.

THE ISSUES

40. The first issue before the Court is as to whether the Waterford Harbour Commissioners suffered a loss to their funds through the sale of their shares in Hellebore Limited. This question has already been dealt with in some detail by the learned President of this Court in Downey -v- O'Brien . His analysis of the financial information available to the auditor starts from the position which was agreed by the Plaintiff in these proceedings

41. Mr. McQuillan that the valuation of the shares in Hellebore Limited was based on the accounts for the year to 31st December, 1985 and the balance sheet of that date. In valuing the Commissioners' shares the auditor, Mr. O'Brien, in fact used the figures set out on that balance sheet. The chairman of the Commissioners, Mr. Downey, in his calculations, altered these figures in two ways. Firstly, the balance sheet valued the life assurance policies at cost (i.e. £40,000). In his calculations Mr. Downey valued them at their surrender value of £26,000. It should be noted that there was no compelling reason why the policy should have been surrendered at that point - other than that the surrender provided Mr. O'Hanlon with the necessary cash to pay £19,960 to the Waterford Harbour Commissioners as a consideration for their shares.

42. Secondly, the balance sheet shows a figure of £49,500 for deferred taxation and Mr. Downey deducted the entire of this figure in his valuation. The learned President of this Court held that Mr. O'Brien was correct in deciding that Mr. Downey was wrong in both these aspects of his calculations, and I respectfully agree with the conclusions of the learned President. The Waterford Harbour Commissioners, therefore, did suffer a loss since their shares were sold at an undervalue.

43. The next question that arises is as to whether Mr. McQuillan, the Plaintiff in these proceedings, raised an objection to the transaction proposed by Mr. Downey to the Commissioners and gave grounds for his objection. The simple answer to this question is no. According to his own oral evidence he saw no reason to raise an objection. Indeed it appeared to me that the Plaintiff did not really to this day understand the concepts which lay behind the valuations made either by Mr. O'Brien or by Mr. Downey. As far as he was concerned they - and a number of the other Commissioners - were accountants who dealt with "paper figures" while he was the practical man dealing with the realities on the ground. This attitude was mirrored in some of the submissions made by the Plaintiff's Counsel, Mr. Peart, who used phrases such as "If I cannot count it it is not money" and "the deficiency was not a reality but merely a paper loss". This is a somewhat cavalier way of referring to the accounts of Hellebore and the calculations made by the Defendant but there is no doubt that these phrases exhibit the point of view of the Plaintiff.

44. All this sits somewhat oddly with the Plaintiff's own grounding Affidavit and the letters which he sent to the Defendant in which he set out all the same financial arguments as were made by the chairman of the Harbour Commissioners, Mr. Downey. However it is clear from the discovered documents that the financial elements in Mr. McQuillan's correspondence with the Defendant (which are reflected in his affidavit) were provided to him and drafted for him by Mr. Downey himself.

45. Finally, in failing to object to the loss to be suffered by the Commissioners in disposing of the shares in Hellebore, was the Plaintiff negligent? In this regard I feel that the Plaintiff's duty to the Commissioners was somewhat different from that of the chairman,

