Kavanagh v. O'Donoghue & Anor [2003] IEHC 129 (14 November 2003)
THE HIGH COURT
Record No: 2001 No 61Cos
IN THE MATTER OF SILKEN CONSTRUCTION LIMITED (IN LIQUIDATION) AND IN THE MATTER OF SECTION
150 OF THE COMPANIES ACT 1990
BETWEEN:
TOM KAVANAGH
APPLICANT
AND
DONAL O'DONOGHUE
AND
MARY O'DONOGHUE
RESPONDENTS
Judgment on Discovery delivered by Ms. Justice Mary Finlay Geoghegan on 14th November 2003
The respondents in the above entitled application have brought an application pursuant to O.31 r.12 of the Superior Court Rules seeking discovery of the report of the applicant herein to the Director of Corporate Enforcement ("the Director") under s. 56 of the Company Law Enforcement Act, 2001. The application for discovery was brought following a request for voluntary discovery pursuant to O. 31 r.12 (4). The Director applied to be joined as a Notice Party in the application for discovery by reason of the fact that the document sought to be discovered is the report to him under s. 56 and the alleged precedent it would set for other applications under s. 150. I acceded to that application and permitted the Director to be joined as a notice party and heard submissions by Counsel on his behalf.
The applicant is the official Liquidator of Silken Construction Limited ("the Company") having been appointed by order of the High Court of the 23rd July 2001. In his affidavit grounding the application under s. 150 of the Companies Act 1990 for a declaration of restriction, he states that he provided his report to the Director under s. 56 of the Act of 2001 on the 29th November 2002 and was not relieved by him of the obligation to bring the application under s. 150.
In the letter from the solicitor for the respondents seeking voluntary discovery pursuant to O.31 r. 12(4) of the Superior Court Rules, the reason for which the applicant's s. 56 Report to the Director is required is stated as follows:-
"The said documents are required in order to ascertain the conclusions of the liquidator in relation to the affairs of the Company and the actions of the respondents and to ascertain what opinion was expressed by the applicant in relation to the conduct of the respondents. The said documents will also assist the respondent in the preparation of a replying affidavit in these proceedings and the documents will assist in narrowing the issues between the parties and in saving costs."
Applicable Law
Section 56 of the Company Law Enforcement Act, 2001 obliges a liquidator of an insolvent company to provide at stated intervals to the director "a report in the prescribed form". The content of the report is prescribed by the Company Law Enforcement Act, 2001 (Section 56) Regulations 2002 (SI Number 324 of 2002).
Section 56(2) of the Act of 2001 obliges a liquidator to apply to the Court for a Declaration of Restriction of each of the directors of the Company under s. 150 of the Act of 1990 within a specified time unless the Director has relieved the liquidator of the obligation to make such an application. Part of the purpose of the s. 56 report is for a liquidator to furnish to the Director, the relevant information upon which the Director may take the decision as to whether or not the liquidator should be relieved of the obligation to bring an application under s. 150 in respect of some or all of the directors of the Company. The report also appears to have other purposes.
Where an application is brought by a liquidator under s.150 of the Act of 1990, the Court is obliged to make a Declaration of Restriction unless the Director satisfies the Court that he or she has acted honestly and responsibly in relation to the conduct of the affairs of the Company and that there is no other reason for which it would be just and equitable to make the Declaration of Restriction. The application is made by originating notice of motion in a voluntary liquidation and by a notice of motion in the winding up proceedings in a compulsory liquidation as in this case. The application is grounded upon an affidavit of the liquidator in which, in accordance with current practice, is obliged to set out the matters which should be brought to the attention of the Court in assessing whether or not the directors have discharged the onus placed on them by s. 150.
The s. 150 motion in which this application for discovery is made is a matter to which O. 31 r. 12 applies. No procedural objection under that rule was made on the application for discovery. It is accepted that the s. 56 report is a document in the possession of the liquidator and hence the issues which this Court must address under O.31 r. 12 on this application are:
(1) Is the s. 56 report a document "relating to any matter in question" in the s. 150 application. (O. 31 r. 12(1)).
(2) If so is discovery of the s. 56 report necessary for disposing fairly of the s. 150 application or for saving costs. (O.31 r. 12(2) and (3)).
Objections of Applicant and Director
Whilst the applicant and Director made slightly different submissions, there was a considerable overlap and the basis of the objection by both these parties to the order for discovery may be summarized as follows:
1. The s. 56 report is not relevant to the issues in the s. 150 application.
2. The Court in exercising its discretion under O.31 r.12 should have regard to the statutory framework of the s. 56 report and s. 150 applications. It was submitted that if the s. 56 report is to be discoverable it would inhibit liquidators from giving frank and candid information to the Director and prevent effective operation by the Director of his functions under the Act of 2001. This submission was directed particularly to those parts of the s. 56 report which require liquidators to give information in relation to possible future actions by liquidators against directors of the company.
3. On behalf of the applicant alone, it was contended that the report is confidential and s. 17 of the Act of 2001 should preclude discovery of the report.
It is to be noted that neither of these parties made any objection based upon an assertion of privilege.
