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Wexford Rope and Twine Co. Ltd. v. Gaynor [2000] IEHC 23 (6th March, 2000)
URL: http://www.bailii.org/ie/cases/IEHC/2000/23.html
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[2000] IEHC 23
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Wexford Rope and Twine Co. Ltd. v. Gaynor [2000] IEHC 23 (6th March, 2000)
THE
HIGH COURT
1997
No.
14043P
BETWEEN
WEXFORD
ROPE AND TWINE COMPANY LIMITED
PLAINTIFF
AND
LIAM
GAYNOR AND BRIAN MODLER
DEFENDANTS
JUDGMENT
delivered by Mr. Justice Barr on the 6th day of March 2000
1. The
plaintiff is an Irish registered limited liability company of modest
proportions which was incorporated in 1989 and at all material times carried on
business in Wexford comprising the purchase of rope and twine products from
various manufacturers for sale to its customers. The founders and original
directors were the defendants. The first defendant is a practising chartered
accountant who worked for the company part time and managed its financial
affairs. The second defendant was employed full time and he had
responsibility for conducting the business of the company in purchasing and
selling stocks of rope and twine. The only other employee was a secretarial
assistant. One of the manufacturers from whom the plaintiff purchased a
substantial part of its product was a Northern Ireland registered company
called Steve Orr Limited.
2. For
reasons about which there is controversy between the defendants on the one hand
and the plaintiff and Steve Orr Limited on the other, the latter entered into
an agreement on or about 2nd October, 1993 with the company and the defendants
to take a 75% controlling interest in the company and to purchase the requisite
shares out of profits. A loan of £30,000.00 was advanced to the
plaintiff in circumstances about which there is also controversy between the
parties. In all events within a few years the loan was duly repaid. The
purchase price of the shares by Orr Limited remains outstanding. Under the
agreement the latter was entitled to appoint an additional director of the
company but did not do so and the defendants remained as sole directors. It
was also agreed that Steve Orr Limited would sell its products to the plaintiff
at basic wholesale prices. The new regime appears to have proceeded
satisfactorily until in or about 1996 in which year there was a substantial
down turn in business. It became apparent that the new relationship was not
working out in practice. Each side blamed the other in that regard.
Events came to a head in October, 1996 when at the behest of Northern Fibres
(Holdings) Limited, a nominee company acting for Orr Limited, three new
directors were appointed to the board of the company and restrictions were
placed on the defendants in the matter of signing cheques. They were not
prepared to accept the changed situation. They offered to buy out the Orr
interest in the company and when that failed both resigned their directorships
and left the employment of the company. The first defendant is no longer
engaged in the rope and twine business and now devotes himself to his practice
as a chartered accountant. The second defendant has established a new rope
and twine business in competition with the plaintiff save that the new firm
does not deal in agri products which was a substantial part of the plaintiff's
business until Orr Limited ceased to supply that product at a competitive price
in 1996. That point does not seem to be in dispute. The
secretary/book-keeper has also resigned and now works for the second
defendant's new business. The end result is that the plaintiff company
presently carries on business from Messrs. Orr's premises in Northern Ireland.
It continues to trade in this state and it is contended that the down-turn in
business is in the process of being reversed, though substantial loss was
suffered by the company through the alleged wrongdoing of the defendants which
both of them vehemently deny.
3. The
plaintiff company has brought proceedings against the defendants in which it
claims,
inter alia
,
injunctive relief and damages for breach of fiduciary duty; breach of
contract; fraud; passing off; against the first defendant damages for
professional negligence and against both damages for conspiracy. The
defendants reject totally the allegations of wrong doing made against them and
contend that all of them are untrue. Both sides have filed voluminous
affidavits in support of their respective versions of relevant events.
4. Three
motions are presently before the court. Each defendant has brought a motion
for security for costs against the plaintiff company pursuant to section 390 of
the Companies Act, 1963 and the plaintiff has brought a motion for judgment in
default of defence against the second defendant.
