Jones v. Gunn [1997] IEHC 27; [1997] 3 IR 1; [1997] 2 ILRM 245 (14th February, 1997)

Judgment of Mrs Justice McGuinness delivered on the 14th day of February, 1997. 1. In these proceedings the Plaintiffs who are a firm of Architects seek a number of reliefs against the three Defendants. A number of the reliefs sought are pursuant to the Companies Acts, 1963 (as amended by the Companies Act, 1990 ), in particular pursuant to Sections 297A and 298 as extended by Section 251 . Other reliefs sought include a declaration that in the conduct of its affairs the third-named Defendant at all material times acted for and on behalf of and as agent for the second-named Defendant, a declaration that by reason of the economic and commercial realities of the situation it is just and equitable that the second and third-named Defendants be treated as a single entity so that the business and liabilities of the third-named Defendant are to be regarded as the business and liabilities of the second-named Defendant and an Order directing the second-named Defendant to repay sums of £83,130 and £1,790 to the third-named Defendant and to pay all or part thereof to the Plaintiffs. 2. The reliefs sought may conveniently be divided into, firstly, reliefs whether pursuant to the Companies Act, 1963 or otherwise against the first-named Defendant in his capacity as director of the second-named and third-named Defendant and, secondly, other general reliefs sought against the second and third-named Defendant companies. 3. At the beginning of the hearing before this Court Senior Counsel for the first and second-named Defendants, Mr McGovern, submitted that a preliminary issue arose which should be decided prior to the Court's embarking on the hearing of evidence, especially as in the nature of the case the evidence would be fairly lengthy. This issue, in the submission of Mr McGovern, was as to whether it was open to the Plaintiff to seek any relief against the first-named Defendant pursuant to Sections 297A and of the Companies Act, 1963 (as amended by the Companies Act, 1990 ), given that the matters alleged against the Defendants took place prior to the coming into force of the Companies Act, 1990 . It was agreed by all parties that the commencement date of the said Act was 1st August, 1991. 4. Counsel for the Plaintiffs, Mr McCann, did not wholeheartedly oppose the hearing of the preliminary issue but submitted that there were other claims against the first and second-named Defendants, and in particular against the first-named Defendant in his capacity as director of the second and third-named Defendants, which arose in equity and with regard to the fiduciary duties of the first-named Defendant to the creditors of the third-named Defendant, which would require the hearing of very similar evidence. Counsel for the Defendants indicated that he would be strenuously opposing any argument that the first-named Defendant owed any duty to the Plaintiffs outside the realm of the Companies Acts. 5. It appeared to me that it would be helpful, and might well shorten the proceedings, to deal in the first place with the issue raised by Mr McGovern and to consider also whether the first-named Defendant as a director of the second and third-named Defendant companies could owe any duties to the Plaintiffs apart from claims under the Companies Acts. 6. At this point I should say that Mr McGovern very openly acknowledged that at this stage of the proceedings he saw himself as dealing principally, and perhaps solely, with any personal liability that might be attributed to the first-named Defendant rather than with the general liability of the second-named Defendant. The third-named Defendant had not entered an appearance or taken any other step to defend the proceedings. 7. In order to enable the Court to appreciate the background of the proceedings, Counsel for the Plaintiffs then opened the case generally to the Court. In setting out here the matters alleged in the opening of the case, it must at all times be accepted that many of these matters are strenuously at issue between the parties and that no decision on the facts can be made by this Court prior to hearing the full evidence. 8. In summary, the facts alleged by the Plaintiffs are as follows: 9. The Plaintiffs are a firm of Architects. In or about mid-October 1981, Mr Nigel Jones, the first-named Plaintiff, was approached by Mr Noel Smyth, Solicitor, who was then acting for a builder named John Moore, in regard to a possible residential development at Killiney Hill, Co Dublin. On 18th November, 1981 at a subsequent meeting Mr Smyth asked Mr Jones to act for his client in an application for planning permission for the said residential development. At this point it appeared that the relevant land was owned by a Mr Joseph Kelly, but at an early stage the ownership was transferred to the third-named Defendant, XJS Investments Limited. 10. Early in February 1982 there was a further meeting between Mr Kelly, Mr Smyth and Mr Jones, and on the 23rd February 1982 Mr Smyth wrote to Mr Jones asking him to prepare preliminary drawings for the purpose of the planning application to the relevant local authority, the then Dun Laoghaire Corporation. It was agreed that this work was to be done on a "no foal, no fee" basis. On the 14th May, 1982 the plans were presented as part of the planning application which was now being made by the third-named Defendant XJS Investments Limited. It appears that this company was owned by the first-named Defendant Mr Gunn, Mr Thomas Murphy, Mr Noel Smyth, Solicitor and Mr Vincent Barrett as shareholders. In 1982 the registered directors were Mr Kelly and Mr Smyth, but from 1983 onwards the registered directors became Mr Gunn and Mr Murphy. 