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You are here: BAILII >> Databases >> High Court of Ireland Decisions >> Brosnan & Ors v. Phelan [2004] IEHC 328 (21 October 2004)
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Cite as: [2004] IEHC 328
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- An order restraining the plaintiffs and each of them, their servants or agents or any person acting on their behalf from taking any step or any further step to acquire, directly or indirectly, whether personally or through any corporate vehicle or in any manner whatsoever, all or any part of or any interest in 1633 Broadway Mars Restaurant Corporation, other than through a shareholding held by them or for their benefit in Mars 2112 Group Limited, unless and until Mars 2112 Group Limited through a valid resolution of its Board of Directors or of its shareholders, decides not to acquire or retain any such interest in 1633 Broadway Restaurant Corporation.
Record Number: 2004 No.10696P
[2004] IEHC 328
Between:
Plaintiffs
And
Defendant
Judgment of Mr Justice Michael Peart delivered the 21st day of October 2004:
There are three Notices of Motion before the Court for determination – two brought by the plaintiffs and one brought by the defendant.
The first of the plaintiffs' Notices of Motion is one dated 13th July 2003 in which the following reliefs are sought:
1. An injunction restraining the defendant his servants or agents acting howsoever, from holding or purporting to hold or convoking or purporting to hold or convoke a meeting of the board of Mars 2112 Group Limited ("the Company") pending the determination of the dispute resolution procedure provided for in the Company's amended and restated shareholders' agreement dated November 19th 1999 at Clause 13.14;
2. In the alternative, an injunction restraining the defendant, his servants or agents acting howsoever, from holding or purporting to hold or convoking or purporting to convoke any meetings of the Board of the Company, other than as composed in accordance with the list of directors set out at paragraph 1 of the Plenary Summons.
The second of the plaintiffs' Notices of Motion is one dated 20th July 2004 in which the following reliefs are sought:
1. An Order restraining the defendant, his servants or agents from implementing or acting upon the purported rights issue adopted at the purported board meeting held on the 14th July 2004;
2. An Order restraining the defendant, his servants or agents from implementing or acting upon any other resolution or decision adopted at the purported board meeting held on the 14th July 2004.
The defendant has countered with his own Notice of Motion dated 22nd July 2004 in which he seeks the following relief:
What is immediately clear from the above reliefs is that there is a Board Room dispute and that at the centre of the dispute is a restaurant in Broadway, Manhatton. Some further elaboration of the background facts is necessary, although, since all the relevant facts and background information is contained in the documents filed in these proceedings, I do not propose to set out all the facts exhaustively.
Mars 2112 Group Limited (hereinafter referred to as "the Company") is a limited liability company incorporated in the State in 1997. Its purpose was to provide a vehicle through which a group of people, including the plaintiffs and defendant, could invest in a commercial enterprise in New York, namely a themed restaurant at 1633 Broadway, Manhatton. For that purpose, another Irish company was formed as a wholly owned subsidiary of Mars 2112 Group Limited, namely Mars 2112 Global Limited. That subsidiary in turn owns an American Company, 1633 Broadway, (referred to as "Broadway") which owns the restaurant business itself. By means of this structure, share capital and loan finance was provided by the investors to Broadway.
The plaintiffs between them control 63% of the Company, while the defendant controls 37% of the Company. A total of $21 million was invested in Broadway, of which the plaintiffs invested about $18 million, the balance being invested by interests controlled by the defendant.
For reasons which do not need to be set forth - indeed there would be dispute between the parties as to the correct reasons – Broadway has run into serious financial difficulties and has gone into what is commonly referred to as "Chapter 11" since March 2002. The Chapter 11 process is by now over two years old, and there is pressure emanating from the U.S. Court for any rescue package to be concluded. I am informed that extensions of time in this regard have been granted but that there will be difficulty in obtaining further leeway in that regard.
The genesis of the present dispute between the parties is centred around a desire and an attempt by each side to provide some sort of rescue package which might enable Broadway to exit the Chapter 11 process. The package put forward by the plaintiff group within the Company involves the writing off by the investors of €11 million and the provision of a further €1.5 million. As a necessary consequence of the acceptance of such a package by the U.S. Court, it is necessary at the same time that the Company's entitlement to a dividend would be lost, and its shares in the U.S. company would be cancelled.