THE
LAW AS TO AN APPLICATION FOR SECURITY FOR COSTS BROUGHT AGAINST A LIMITED
LIABILITY COMPANY
5. I
have been referred to the following authorities on this topic:-
- Peppard
& Co. Ltd. and Another -v- Bogoff and Others
[1962] I.R. 180 (S.C.)
- S.E.E.
Co. Ltd. -v- Public Lighting Services Ltd.
[1987] I.L.R.M. 255 (S.C.)
- Jack
O'Toole Ltd. -v- MacEoin Kelly Assoc. and Another
[1986] I.R. 277 (S.C.)
- C.P.R.
Keogh -v- Údarás na Gaeltachta and Others
[1991] I.R. 320 (S.C.)
- Lough
Neagh Exploration -v- Morrice
[1998] 1 ILRM 205 (Laffoy J.)
- Lismore
Homes Ltd. -v- Bank of Ireland Finance Ltd. and Others
[1999] 1 I.R. 501 (S.C.)
- Beauross
Ltd. -v- Paul Kennedy
18th October, 1995 unreported (Morris J.)
6.
Section
390 of the Companies Act, 1993 is in the following terms:-
"Where
a limited company is plaintiff in any action or other legal proceeding, any
judge having jurisdiction in the matter, may, if it appears by credible
testimony that there is reason to believe that the company will be unable to
pay the costs of the defendant if successful in his defence, require sufficient
security to be given for those costs and may stay all proceedings until the
security is given."
7. Principles
of law derived from the foregoing authorities in the context of the problem
under review establish the following propositions:-
- The
plaintiff must be a limited liability company (as in the present case) to come
within section 390.
- There
must be a proven or admitted inability to discharge its liability to the
defendants for costs should it fail in its action and an order for costs is
made against it. This point is conceded on behalf of the plaintiff. It
appears that at no stage would it ever have been in a position to fund out of
its own resources a substantial unsuccessful plenary action in the High Court.
The present action seems likely to continue for upwards of a week if it
proceeds to finality at trial. It also seems likely that Orr Ltd. or some
other third party will be required to fund all or part of the plaintiff's costs
if it is unsuccessful. No evidence has been adduced that an order for
security for costs in favour of the defendants would stifle the action.
There is evidence, however, that the second defendant is a man of limited means
(his salary while working for the company supports that contention) and it is
submitted that if he fails in his application for security for costs and
subsequently succeeds in the action, he is unlikely to recover all or any of
his costs against the plaintiff and he has no redress in that regard against
Orr Ltd. or anyone else. It is submitted on his behalf that the effect of a
successful defence of the action by him without security for costs would be a
pyrric victory resulting in disastrous loss to him. These are factors which
are,
inter
alia
,
relevant to the exercise by the court of its discretion in granting the reliefs
sought.
- The
defendants must establish that they have a
prima
facie
defence to the plaintiff's claim. In the light of the evidence adduced by
them on affidavit I am satisfied that they have met that condition. Their
explanation of the circumstances which they allege in connection with the break
down of their relationship with the plaintiff company has the appearance of
credibility. On the other hand, there are some allegations made against them
on behalf of the plaintiff which lack reality. In this regard I have in mind
in particular the contention made against the first defendant regarding his
alleged failure to hand over the company cheque-book; leaving the meeting at
which that request was made and not handing it over for forty minutes
thereafter. It is not alleged that Mr. Gaynor issued any cheque during that
period. His explanation is that he did not wish to part with the cheque-book
until he had first arranged with the plaintiff's bankers that he would not have
any responsibility for cheques subsequently drawn by the company. That
patently reasonable explanation is now accepted. It is also contended on
behalf of the plaintiff that shortly before their resignations as directors the
defendants improperly favoured particular customers and issued cheques to them
in discharge of accounts due by the company and, furthermore, that outstanding
professional accountancy fees due by the company to the first defendant and an
outstanding pension fund payment relating to the second defendant were also
discharged by cheques drawn by Mr. Gaynor on the company bank account. It is
now conceded that all such payments were properly due by the company at the
time the relevant cheques were drawn, and that it was then and still is
solvent. Where it is established, as in the instant case, that the defendants
appear to have a
prima
facie
defence to the claim or claims made against them the onus passes to the
plaintiff company to satisfy the court on the balance of probabilities that
there are special circumstances which the court should take into account and
accept in exercising its discretion whether or not to accede to the defendant's
application for security for costs.