11. In September 1982 more detailed plans were prepared and in November 1982 there was a discussion in regard to the fees to be paid to the Plaintiffs. A figure of £50,000 was agreed but on a "no foal, no fee" basis. The application for planning permission was pursued and the first-named Plaintiff acted as Architect throughout the process. Permission was refused by Dun Laoghaire Corporation on the 19th January, 1983 and the matter was appealed to An Bord Pleanála. The Plaintiffs allege that at this stage and at all stages thereafter it was clearly acknowledged that the "no foal, no fee" basis meant that Mr. Jones' fees would be paid if either (1) planning permission was obtained or (2) the owners of the land were paid compensation by the local authority in the event of planning permission being refused. The appeal was heard by An Bord Pleanála on the 5th July, 1983 and permission was refused, but on grounds that enabled the third-named Defendant to claim compensation from the local authority, which was done. Following considerable litigation it was held that compensation was payable and subsequently there was a process of arbitration between the developer and the local authority as to the quantum of compensation. The first-named Plaintiff acted for the third-named Defendant in the arbitration and was paid for this aspect of his work. 12. In July 1987 the sum of £150,000 was agreed as compensation to be paid to the third-named Defendant. Around that time Mr Jones met Mr Gunn and was asked and agreed to prepare maps for the sale of the Killiney land without planning permission. The first-named Plaintiff alleges that at this stage he was assured that all his fees would be paid. On the 19th May, 1988 he sent an invoice for £34,226.13 for the fees then due and owing. In September he was again assured that these fees would be paid. Mr. Jones then alleges that in January 1989 he was informed by Mr Gunn that the concept of "no foal" did not include payment if compensation was received rather than planning permission being obtained. Correspondence from the Plaintiffs and their Solicitor with regard to the payment of fees produced no reply. The third-named Defendant received the £150,000 compensation in or about February 1989 and in addition sold the Killiney lands for a sum of £92,500. On the 22nd August, 1990 the Plaintiffs issued a Summary Summons claiming their fees in the sum of £35,660.63. This was not contested by the third-named Defendant and on the 5th October, 1990 the Plaintiffs obtained judgment in default. An attempt was made to execute the judgment but there was a return of no goods. 13. The Plaintiffs then sought and obtained an Order for Discovery in aid of Execution pursuant to the Debtors (Ireland) Act, 1872 . This Order having been obtained from the Master of the High Court on the 14th July, 1993 the first-named Defendant and a Mr Delaney on behalf of the third-named Defendant were cross examined in the Master's Court. Mr Murphy, the other director, had died prior to this date. From this cross examination it is alleged by the Plaintiffs that the following information in regard to the affairs of the third-named Defendant was elicited. 14. The lands in Killiney were purchased by the third-named Defendant for a sum of £40,000 which was financed by a loan from Guinness & Mahon Bankers. In July 1982 the third-named Defendant restructured its finances. It obtained a loan of £100,000 from Ansbacher Bank. Of this sum £52,000 was used to pay off the capital and interest due to Guinness & Mahon and apparently the remaining £48,000 was paid to Mr Noel Smyth, Solicitor, by way of legal fees, Mr Smyth being Solicitor for the third-named Defendant in addition to being one of the four shareholders in the company. The loan from Ansbacher Bank was personally guaranteed by the first-named Defendant Mr Gunn and by the other three shareholders. The capital was to be repaid at the end of the development project. 15. The interest on the £100,000 loan from Ansbacher Bank was paid by the second-named Defendant Messrs E Type Properties Limited in which Mr Gunn and Mr Murphy were shareholders. In order to pay the interest the second-named Defendant also borrowed moneys from Ansbacher Bank which again were personally guaranteed by the four shareholders in the third-named Defendant, Mr Gunn, Mr Murphy, Mr Smyth and Mr Barrett. 