The defendant and those whose interests he represents are of the view that the Company should have a rights issue in order to raise capital so that an arrangement can be reached with the creditors of the U.S. company, and so that thereafter the U.S. company can come out of Chapter 11. In that way the defendant group are of the view that their investment can be protected, as such a scheme would not involve the cancellation of their shares. It is clear from the defendant's affidavit that his group are of the view that the motive behind the plaintiffs' strategy is to enable them to again purchase the restaurant at the end of the Chapter 11 process in a way which excludes the defendant from any further participation in the process. This suspicion is expressed as follows by the defendant in his affidavit at paragraph 55:
"…They [the plaintiffs] have then used the information obtained in their capacity as directors and have taken advantage of the stalemate at Company Board level caused by their own acts and omissions to propose and attempt to advance an opportunistic plan to acquire Broadway out of Chapter 11 protection using a corporate vehicle under their control and completely separate from the Company. In this way they plan to divest the Company of its principal asset, while disenfranchising certain of the members of the Company…"
The defendant group is confident that the restaurant has the capacity to trade out of its difficulties provided some accommodation can be reached with the creditors, as they point to a current favourable trading situation withy positive cash flow. In paragraph 10 of his affidavit, he states, inter alia:
"… I am advised and believe that if the company waives the amounts due to it by Broadway, which total approximately US$11,600,000, and if fresh funding of approximately US$1,500,000 can be sourced, this will result in a dividend acceptable to Broadway's creditors and to the Court and will allow Broadway to emerge from Chapter 11 bankruptcy protection. If the additional funding can be sourced and provided by the Company then the ownership of Broadway can remain with and to the benefit of the Company."
In relation to this argument, the plaintiffs submit that what the defendants propose by way of an exit strategy from Chapter 11 is simply not possible for a parent company to put up the further funding in order to take its own subsidiary out of Chapter 11 in an accommodation with its creditors, and that it must be achieved through a separate vehicle, with the parent company agreeing to the cancellation of its shares in the rescued company. Mr Shipsey has referred this Court to the contents of the Plan of Reorganization of Broadway under Chapter 11 which was presented to the US Bankruptcy Court in June 2004, and in particular to Article 4.06 thereof which deals with the manner in which equity interests are to be treated in the Scheme. It provides as follows:
"Equity Interests (Class 6)
The holders of Allowed Class 6 interests shall receive no distribution under the Plan. All existing shares of ownership of Mars Common Stock and Mars Preferred Stock, together with all options, warrants and other type of entitlements to acquire such shares, shall be cancelled and extinguished, and all issued and outstanding certificates representing such shares shall become void without the need for further action."(my emphasis)
Mr Shipsey highlights the fact that this is not the Plan of the plaintiffs, but rather the Company's own plan submitted to the US Bankruptcy Court. He refers to the fact that the defendant signed this Plan and also to the fact that by a letter sent to all shareholders, including the group represented by the defendant, all shareholders in the Company were invited to participate in the raising of US$1.5 million finance through a new corporate vehicle, as part of the Reorganization Plan. It follows, as submitted by Mr Shipsey, that there has been no effort such as that alleged by the defendant, that the plaintiff group of shareholders are attempting to wrest the restaurant from Broadway for their own benefit and without reference to or participation by the defendant group.
The purpose of the plaintiffs' first Notice of Motion is to restrain the defendant from holding a meeting of the Board of the Company, either until a dispute as to the composition of that Board is resolved under the Dispute Resolution procedure provided in the Rules of the Company, or unless the Board is composed of those members who the plaintiffs contend make up the Board. There is a dispute in this regard, and while efforts have been made by the plaintiffs to invoke the Dispute Resolution Procedure provided for, they maintain that the defendant has frustrated these efforts by failing to agree on the name of Senior Counsel to whom the dispute can be referred for resolution. Clause 13.14 provides also that in the event of a failure to agree a Senior Counsel, any party may call upon the President of the Law Society of Ireland to nominate Counsel. It appears that three names were put forward by the plaintiffs and that the defendant responded not by agreeing one particular Counsel from the list, but stating that he did not mind which Counsel was nominated. The plaintiffs did not take that response at face value, and did not make a choice of any such Counsel, but neither did they refer the matter to the President of the Law Society. The plaintiffs submit that the defendant ought to be restrained from holding any Board meeting called by him on the basis of a composition of Board members which is in dispute, until such time as the dispute has been resolved under the Clause 13.14 mechanism. The defendant has submitted that this dispute is not a bona fide dispute but a contrived one, and that the invocation of the Clause 13.14 procedure for its resolution will in any event take too long. The point has also been made by Counsel on behalf of the defendant, Mr Hennessy, that even if the Board composition contended for by the plaintiffs is correct, the defendant group still has a majority of the Board on its side, and that therefore the resolution of the dispute as to its composition is moot or at least meaningless in terms of any injunctive relief being granted pending the determination of the dispute.
Mr Hennessy has also made the point that the plaintiffs have dragged their feet in relation to the resolution of the dispute under Clause 13.14. He says that this dispute has been in existence for quite some time, and that the plaintiffs are only now choosing to attach some urgency to the resolution of it, so that they can gain some advantage by way of injunctive relief.
The relevance of the resolution of the dispute is that the plaintiffs want to restrain the defendant group from implementing a rights issue which was purported to be authorised at a Board meeting called by the defendant and held on the 14th July 2004 and at which a rights issue was approved for the purpose of raising capital to provide the sum of US$1.5 million to deal with the US creditors under the Plan for Reorganisation. The plaintiff group chose not to attend that meeting. I have already referred to the fact that the plaintiff group maintain that it is simply not possible for Broadway to exit Chapter 11 by means of an injection of capital from the parent company, without the cancellation of the parent's shares in Broadway. The plaintiffs maintain that any resolution passed at that meeting is invalid on the basis that the meeting was improperly constituted. They also submit that the rights issue would place the company in a position where it was in breach of its own Plan as submitted to the US Bankruptcy Court.
