High Court of Ireland Decisions

1. The Applicant is the liquidator of Verit Hotel & Leisure (Ireland) Limited (hereinafter called “the Company”) and has brought this application pursuant to Section 150 of the Companies Act 1990 seeking an order against each of the Respondents who are the directors of the Company, restricting them pursuant to that Section. This application has a very long history, having initially being brought by Notice of Motion dated 6th December, 1994 and I think I should briefly set out that history.

2. In addition to the present motion, the liquidator also brought a motion dated 21st November, 1994 against the Respondents and an associated company called Letcane Investments Ltd. for relief pursuant to Sections 297 A, 286 and 298 of the Companies Act 1963. Unfortunately these two motions became somewhat intermingled as both the Respondents and the liquidator chose to file Affidavits common to both motions, which has caused considerable confusion, although I think that ultimately it is accepted by both parties that the evidence in all Affidavits is admissible in these proceedings, whether it is strictly related to this claim or to the claim in the other Motion. In any event, I am treating all such evidence and exhibits as being admissible and relevant to these proceedings.

3. The second proceedings were protracted and involved several Interlocutory Motions and appeals to the Supreme Court, and it was ultimately determined that the issues would be heard on oral evidence. They were eventually compromised by virtue of a settlement dated 11th December, 1998 whereby the Respondents agreed to pay the liquidator the sum of £500,000.00 and costs of those proceedings. There were further delays due to the implementation of this settlement, which were not resolved until May, 1999.

4. On 10th March, 2000 the liquidator served a Notice of Re-Entry of this present motion and by a Motion dated 21st March, 2000 the Respondents applied to dismiss this motion on the grounds of excessive delay. That motion came on for hearing before O’Donovan J. who refused to strike out the motion, and the Respondents appealed that refusal to the Supreme Court. By an Order dated 31st July, 2001 the Supreme Court upheld the decision of O’Donovan J. and dismissed the appeal.

5. The nature and length of these various proceedings is relevant in relation to two preliminary points which were made before me by Dr. Forde SC on behalf of the Respondents, and on which I have in fact already ruled during the hearing of the case, but I think it desirable that I should express my views briefly in this judgment.

6. The first point raised was that the liquidator is now estopped from pursuing these proceedings. The basis for this claim is an argument in that the issues in these proceedings and the issues which arose in the other motion are so closely interrelated that they must be dealt with together, and by settling the issues in the other motion the liquidator is estopped from proceeding with this motion. While there are certainly similarities between the issues, I can see practical difficulties to hearing two motions of these types together, particularly in view of the fact that under Section 150 the onus of proof is on the Respondents, while in the other Motion the onus of proof is on the liquidator. However, quite apart from generalities, I have ruled that there can be no estoppel in the present case because of the nature of the Section 150 proceedings. I will be returning to this later in relation to another matter, but it is sufficient to say for the purpose of this point that the proceedings are mandatory, and the Section provides that the Court must be satisfied as to certain matters. That being so, there can be no question of such proceedings being settled, and there would have been no power in the liquidator to undertake as part of an overall settlement not to pursue the Section 150 proceedings. I should say that in the other proceedings, and the Respondents have not sought to argue that the settlement did in fact encompass the Section 150 Motion, but only that the fact that there was a settlement of similar issues creates an estoppel. There can be no question of the liquidator being estopped, as Section 150 raises an issue between the Directors and the Courts and not between the Directors and the liquidator.

7. The second point raised by Dr. Forde SC was a procedural point, namely that the Rules of Court do not provide for an Application under Section 150 to be brought by Notice of Motion, and he contended that for this reason it ought to be brought by Plenary Summons pursuant to Order 1 Rule 1 of the Superior Court Rules. It certainly appears to be correct that there is no provision in the rules for bringing an application under Section 150 of the 1990 Act by way of Notice of Motion, although Order 74 Rule 136 sets out a number of Sections under which applications are to be made in this way. It does seem a strange omission from the rules and one which should possibly be rectified. However, I have declined to make any finding on this matter, as it was first raised on the hearing of this application before me, notwithstanding the fact that this application was brought in December 1994 and has been the subject of two separate challenges by the Respondents without any reference to this point. In my view the Respondents have accepted the procedures followed by the Liquidator and can not now be heard to raise a procedural objection.

8. Dr. Forde SC raised a further point in this case, which while not a preliminary point, is nevertheless one which I should deal with at this stage. A number of Affidavits have been filed in this motion including a lengthy Affidavit by John Carway. The liquidator has chosen not to seek to cross-examine John Carway on his Affidavit and the argument is made that as there is no cross-examination I must accept all the facts stated in the Affidavit as being correct. In one sense, of course, this is so, in that I can only determine this application on the evidence before me, but of course the evidence also includes a large number of exhibits, to which I may also have regard, and if there is a conflict between the exhibits and any evidence, I am entitled to form a view based on the exhibits which may be contrary to some of the evidence. I think this objection is really based on a total misconception of the nature of proceedings under Section 150. Dr. Forde SC has argued strenuously that these are adversarial proceedings between the liquidator and his clients, and he is entitled to treat them in the same way as any other inter partes action. In fact, these are not adversarial proceedings in that sense. The relevant part of Section 150 (1) is as follows:-

9. Strangely, neither the Section nor any of the rules made under the Act gave any guidance as to how the matter is to come before the Court, or indeed who is to bring it before the Court. As a matter of practice in the case of Court Liquidations, the liquidator almost invariably will bring an application by Notice of Motion and indeed on occasion will be directed to do so by the Court. However, this is simply a means of getting the question of the imposition of a restriction before the Court. There is in fact no obligation on a liquidator who brings the matter before the Court to put forward any facts which would tend to show that the directors had acted dishonestly or irresponsibly, nor indeed is he obliged to so argue. In practice, there are occasions when the liquidator will bring an application under this Section, and will tell the Court that he believes that the directors acted honestly and responsibly.