16. In 1987 the capital loan from Ansbacher Bank to the third-named Defendant, which then stood at £104,000, was replaced by two Deutschmark loans equivalent to £104,000 and £35,000 - again personally guaranteed. The £104,000 was used to discharge the original loan from Ansbacher Bank and the £35,000 was apparently paid to Mr Smyth by way of legal fees. 17. After the compensation had been paid to the third-named Defendant in the sum of £150,000 and the Killiney lands had been sold the Deutschmark loans from Ansbacher Bank fell to be discharged. The Plaintiffs allege that following the discharge of these loans and various other payments the third-named Defendant was left with a balance of in or about £85,000 in cash. The liabilities of the third-named Defendant at that stage stood at £35,666 owed to the Plaintiffs in respect of fees and in or about £95,000 owed to the second-named Defendant in respect of the interest paid on the Ansbacher loan - which was personally guaranteed by the four shareholders of the third-named Defendant company. Clearly the liabilities of the third-named Defendant exceeded its assets. The third-named Defendant company then proceeded to pay the entire £85,000 of its assets to the second-named Defendant company, thus releasing the personal guarantors from the vast majority of their liability. Nothing whatsoever was paid to the Plaintiff. The Plaintiff in its present action claims that the directors of the third-named Defendant wrongly preferred a "connected creditor" to an "independent creditor" and that at the very least payment should have been made to the creditors on a pro rata basis. 18. The third-named Defendant has ceased to trade since 1989 but has never been wound up. At no stage has a liquidator been appointed and it appears that the company would not have enough assets to pay the fees of a liquidator. 19. In the present proceedings the third-named Defendant has not entered an appearance and has taken no part in the proceedings. On the 13th June, 1994 the Plaintiffs sought judgment in default of appearance against all the Defendants in the action. Counsel appeared for the first and second-named Defendants and they were given a period of one week to file an appearance. The motion against the third-named Defendant was adjourned to the trial of the action. 20. I should again stress that the above summary of events is based entirely on the allegations of the Plaintiffs and that with some obvious exceptions all matters are at issue between the parties. For the purpose of the preliminary issue however, the Plaintiffs' case can be taken at its height. 21. The first matter that arose in the preliminary issue was whether it was possible for the Plaintiffs to ground a claim on Sections 297 A and 298 with Section 251 of the Companies Act, 1963 in respect of events which occurred prior to the coming into force of the Companies Act, 1990 on the 1st August, 1991. Section of the Companies Act, 1963 , prior to its amendment by the Companies Act, , provided as follows at subsection (1): "297 (1) If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud the creditors of the company or creditors of any other person or for any fraudulent purpose, the Court on the application of the liquidator or any creditor or contributory of the company, may, if it thinks proper so to do, declare that any persons who were knowingly parties to the carrying on of the business in manner aforesaid shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the Court may direct. On the hearing of an application under this subsection the liquidator may himself give evidence or call witnesses". 22. Section 298 subsection (1) of the original Act provided as follows: "298 (1) If in the course of winding up a company it appears that any person who has taken part in the formation or promotion of the company or any past or present director or liquidator or any officer of the company, has misapplied or retained or become liable or accountable for any money or property of the company, has been guilty of any misfeasance or breach of trust in relation to the company, the Court may, on the application of the liquidator or of any creditor or contributory, examine the conduct of the promoter, director, liquidator or officer, and compel him to pay or restore the money or property or any part thereof respectively with interest at such rate as the Court thinks just, or to contribute such sums to the assets of the company by way of compensation in respect of the misapplication, retainer, misfeasance or breach of trust as the Court thinks just". 23. The Companies Act, 1990 replaced the former Section 297 with a new Section 297 which introduced a criminal offence of fraudulent trading which is not in question here. It also inserted a new Section, Section 297A, which provides in subsection (1) as follows: "297A (1) If in the course of winding up a company or in the course of proceedings under the Companies (Amendment) Act, 1990 it appears that - (a) any person was, while an officer of the company, knowingly a party to the carrying on of any business of the company in a reckless manner; or (b) any person was knowingly a party to the carrying on of any business of the company with intent to defraud the creditors of the company, or creditors of any other person or for any fraudulent purpose; the Court on the application of the receiver, examiner, liquidator or any creditor or contributory of the company, may, if it thinks proper to do so, declare that such person shall be personally responsible without, any limitation of liability, for all or any part of the debts or other liabilities of the company as the Court may direct". 24. Subsection (2) is not relevant at this stage. 