46. Mr. Downey. The Plaintiff understood that the Commissioners had a statutory duty to keep Waterford Harbour properly dredged and he saw it as his task to have that dredging work carried out reliably, efficiently, and at a reasonable cost. While the Defendant clearly showed the loss entailed in the incorrect calculation of the value of the Commissioners' shares - a matter which lay particularly within the expertise of Mr. Downey - he seems to have taken little account of the practical arguments put forward by Mr. McQuillan both as regards the savings made through Hellebore Limited from 1983 to 1986 and as regards the risk entailed in the Commissioners retaining their interests in Hellebore after 1986. In this context I am to an extent reminded of the facts in State (Raftis) -v- Leonard [1960] I.R. 381. In that case, as is set out in the head note, the Respondent, an auditor for the Department of Local Government, in auditing the accounts of the County Borough of Waterford for the year 1956/57 charged against the City Manager of Waterford a sum of £85 3s 9d found by him to be the amount of the loss incurred by the Corporation of Waterford by reason of the alleged negligence of the City Manager in hiring haulage lorries for the Corporation at a rate higher than that offered by the hauliers making the lowest tender. The City Manager explained his failure to hire the lorries tendered by such hauliers as being due to the alleged unsuitability of hauliers' lorries and to the unsatisfactory service which he alleged that such hauliers had previously given to the Corporation but his explanation was not accepted by the Respondent as adequate or well founded. A majority of the divisional court which heard the matter held that the charge relating to the hire of the lorries should be quashed in as much as the grounds given by the Respondent for refusing to accept the explanation given by the City Manager for not employing the lowest tendering hauliers were not sufficient to justify him in finding that such deficiency or loss as might have been incurred by the Corporation had been incurred by the City Manager's negligence or misconduct within the meaning of Section 20 of the Local Government (Ireland) Act, 1902. In reaching this decision Murnaghan J. (with whom McLoughlin J. concurred) laid a considerable amount of stress on the practical experience of the City Manager in dealing with such matters as the hire of lorries. He accepted that the tender of Messrs. O'Donovan & Sons Limited was prima facie the lowest tender and it was not at all clear from the financial evidence which was available to the auditor and therefore before the Court that the hire of the other firm of contractors did not result in higher expenditure by Waterford Corporation. However he noted that the City Manager by way of explanation to the auditor as to why he had not accepted the lowest tender gave a number of different reasons, including the reason that the firm in question was "in general an unsatisfactory contractor". Murnaghan J. goes on to say as follows:-

"Of necessity, as it seems to me, the City Manager is the person who must judge whether a contractor is satisfactory or unsatisfactory and, when he says that a certain firm is an unsatisfactory contractor, his opinion on that point cannot be lightly disregarded.

I have not had the advantage of seeing and hearing the City Manager.... I am not prepared to decline to accept the City Manager's statement that Messrs. O'Donovan & Sons Limited were in general an unsatisfactory contractor on the affidavits before the Court. It follows that it is impossible that I should hold that the City Manager was negligent in not accepting this tender."

47. In seems to me that in the instant case, while he did not raise objections based on the valuations of the Waterford Harbour Commissioners' shares in Hellebore Limited, the Plaintiff, Mr. McQuillan, put forward to the auditor a number of practical reasons why the course which the Commissioners were following in disposing of their shares in Hellebore Limited was the proper course to take. I feel that Mr. McQuillan had taken careful thought as to the practicalities of the courses open to the Commissioners and that he had colourable reasons for his view that the disposal of the shares to Mr. O'Hanlon was the best course to take and that any alternative was likely to be still more costly to the Commissioners. In this way I would distinguish between the duty of care owed by Mr. McQuillan to the Commissioners and the duty of care owed by Mr. Downey who was both the chairman of the Commissioners and a professional accountant. In the circumstances it seems to me that the Plaintiff, Mr. McQuillan, was not negligent in failing to raise an objection to the course followed by the Waterford Harbour Commissioners in the disposal of their shares in Hellebore Limited.

48. Given the decision that I have made on this aspect of the matter there is no need for me to deal with the other grounds brought forward by the Plaintiff - that the Plaintiff was entitled to an Order of Certiorari because the auditor had failed to comply with rules of natural justice in arriving at the decision to impose a charge on him. However I feel that I should say in relation to this ground that I would respectfully agree with the position taken by the learned President of this Court at page 150 of his judgment where he states:-

"It seems to me that Mr. O'Brien took considerable care to inform all the Commissioners, including Mr. Downey, that grave concerns at what had happened, that he explained in considerable detail, what, in effect, were the complains of wrongdoing he was advancing and that he warned each, including Mr. Downey that the possibility of the imposition of a charge could arise. He gave to each an opportunity to answer the complaints and I fail to see how there was any unfairness in the procedures which he adopted."

49. As in the case of the Commissioners, Mr. O'Brien gave due notice of the danger of a charge to the Plaintiff, Mr. McQuillan, and gave him an opportunity to make his case. It does not appear to me that there is any inherent necessity for the auditor in a situation such as obtained in the instant case to hold an oral hearing in regard to his objections. The matter was fully covered in correspondence and it seems to me that the procedures followed by Mr. O'Brien were in accordance with natural justice.