10. I think it is particularly instructive to compare this Section with Section 160 of the 1990 Act. Under that Section the Court may make a Disqualification Order absolutely barring directors and other persons concerned with the company from being in any way, directly or indirectly, concerned or taking part in the promotion, formation or management of any company. Under that Section the Court may in certain circumstances make a Disqualification Order on its own motion , but the Section also provides that an application for such an Order may be made either by the Director of Public Prosecutions or by any member, contributory, officer, employee, receiver, liquidator, examiner or creditor of the company. Furthermore, under Order 75 B. Rule 3 of the Superior Court Rules it is provided that a Section 160 application shall be brought by way of Notice of Motion. Such an application, however, is not mandatory, as in a Section 150 application, and if some party chooses to make this application, then a truly adversarial situation does arise.

11. It has been emphasised in a number of cases, including the judgment of the Supreme Court in the Respondent’s application to dismiss the present case for delay, that the purpose of the Section is to protect the public interest in ensuring that persons who have behaved dishonestly or irresponsibly in relation to a company will be restricted from doing so for a fixed period in the future. Most proceedings brought by a liquidator against the directors are for the benefit of the creditors. There is no such benefit in Section 150 Proceedings, and once the formal application has been brought, together with the formal proof that the company is insolvent, it is a matter for the liquidator whether he should take any further part in the proceedings. In many cases the liquidators feel that they do have an obligation to pursue the directors to some degree, but if they do so, they do so in the public interest.

12. To turn to the facts of the present case, the Company commenced business in 1990 and owned and operated six hotels and licensed premises, including both the Nenagh Lodge Hotel and the Ormond Hotel in Nenagh. The Company came under severe pressure from the Revenue Commissioners in 1993 and came to some form of agreement with them which involved a payment of £300,000.00 on account of tax arrears apparently to be paid by 31st January, 1994. It was intended to make this payment out of the proceeds of a sale of the Nenagh Lodge Hotel, which was put up for auction on 27th January, 1994. It was withdrawn from auction because the highest bid would not be sufficient to allow the payment of £300,000.00 to be made. The Respondents also controlled a company called Letcane Investments Ltd. (hereinafter called “Letcane”), and immediately entered into an agreement with Letcane to sell the Ormond Hotel, Nenagh to it on terms which included the payment of an immediate deposit of £212,000.00 and the granting by Letcane to the Company of an unsecured loan of £88,000.00. What in fact happened was that Letcane directly discharged the £300,000.00 to the Revenue Commissioners on 4th February, 1994.

13. It is quite clear that the £300,000.00 was not the entire sum then owing to the Revenue. The Statement of Affairs discloses that at the date of winding up, that is after the £300,000.00 had been paid, there remained a sum of £561,526.00 due in respect of V.A.T. and £229,394.00 due in respect of P.A.Y.E and P.R.S.I. It would appear probable that the £300,000.00 was payable in respect of P.A.Y.E. and P.R.S.I., as the arrears, other than interest, only commenced from February 1994, but the arrears of V.A.T. dated from January, 1993.

14. The liquidator has criticised a number of matters in relation to the affairs of the Company, including the transaction with Letcane involving the Ormond Hotel. The way in which that transaction was put through the books of the Company was certainly questionable, but it does seem clear that the £300,000.00 was almost certainly a preferential debt. I think in relation to this application the greatest significance of this transaction is not that it may have technically been a fraudulent preference, but rather that the panic to put through this sale showed that the directors were well aware in January, 1994 that if they did not immediately pay £300,000.00 to the Revenue, the Company was going to go under. They managed to make the payment, but it is instructive to note that they made no further payments whatever to the Revenue prior to the winding up of the Company. Indeed it is clear that at least from the beginning of 1993 this Company was being kept alive by the fact that it was in effect trading on monies due to the Revenue, and allowing huge arrears to build up, together with the attendant interest. Quite astonishingly Dr. Forde SC attempted to justify this situation by arguing that if a company is temporarily short of funds, it may be justified in not paying the Revenue and in effect taking a loan on interest to keep the company going. P.A.Y.E. and P.R.S.I. are monies which a company pays to the Revenue on behalf of its employees, and constitutes its employees tax and its employees social insurance. To try to justify trading by using what is in effect its employees money without their knowledge or consent, is to me a quite bizarre and totally irresponsible attitude. This appears to have been a policy of the Board of Directors, and is not something which can be attributable to any one particular director. On this ground alone I have no doubt that the directors must be restricted under Section 150.

15. Other complaints were made by the liquidator, which I will deal with very briefly. There is no doubt that in the Statement of Affairs the various properties were undervalued. However, at least some attempt was made to give a real value as they were very much written down from their book value, and I would take into account that these properties were all sold at the same time by a liquidator, and almost certainly would have been worth more than they realised had they been sold by the Company as a going concern. I do not think that in itself this undervaluation would have amounted to any form of irresponsibility.

16. A further point was made that there was an inter company debt which was alleged to be due to the Company from an associated company, and that this was not in any way a realisable debt. Unfortunately, the directors have not chosen to give any great detail about this, and their failure to explain the purpose of the debt or its likely recoverability is certainly something I will take into account. It is for the directors to show that this was a genuine debt and that there were real beliefs that it was recoverable.

17. I certainly have no doubt that for a considerable period before the Company went into liquidation, the directors knew or ought to have known that it was not a viable going concern, and was going to continue to lose money at the expense of its creditors and in particular the Revenue. I have no doubt that an order must be made in this case.