25. It is under this section that the Plaintiff claims personal liability against the first-named Defendant. However, Section 297A refers to the situation which would arise "in the course of winding up of a company", while in the present case the third-named Defendant company was never wound up. In order to apply Section 297A to the third-named Defendant the Plaintiff must also rely on Section 251 of the Companies Act, 1990 which provides as follows: "251 (1) This section applies in relation to a company that is not being wound up where - (a) execution or other process issued on a judgment, decree or order of any Court in favour of a creditor of the company is returned unsatisfied in whole or in part; or (b) it is proved to the satisfaction of the Court that the company is unable to pay its debts, taking into account the contingent and prospective liabilities of the company, and it appears to the Court that the principal reason for its not being wound up is insufficiency of its assets. (2) The following sections with the necessary modifications shall apply to a company to which this section applies notwithstanding that it is not being wound up - (a) sections , , and of this Act and (b) the provisions of the principal Act mentioned in the Table to this section..." 26. It is not necessary to quote the remainder of this Section here, but it should be noted that the Table appended to the section includes Sections 297A and 298 of the Principal Act. 27. Counsel for the Plaintiff points out that in the present case the execution issued against the third-named Defendant of his judgment of 5th October, 1990 would fulfil the conditions set out in Section 251 (1)(a). 28. In his submission to this Court Counsel for the first and second-named Defendants relied to a large extent on the judgment of Murphy J. in the case of In Re : Hefferon Kearns Limited (No 1) reported at [1993] 3 IR 177. That case refers to the "reckless trading" provisions introduced by the Companies (Amendment) Act, 1990 which came into force on the 29th August, 1990. In that case also a preliminary issue was raised as to whether the new provision could apply retrospectively to events which occurred prior to the coming into force of the 1990 Act. In his carefully argued judgment the learned Murphy J. held that the liability created by Section 33 (1)(a) of the Companies (Amendment) Act, 1990 was not retrospective. 29. At page 183 of his judgment the learned Murphy J. stated "Section 33 aforesaid introduced into Company Law in Ireland a new concept of liability. It provided that officers of a company might incur civil liability in respect of the debts of a company where that person, while an officer of the company, was knowingly a party to the carrying on of the business of the company in a reckless manner. The first of the issues before me is whether Section 33 aforesaid is retrospective in its effect, that is to say, whether it relates to the actions of an officer of a company which took place before the 29th August, 1990. The nature of retrospective legislation and the intention of the legislature in relation to the manner in which laws enacted by it should operate were dealt with fully and authoritatively by the Supreme Court in Hamilton v. Hamilton [1982] IR 466. In his judgment O'Higgins C. J. (at page 474) adopted the definition provided by Craies on Statute Law (seventh edition page 387) of legislation which operated retrospectively where it 'takes away or impairs any vested right acquired under existing laws, or creates a new obligation, or imposes a new duty, or attaches a new disability in respect to transactions or considerations already passed'. The Chief Justice was thus distinguishing retrospective legislation properly so called from other statutes having a retroactive effect such as statutes dealing with the practice and procedure of the Courts which enabled procedures to apply to actions arising before the operation of the statute. Another example of legislation referring to earlier events but not itself operating retrospectively is to be found in the decision of Barron J. in O'H v. O'H [1991] ILRM 108. As Barron J. pointed out (at page 112) a distinction must be drawn between applying the new law to past events and taking past events into account in applying new law. He quoted with approval a further passage from Craies on Statute Law as follows: 'But a statute is not properly called a retrospective statute because a part of the requisites for its action is drawn from a time antecedent to its passing'. If the legislation in the present case must be construed as operating prior to the operative date then unquestionably it is retrospective in the strictest sense of that word. It would be the actual conduct of the officers of the company prior to the enactment of the legislation which would give rise to the statutory consequence. Their actions would not establish the conditions or prerequisites of liability but of themselves would (subject to the discretion of the Court) give rise to a liability even if the conduct had ceased prior to legislation coming into operation. That legislation should operate in this way is not readily inferred. Again the common law principles in this regard are summarised in the decision of the Chief Justice in Hamilton v. Hamilton [1982] IR 466 (at page 474) by reference to a decision in Gardner v Lucas (1878) 3 appeal case 582 (at page 601) as follows:- '.... unless there is some declared intention of the legislature clear and unequivocal or unless there are some circumstances rendering it inevitable that we should take the other view, we ought to presume that an Act is prospective and is not retrospective'. The common law construction was based on the presumption that Parliament did not intend to create the injustice which would normally flow from retrospective legislation. In this country one can deduce with greater certainty the intention of the legislature because of the particular obligations imposed upon it by the Constitution". 