Special circumstances relevant to
the incident case are:-
(i)
that the inability of the plaintiff company to discharge an award of costs
which might be made in favour of the defendants if the plaintiff's action fails
was allegedly caused by wrongs committed by the defendants and each of them
which are the subject - matter of the action.
8. Voluminous
affidavits with supporting documentation have been put before the court on both
sides which indicate substantial conflict on aspects of the dispute which lead
to the resignation of the defendants as directors of the company. Some
specific contentions made on behalf of the plaintiff to which I have already
referred are without substance. Others do not go sufficiently far as to
establish a prima facie case of fraud, deceit or negligence against the
defendants or either of them. Furthermore, the plaintiff does not appear to
contest some important aspects of the defendants' response to such allegations.
In particular I have in mind the defendants' contention that a major cause of
the down-turn in the company's business in 1996 was the failure or inability of
Orr Ltd. to supply agri product to the company at an economic price thus
stifling that aspect of the business which previously amounted to more than 50%
of the entire. Furthermore, one of the principal arguments put forward by
the plaintiff in support of its allegations of fraud and deceit against the
defendants relates to their combined offer to purchase the company's shares
held by the nominee of Orr Ltd. at a nil valuation. The defendants'
response, if ultimately accepted by the trial court, is a credible explanation
which reflects no discredit on them.
9. It
is also argued on behalf of the plaintiff that there is no tenable explanation
for the second defendant setting up his new business. The inference is drawn
that the reality is he and his co-director set about wrecking the company's
business with a view to supplanting it by the new enterprise. The defendants
contend that the failure to supply the company with agri product at cost as
provided in the agreement to which I have referred and the deteriorating
relationship between them and the Orr interest (allegedly not caused by them)
which came to a head with the appointment of three new directors had the effect
of creating two alternatives. First, that the defendants would buy out the
Orr interest in the company or, alternatively, that they would terminate their
connection with it. The latter event having come about, the first defendant
reverted solely to his practice as a chartered accountant and there is no
evidence that he has any interest in or derives any benefit from the new
business set up by the second defendant other than fees for the provision of
professional accountancy services for that business. It is not in dispute
that the second defendant has always been in the rope and twine business in
Wexford and therein lies his particular expertise. He contends that he had
no plans to set up in business in competition with the plaintiff and that that
possibility did not arise until the joint offer to purchase the shares held by
the Orr nominee was rejected.
10. Another
contention raised against the second defendant is that as a director of the
company he was obliged in law to give appropriate notice of the termination of
his executive position and that he could not summarily terminate his employment
with the company. His response to that argument is that he did not refuse to
give notice of termination of employment and was not asked to do so by the
company. The attitude of all parties at the time of the second defendant's
resignation is an issue which the trial court will examine and determine in due
course. On the evidence before the court it remains an open question.
11. In
summary on this issue it is now well settled law that on an application for
security for costs it is no part of the function of the court to evaluate the
prospects of the success of the respective cases put forward on behalf of the
plaintiff and the defendants. The essence of the law is summarised in the
following passage from the judgment of Barron J. in
Lismore
Homes Ltd. -v- Bank of Ireland Finance Ltd
.
(Supra) at pp 529 - 530.
".....in
the sense that once an arguable case was being presented it mattered not what
the strength of that case was. This is something which has been made quite
clear in the judgment of Murphy J., in
Bula
Ltd
(in
receivership) -v- Tara Mines Ltd.