Relevance
It was common case between the parties that the test of relevance remains that set down by Brett L.J in Compagnie Financière du Pacifique v Peruvian Guano Company [1882] 11 QBD 55 at p. 63:-
"It seems to me that every document relates to the matters in question in the action, which not only would be evidence upon any issue, but also which, it is reasonable to suppose, contained information which may - not which must - either directly or indirectly enable the party requiring the affidavit either to advance his own case or to damage the case of his adversary. I have put in the words 'either directly or indirectly' because, as it seems to me, a document can properly be said to contain information which may enable the party requiring the affidavit either to advance his own case or to damage the case of his adversary, if it is a document which may fairly lead him to a train of enquiry, which may have either of these two consequences".
The matters in question in a s. 150 application such as this where there is no issue as to the applicability of s. 150(2) (b) or (c) or as to whether
s.150 applies to the company and to the respondent directors are:
(i) Did the directors act honestly and responsibly in relation to the conduct of the affairs of the company; and
(ii) Is there any other reason for which it would be just and equitable that a declaration of restriction be made.
I accept the submission, that this Court in exercising its discretion under O.31 r. 12 should have regard inter alia to the statutory framework and purpose of the s. 56 report. As the s. 56 report is in a prescribed form, it is possible to identify precisely the nature of the contents of same. I am satisfied that much of the report in the prescribed form is not and could not be considered to be relevant to matters in question in a s. 150 application. It also appears to me probable that certain of the non relevant information is information which, in general, a liquidator should having regard to the statutory framework be entitled to furnish to the Director without necessarily disclosing same to the directors of the Company. Accordingly it appears appropriate to identify those portions of the s. 56 report which in accordance with the test set out by Brett L.J. in the Peruvian Guano case referred to above could be considered as relevant.
I have concluded that in this s.150 application there are two such relevant questions. Firstly, question 22 which seeks certain factual information in relation to each person who appears to have been a director of the Company at the date of or within twelve months prior to the commencement of the winding up and other information relevant to s.150 of the Act of 1990. Of particular relevance is the question and request put at paragraph 22(g) where the liquidator is asked to answer the question "Has the person demonstrated to you that s/he has acted honestly and responsibly in relation to the conduct of the Company's affairs?". The liquidator must answer 'Yes' or 'No' to this question and then is directed to "provide on a separate sheet details of the factors which support this answer".
The factors which support the liquidator's conclusion as to whether the director in question has or has not demonstrated that he or she has acted honestly and responsibly in relation to the conduct of the affairs of the Company are matters which may fairly lead to a train of inquiry which may enable the respondent directors to advance their own case. This is particularly so where a liquidator concludes that the directors have demonstrated that they have acted honestly and responsibly and sets out the factors which support this conclusion. However, it is also envisagable where there is a negative conclusion.
I have reached a similar conclusion in relation to question 31 in the s. 56 report. This asks whether the liquidator is asking the Director to relieve him from the requirement to apply pursuant to s. 150 for the restriction of one or more of the directors. It then also seeks the grounds upon which the liquidator considers that the application for restriction should not now be taken or alternatively, the grounds upon which the application for restriction will be made. Similarly to question 22, if a liquidator has, in the s.56 report, requested that he be relieved of the obligation to bring an application under s.150 and sets out the grounds for same, this is clearly a matter which may lead to a line of inquiry which could advance the respondent directors defence to the application under s.150. Depending on the grounds even where no relief is sought they may lead to a train of enquiry which may assist in the preparation of a response to the s.150 application.
There is a third question to which similar principles may apply in certain circumstances. It is question 21 relating to persons acting as a shadow director. It does not appear to arise on the facts of this case as it is contended that both respondents were directors of the Company.
Necessity or Saving of Costs
The disclosure of the part of the s.56 report relating to questions 22 and 31 must in the light of my conclusion on relevance be considered necessary for fairly disposing of the s.150 application. The fact that most liquidators may repeat in their affidavit grounding the s.150 application what has in substance been said to the Director does not appear to make disclosure unnecessary. The respondents are entitled to see what was said to the Director. Further such disclosure may also save costs as depending on the content it could reduce the time and effort required of directors and their lawyers in preparing the response to a s.150 application.
Confidentiality
Section 56 of the Act of 2001 does not expressly provide that the report of the liquidator thereunder is a confidential document. Section 17(1) provides:-
"Information obtained by virtue of the performance by the Director of any of his or her functions which is not otherwise come to the notice of the public, shall not be disclosed, except in accordance with law by any person including …"
Leaving aside the question as to whether or not a liquidator is envisaged as a person bound by the provisions of s. 17(1), I have concluded that having regard to the phrase therein "except in accordance with law", s.17(1) does not preclude the making of an Order for Discovery to which the respondents might otherwise be entitled.
Conclusion
Accordingly, I have concluded that the respondents are entitled to an Order for Discovery pursuant to Order 31 rule 12 of the portion of the applicant's report under s.56 of the Act of 2001 relating to the answers given to questions 22 and 31. I am aware that it is sometimes the practice to set out the factors, reasons or grounds sought in these questions on separate sheets or in appendices to the report. If this has been done in this case then the Order for Discovery will include such additional sheets and/or appendices.
Discovery and Admissible Evidence
Notwithstanding the Order for Discovery to which I have held the respondents entitled, I would wish to emphasise that it does not follow simply because the Court has made an Order for Discovery that, either a conclusion expressed by a liquidator in response to questions 22 and 31 in the s.56 report or the reasons or grounds for same are admissible evidence in the application for the declaration for restriction under Section 150. I am not making any decision on such issue in this judgment.