The defendant on the other hand submits that the plaintiffs by their strategy would be committing a wrong against the company by acting against the best interests of the Company by in effect divesting it of its only asset in the Reorganization Plan. In answer to that point Mr Shipsey submits that if indeed there is a wrong being committed as alleged by the defendants, it is a wrong to the company and not to Mr Phelan, and that for Mr Phelan to seek redress arising from it would be to offend against the well-known rule in Foss v. Harbottle. Mr Hennessy submits that the plaintiffs' actions in attempting to get hold of the only asset of the Company in the way they are doing amounts to a breach of their fiduciary duty to the company and consequently comes within the ambit of one of the exceptions to the rule in Foss v. Harbottle.
In relation to the rights issue, Mr Hennessy has submitted that a company can have a rights issue at any time it wishes, and there is noting improper in having a resolution passed in that regard. What the proceeds of that rights issue might be used for is another matter in his view. The defendant group feels that it ought to be used for the benefit of the company. Ultimately it would be a matter for the US Bankruptcy Court to pass judgment on, but in his submission the fact that there is the requirement in the Reorganization Plan which requires the parent company to have its shares cancelled upon the provision of the funding of US$1.5 million is irrelevant to whether there is or is not a rights issue. He submits that there can be no damage to the company if a rights issue is authorised by the resolution of the Company.
Very helpful legal submissions have been made to this Court by both Mr Shipsey and Mr Hennessy. But really these three applications can be disposed of on the facts of the case, rather than by an examination of legal principles.
As far as the plaintiffs' motions are concerned there are three reliefs sought, the first two being related to the dispute concerning the composition of the Board, and the third being to restrain the implementing of the rights issue resolution of the 14th July 2004. In relation to the former, I am of the view that the intervention of the Court by way of injunction is not merited. There is a perfectly adequate dispute resolution procedure in existence, and in the light of the defendant's response to the invitation to choose any one of three proposed Senior Counsel to act as arbitrator of that dispute, it was in my view open to the plaintiffs to pick any name on the list and commence the procedure to have that dispute resolved. In the alternative, the President of the Law Society could have been asked to nominate a suitable Counsel. Neither of these courses was adopted up to the date of the application before me. It is clear that there is certainly a dispute between the parties with regard to the composition of the Board, but I am not of the view that the proceedings as drafted disclose a fair issue to be tried, in view of the fact that the Dispute Resolution Procedure in the Company's rules has not been properly engaged upon, and it certainly has sufficient capacity to resolve the issue. In any event I have not been satisfied by the plaintiffs on the facts, that the defendant's submission is incorrect, namely that even if the composition is correctly that contended for by the plaintiffs, the group which he represents still has control of the Board. That is a matter very much in dispute. However even if there was to be a fair issue apparent in the proceedings, I am satisfied that even if damages were not to be regarded as an adequate remedy, the balance of convenience would still lie in favour of refusing interlocutory relief, given that the dispute can be resolved far more expeditiously and at lesser cost by the full invocation of the Dispute Resolution procedure available.
I will not therefore make the orders sought in the plaintiffs' Notice of Motion dated 13th July 2004.
I also refuse to grant the relief sought in the plaintiffs' second Notice of Motion dated 20th July 2004 restraining the implementation of the purported rights issue. It seems to me that if the purpose of such a rights issue is one which the US Courts will regard as impermissible under the Reorganization Plan, that Court will not allow the fruits of the rights issue to be used for that purpose and nothing will be gained thereby by the defendant group. Conversely in such a situation, the plaintiffs could not be thereby prejudiced in anything they may do. Certainly there would be no basis on which this Court should intervene at this stage by way of interlocutory relief.
It seems to me that the whole focus of the plaintiffs ought at this stage, if indeed it has not already happened by now, be on the resolution of the dispute as to the composition of the Board. The resolution of that dispute is at the heart of the difficulties between the parties, and the sooner the matter is clarified the sooner the Reorganization Plan can be implemented by whatever method should find favour with the US Bankruptcy Court.
I also refuse the relief sought by the defendant. He seeks to restrain the plaintiffs from taking any step to acquire the asset of the US Company other than through their shareholding in the Company, until such time as the Company itself has by resolution decided either to acquire or retain its interest in Broadway, or not. The issue here is affected by the resolution of the issue as to the composition of the Board. Under the Reorganization Plan, there appears to be nothing to prevent the plaintiffs from acting as they are, and it would take some argument to persuade me at this stage that their actions came within the exception to the rule in Foss v. Harbottle. I certainly am not convinced at this stage, and I would not be of the view that any fair issue has been disclosed in the claim made by the defendant. In any event damages are likely to be an adequate remedy. I am certainly not persuaded that they are not. I refuse the relief sought by the defendant.