30. There is no doubt that the judgment of Murphy J. in the context of Section 33 of the Companies (Amendment) Act, 1990 would apply equally to the "reckless trading" provisions set out in Section 297A(1)(a) as inserted by the Companies Act, , and I would have no hesitation in following it. 31. Mr McCann on behalf of the Plaintiff however submits that the Plaintiff's claim would arise not under the "reckless trading" provision set out in Section 297A(1)(a) - which he agrees cannot operate retrospectively - but under Section 297A(1)(b) which refers to the carrying on of the business of the company with intent to defraud the creditors of the company or for any fraudulent purpose. This, he submits is a re-statement of the previous law contained in the old Section 297 which provides a penalty of personal liability where there has been fraudulent trading and therefore the application of sub-paragraph (b), as opposed to sub-paragraph (a), is not, in fact, retrospective. He refers to the judgment of the learned Barron J. in the case of Alba Radio v. Haltone [1995] 2 IR 170. In that case the Plaintiff sought an Order for the examination of a director of the Defendant company under Section 245 of the Companies Act, 1963 as inserted by Section 126 of the Companies Act, 1990 . As no winding up Order had been made nor had any provisional liquidator been appointed, the application was made by virtue of the provisions of Section 251 of the Companies Act, 1990 . In dealing with the element of retrospectivity, the learned Barron J. stated (at page 173 of the report): "Whether or not an Act is retrospective in its effect is determined by the proper construction of the provisions of that Act. Where rights have been acquired or duties imposed in respect of completed transactions prior to the passing of the Act in question, then those rights or those duties cannot be affected by the Act unless it is to be retrospective in its operation. In the present case there is no right vested in Michael Murphy not to be examined under Section 245 of the Companies Act, 1963 unless the company is being wound up. Because the law has been altered as to the circumstances in which an application may be made under Section 245 and its provisions have been altered to some extent does not mean that the Act is being operated retrospectively". 32. Mr McCann argues that this line of argument would also apply in regard to Section 297A(1)(b). However, it must be borne in mind that Barron J. in the Alba Radio case was dealing with a procedural matter and that the learned Judge himself adds at the last paragraph of his judgment a type of caveat or reservation as follows: "It may be that as a result of the examination of Michael Murphy or in pursuance of other proceedings taken, a liability may be sought to be imposed upon him which would, if imposed, give a retrospective effect to the provisions of the Act of 1990. That issue has not yet arisen and may never arise. That it may do so is no reason for refusing the relief being granted". 33. There is no doubt that there is a strong line of case law against the retrospective operation of statutes. In Hamilton v. Hamilton [1982] ILRM 290 a majority of the Supreme Court ruled against a retrospective application of the Family Home Protection Act, 1976 . The then Chief Justice, Chief Justice O'Higgins, stated at page 293/4 of the report: "This brings me to the subject of retrospectivity and it is necessary to state with some precision what I regard as such in a statute. Many statutes are passed to deal with events which are over and which necessarily have a retroactive effect. Examples of such statutes - often described as ex-post facto statutes - are to be found in acts of immunity or pardon. Other statutes having retrospective effect are statutes dealing with the practice and procedure of the Courts applying to causes of action arising before the operation of the Act. Such statutes do not and are not intended to impair or effect vested rights and are not within the type of statute with which, it seems to me, this case is concerned. For the purpose of stating what I mean by retrospectivity in a statute, I adopt a definition taken from Craies on Statute Law which is, I am satisfied, based on sound authority. It is to the effect that a statute is to be deemed to be retrospective which takes away or impairs any vested right acquired under existing laws, or creates a new obligation, or imposes a new duty, or attaches a new disability in respect to transactions or considerations already passed. (see Craies 5th edition 357). It is implicit in the contention put forward on behalf of Mrs Hamilton that Section 3 of the Family Home Protection Act, 1976 applies in this case in such a manner as (a) to impose a new requirement for the completion of a transaction entered into before the Act came into operation (b) to remove the existing rights of the parties to that transaction to completion without observing such requirement and (c) thereby to effect and impair rights which were vested under existing laws. Put shortly, it is implicit in this contention that this Act was intended to have and has retrospective effect. Retrospective legislation since it necessarily effects vested rights has always been regarded as being prima facie unjust..... The result is a rule of construction which leans against such retrospectivity and which according to Maxwell is based on the presumption 'that the legislature does not intend to do what is unjust' (see Maxwell the Interpretation of Statutes 9th edition 221)". 