[1987]
I.R. 494, as approved in
C.P.R.
teo -v- Údarás na Gaeltachta
[1990] 1 I.R. 320.
Once
an arguable case has been established the strength of that case is immaterial
unless it leads to showing that in reality the defendant has no real defence."
12. In
the instant case the plaintiff has failed to establish the latter proposition.
(ii)
It was also argued on behalf of the plaintiff that another well recognised
exception in the nature of a special circumstance which the court should take
into account would arise if the plaintiff made out a
prima
facie
case
that its inability to give security for costs is derived from the wrong doing
of the defendants of which complaint is made in the action. I am not
satisfied that such a case has been established. As already stated, the
evidence suggests that the company would not at any stage in its existence have
been in a position to discharge the defendants' costs of a lengthy plenary
action in the High Court if in the ultimate it failed and costs were awarded
against it. The financial circumstances of the company declined in 1996 and
1997, but the plaintiff's evidence on affidavit does not go sufficiently far as
to establish a
prima
facie
case
that the fall in profits was caused by wrong doing on the part of the
defendants or either of them. The alternative case which they put forward is
at least equally credible.
(iii)
The remaining special circumstance relied upon by the plaintiff relates to
alleged unreasonable delay on the part of the defendants in bringing their
application for security for costs. After the trial was commenced and before
service of the statement of claim an interim motion was brought by the
plaintiff which raised several issues which were resolved between the parties
and an order was made on consent. It is alleged by the defendants that they
thought that that was an end to the matter and that the action would not
proceed any further. The first defendant states that he was surprised by the
service of the statement of claim and that correspondence relating to the
matter of security for costs was put in train soon after that. The second
defendant did likewise but a little later. There is no evidence to suggest
mal
fides
on the part of either defendant nor any harm done to the plaintiff by reason of
the minor delay of which complaint is made. An application for security for
costs may be refused by the court if the delay on the part of the applicant is
detrimental to the party against whom the order is sought. In
S.E.E.
Co. Ltd. -v- Public Lighting Services Ltd
.
[1987} I.L.R.M. 255 the Supreme Court dealing with an application under
section
390 of the
Companies Act, 1963 considered that among the circumstances to be
taken into account in exercise of the court's discretion in deciding to grant
security for costs, the delay of the defendant in bringing the application was
a significant factor. That judgment was followed by Morris J. in
Beauross
Ltd. -v- Kennedy
(unreported) 18th October 1995 where it was held on the facts of the case that
there was an undue and unnecessary delay in bringing the application whereby
the other party had incurred considerable costs which would not have been
incurred if the application had been made without delay. Morris J. held that
if the party seeking security has delayed to such an extent as could admit the
other party to an amount or a level of costs which it would never have become
committed to had it known that it was to be required to provide security for
costs and thereby alter its position to its detriment then the court should not
make the order.
13. In
that case although the time lapse of a little more than three months was of
itself insufficient to demand a refusal of security, substantial legal costs
had been incurred in that period which included an oral hearing and a cross
examination of the defendant before the Master. It seems to me that in the
present case it was reasonable for the defendants to await the statement of
claim in order to ascertain what precisely was being alleged against them
before putting in train an application for security for costs. The interim
application which was made in the meantime relating to matters at issue which
lead to an order on consent was another factor which might be regarded as
justifying postponement of the application for security. It seems that the
only additional costs which the plaintiff might point to in the context of the
defendants alleged delay in bringing their motions for security for costs is
the expense of preparing and serving the statement of claim which in the
overall context of the litigation is a comparatively modest item of expense for
the plaintiff. In all events, as I have already stated, it was not
unreasonable for the defendants to await the statement of claim before putting
in train the applications for security for costs.
14. All
in all, I am satisfied that the defendants are entitled to the orders which
they seek.
© 2000 Irish High Court