34. The learned O'Higgins C. J. goes on to quote from a number of English cases, in particular from In Re: Athlumney [1898] 2QB 551 where Wright J. said: "No rule of construction is more firmly established than this that a retrospective operation is not to be given to a statute so as to impair an existing right or obligation, otherwise than as regards procedure, unless that effect cannot be avoided without doing violence to the language of the enactment. If the enactment is expressed in language which is fairly capable of either interpretation it ought to be construed as prospective only". The case of O'H v. O'H [1991] ILRM 108 already mentioned above also deals in some detail with the question of retrospection. This case turned on the consideration of the provisions of Section 29 of the Judicial Separation and Family Law Reform Act, which operates to prevent a spouse from disposing of matrimonial property in order to deprive his/her spouse of the financial reliefs provided under the 1989 Act. The learned Barron J. in his judgment held that the Section could not operate retrospectively and could not be used to recover property which the husband had signed over to his son shortly prior to the separation proceedings brought by his wife, because the disposal of the property had occurred prior to the coming into force of the 1989 Act. At page 110 of his judgment, Barron J. cited a passage from In Re: Raison (1891) 63 LT 709: "There is an old and well known saying with regard to new laws, that you are not by a new law to affect for the worse the position in which a man already finds himself at the time when the law is actually passed". 35. Barron J. also refers to the quotations from Craies on Statute Law which were referred to by O'Higgins C. J. in Hamilton v. Hamilton, which I have already referred to. At the end of his judgment Barron J. states (at page 114): "It may well be that where the Court takes the view that it would be unfair or unreasonable to take away the benefit of rights accruing to a transferee under an impugned disposition it would not set it aside. Nevertheless, if it did, the Court would be taking away or impairing a vested right acquired under existing laws, or imposing a new duty, or attaching a new disability in respect of transactions or considerations already passed. In the absence of an expressed intention to this effect, it must be presumed that this was not intended". 36. In the instant case the crucial factor, it seems to me, is that there has been no effort to wind up the third-named company and in order to apply Section 297A(1)(b) it would be necessary to bring in the provisions of Section 251 of the Companies Act, 1990 . Section 297A(1)(b) in itself is not retrospective in its application, since by and large it restates existing law and does not impose new penalties or disabilities. However, that is in the context of a company in the course of being wound up. Under the previous law the penalty of personal liability could not have been applied to the directors of the third-named Defendant as it has never been wound up. 37. I do not find it a particularly attractive proposition that a director of a company, who may have treated its creditors in a fraudulent manner, should be able to avoid personal liability simply by ceasing to trade and by not winding up the company. That may, indeed, have been one of the mischiefs which it was sought to cure by the enactment of Section 251 of the Companies Act, 1990 . 38. Nevertheless, I must conclude that to operate the Sections 297A(1)(b) and Section 251 together would be to impose a liability on the first-named Defendant which could not have been imposed on him under the original 1963 Act. The impugned transactions were completed prior to August 1991 and therefore the Plaintiff's claim under Section 297A must fail because it would involve retrospection. The same infirmity would attach to a claim under Section 298 because it, too, would involve the use of Section 251 . 39. Counsel for the Plaintiff submits, however, that the Plaintiff has other remedies available to him which arise from the fiduciary duty of the directors of the third-named Defendant company to its creditors and from general equitable principles. This claim is generally referred to in the statement of claim and is set out more particularly in the Plaintiff's reply to particulars dated 20th July, 1994 at paragraph 6 where it is claimed that the breach of duty on the part of the first-named Defendant and Thomas Murphy arose "as part of the general fiduciary duty owed by the directors of a limited liability company (including the duty, as directors of a company which is insolvent or threatened with insolvency, to have regard for and to act in the best interests of the creditors generally)". 40. As far as this aspect of the claim is concerned, Counsel for the first and second-named Defendant argued that the limited liability company is a statutory concept, with its creation, composition, attributes, rights and duties entirely set out and circumscribed by the relevant statutes. Any exceptions there may be to the rule of limited liability (such as are now provided in the case of reckless or fraudulent trading) are also purely statutory. It is not, he submits, nor should it be, possible to "get around" the statutory scheme by the introduction of extraneous equitable or common law rights and duties. Such a course would defeat the entire statutory system. Insofar as the directors have fiduciary duties they are not to the creditors, but to the company as a whole. In support of this contention, Mr McGovern referred me to Mr Justice Keane's work Company Law in the Republic of Ireland (2nd edition) at paragraph 29.23, where Judge Keane refers to the case of Percival v Wright [1902] 2 Chancery 421. In that case it was established that the duties of the director lay to the company as a whole and not to the shareholders as individuals. The same principle is set out by Mr Patrick Ussher in his book Company Law in Ireland at page 202 "it is well established in law that the director owes the duties arising out of his office to the company itself, the separate person, and to no-one else". However, it should be borne in mind that these statements are made in the context of contrasting the duty of the directors to the company as a whole with any duty they might have to individual shareholders. They are not referring to the position of creditors at all. 41. The situation as described by Mr McGovern in his submissions would have the benefit of clarity and relative simplicity - no small advantage. 42. Mr McCann, however, on behalf of the Plaintiff points to another line of authority which, while accepting that while the company is solvent and trading the directors' fiduciary duties are to the company itself, would suggest that once the company is insolvent the directors have also a duty to the creditors. In this connection Mr McCann referred me to the English House of Lords decision in the case of Winkworth v. Edward Baron Development Company Limited & Ors reported at [1987] 1 ALL ER 114. The facts of that case concerned the property dealings of a husband and wife in connection with a company wholly owned by them and are not specifically comparable to the facts in the instant case but at page 118 of the report Lord Templeman in his speech discusses the equitable relationship between a company and its creditors: "But a company owes a duty to its creditors, present and future. The company is not bound to pay off every debt as soon as it is incurred and the company is not obliged to avoid all ventures which involve an element of risk, but the company owes a duty to its creditors to keep its property inviolate and available for the repayment of its debts. A duty is owed by the directors to the company and to the creditors of the company to ensure that the affairs of the company are properly administered and that its property is not dissipated or exploited for the benefit of the directors themselves to the prejudice of the creditors". 43. Mr McCann also refers me to a judgment of the English Court of Appeal in the case of West Mercia Safety Wear (in liquidation) v. Dodd & anor . The facts of this case are nearer to the matters alleged by the Plaintiff in the instant case in that in the West Mercia case a director of two companies had transferred a sum of £4,000 from one company to another in order to reduce his own personal liability on a loan. Despite the fact that the money was owed by the first company to the second company it was held by the court that the director had breached his duties to the general creditors of the first company. The situation is summarised in the head note [1988] BCLC 250: "Once a company was insolvent the interests of the creditors overrode those of the shareholders since the company's assets belonged in a practical sense to the creditors who could displace the power of the shareholders and directors to deal with them. Since West Mercia was know by D. to be insolvent when he caused £4,000 to be transferred from its account to Dodd, and its transfer was a fraudulent preference made solely to relieve D. of personal liability under his guarantee in disregard of the interests of the general creditors of West Mercia, D. had breached his duty". 44. In the West Mercia case the companies were in point of fact not merely insolvent but in process of liquidation. 45. The question of the duty of the directors of an insolvent company to the general creditors of that company has also been dealt with in this jurisdiction by both the High Court and the Supreme Court in the case of In the Matter of Frederick Inns (in liquidation) High Court [1991] ILRM 582 and Supreme Court [1994] 1 ILRM 387. In that case a number of connected companies, which were insolvent but not actually in liquidation at the time, entered into an agreement to make payments to the Revenue Commissioners in respect of monies owed. The payments were allocated to the various companies in such a way that some companies made payments in excess of their actual liabilities to the Revenue Commissioners. When the companies went into liquidation the transactions with the Revenue Commissioners were challenged as being ultra vires the payor companies insofar as they were a gratuitous reduction or alienation of the companies' assets and had been made when the companies were insolvent. In the High Court it was held by Lardner J. as summarised in the head note that such payments were misapplications of the companies' assets because they were made when the companies were insolvent and were made in disregard of the rights and interests of the general creditors. At page 589 of the judgment the learned Lardner J. said: " .... the payments in question cannot be said to be trading so as to be fraudulent trading. Nonetheless in my judgment the payments to the Revenue which are in question were made by the authority of the directors of the respective companies in breach of the duty which the company and directors owed to the general creditors of these insolvent companies. Counsel for the liquidator has referred me to a statement of law by Street C. J. in Kinsela v. Russell Kinsela Pty. (in liquidation) [1986] 4 NSW LR 722 at 730 where he said 'in a solvent company the proprietary interests of the shareholder entitled them as a general body to be regarded as the company when questions of the duty of directors arise. If as a general body they authorise or ratify a particular action of the directors, there can be no challenge to the validity of what the directors have done. But where a company is insolvent the interests of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company's assets. It is in a practical sense their assets and not the shareholder's assets that, through the medium of the company, are under the management of the directors pending either liquidation, return to solvency, or the imposition of some alternative administration. This statement was made in relation to the law of New South Wales. It was approved by Dillon L. J. in West Mercia Safety Wear Limited (in liquidation) v. Dodd [1988] BCLC 250. It seems to me to be consonant with the intent of Irish company legislation and to be appropriate and applicable to insolvent companies in Irish law. In my judgment therefore, the payments to the Revenue which are in question were also misapplications of the respective companies' assets because they were made when the companies were insolvent and the payments were in disregard of the rights and interests of the general creditors". 46. The judgment of the learned Lardner J. was upheld by the Supreme Court on this point, as on the other elements of his decision. The judgment of the Court was given by Blayney J. (O'Flaherty J. and Denham J. concurring). In the course of a lengthy and careful judgment Blayney J. stated (at page 396 - 397): "It is clear from this that as soon as the winding up Order has been made the company ceases to be the beneficial owner of its assets with the result that the directors no longer have power to dispose of them. Where, as here, a company's situation was such that any creditor could have caused it to be wound up on the ground of insolvency, I consider it can equally well be said that the company had ceased to be the beneficial owner of its assets with the result that the directors would have had no power to use the company's assets to discharge the liabilities of other companies. Once the company clearly had to be wound up and its assets applied pro tanto in discharge of its liabilities, the directors had a duty to the creditors to preserve the assets to enable this to be done, or at least not to dissipate them. This decision is supported by the decision of the Court of Appeal in New South Wales in Kinsela v. Russell Kinsela Property Limited (in liquidation) [1986] 4 NSW LR 722". 47. Blayney J. then goes on to quote the passages from the Kinsela judgment which were also quoted by Lardner J. in the High Court and concludes as follows: "I would respectfully adopt and follow this statement of the law and where it is applied to the facts here I think it is clear that it could not be held that the payments by the four companies were 'lawfully and effectively done'. At the time the payments were made the four companies were under the management of their directors pending imminent liquidation. Because of the insolvency of the companies the shareholders no longer had any interest. The only parties with an interest were the creditors. The payments made could not have been lawful because they were made in total disregard of their interests". 48. While I would accept Mr McGovern's contention that in general the rights and duties of directors are set out in the relevant statutes, I consider that the various authorities opened to me by Mr McCann are persuasive and, of course, in the case of the Supreme Court binding on me, in establishing that where a company is clearly insolvent, even if not in liquidation, the directors owe a fiduciary duty to the general creditors and may not make payments which benefit either closely connected companies or themselves personally to the detriment of the general and independent creditors. 49. If, therefore, the Plaintiff can establish the truth of his allegations on the evidence it appears that he may have a claim against the first and second-named Defendants in this respect. It is clear that other related issues, such as whether it is proper to lift the corporate veil in respect of the second and third-named Defendants, which have not been dealt with in the consideration of this preliminary issue, will also arise. 50. Therefore, while it appears to me that the Plaintiffs' claim under Section 297A and Section 251 must fail, I will proceed to hear evidence in regard to the Plaintiff's other claims. © 1997 Irish High Court BAILII: Copyright Policy | Disclaimers | Privacy Policy | Feedback | Donate to BAILII