Donegal Investment v Danbywiske: Trial judge must explain reasons for disregarding expert evidence

Here, the Supreme Court (Clarke J writing) held that the High Court trial judge (McGovern J) erred by not expressly explaining his reasoning for adopting a different approach for the valuation of shares to that proposed by expert evidence by either parties to the dispute.

 

Background

The background to these proceedings are explained in the Court of Appeal judgment (here). The parties are shareholders in a holding company, Elst, which owns Monaghan Mushrooms. Donegal issued High Court proceedings under s 205 of the Companies Act (shareholder oppression). The High Court ordered that Danbywiske purchase Donegal’s shares.

In the High Court (here), McGovern J heard expert evidence from both sides but chose a different method of valuation from either of the proposed methods. He ordered that Danbywiske pay Donegal €30.6 million for its 30% share in Elst.

The Court of Appeal overturned that valuation and ordered that the case be returned to the High Court for a determination of value. The CoA held that McGovern had not adequately explained his reasons for reaching his determination on value. Danbywiske applied to the Supreme Court for leave to appeal that decision.

The Supreme Court granted leave on three questions:

(a) Whether the principles set out in Hay v O’Grady as to the limits of an appellate court’s review of fact apply both generally and to expert testimony and, as such, constitute a complete code which cannot be departed from?

(b) Whether these principles were departed from in the rulings of the Court of Appeal on the findings of fact in the High Court relating to share valuation?

(c) Does the costs order of the Court of Appeal require to be reviewed?

Dismissing the appeal the Supreme Court stated:

9.1 For the reasons set out in this judgment I am satisfied that it is open to a trial judge to adopt a methodology or approach which differs from each of the approaches advocated in the expert testimony tendered by the parties. However, where a trial judge is persuaded to adopt a different approach, it is necessary for the judge to structure the judgment in such a way that either expressly explains why the approach adopted is considered to be appropriate notwithstanding the expert evidence tendered or that, at a minimum, the reasoning of the trial judge in that regard can be inferred with some reasonable level of confidence.

9.2 There is even some doubt as to the precise approach actually adopted by the trial judge in this case. But even if the approach actually adopted can be inferred to a sufficient level of confidence, I am satisfied that the Court of Appeal was correct to hold that the reasons why the trial judge utilised the approach which he did are neither clear from the judgment nor can safely be inferred.

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Keaney v Sullivan & Ors: absolute privilege of legal proceedings is not a licence to make unsubstantiated allegations

ARHMJ9 Boats moored in Cobh harbour with the Titanic Bar seen beyond

Cobh harbour and the Titanic Bar

The fifth exception to the rule from Foss v Hardbottle (a shareholder cannot sue for an injury to a company), which allows an action where the justice of the case demands, cannot permit an action for the reduction in value of a shareholding: O’Neill v Ryan [1993] ILRM 557.

And, under the Rules of the Superior Courts, the High Court can strike out proceedings for fraud, deceit, misrepresentation or undue influence unless the plaintiff expressly pleads the facts, matters and circumstances of the allegation: Hanly v Finnerty [1981] ILRM 198.

Background

In 1996, with the proceeds of a lottery win, Keaney purchased the Scotts Building in Cobh for the purpose of opening a themed pub to be known as the Titanic Bar. In 2000 he retained the service of Sullivan, a chartered accountant and financial advisor, to find an investment partner. Nolan, the fourth defendant, was identified as a suitable investor. As part of their agreement, Keavey made a deed of assignment making Nolan a tenant in common with equal shares in Scotts Building. They incorporated the Titanic Queenstown Trading Company, with Keaney as a 49% shareholder and Nolan owning 51%. They agreed that the Company would operate the Bar, and Keaney transferred the pub licence from his own name into the Company’s name.

In July 2003, Keaney and Nolan made another agreement whereby Keaney sold his interest in the premises and the Company to Nolan and the eighteenth defendant.

In 2006, Keaney issued proceedings against eighteen defendants in relation to the 2000 agreement, the management of the Bar and the 2003 agreement. Keaney was seeking to have all the transactions set aside for alleged deceit, breach of duty, duress, undue influence and unconscionable bargain. In the High Court, the defendants applied to have the actions struck out for lack of particularity. The High Court allowed Keaney to make two amended pleadings in order to specify his allegations.

At trial, Finlay Geoghegan J dismissed some of Keaney’s claims under O 19 r 5(2) of the RSC for lack of specificity and others under the rule from Foss v Hardbottle, because the trial judge found Keaney was in effect seeking a remedy for the loss in value of his shares in the Company. Keaney appealed to the Supreme Court.

Applicable Law

Order 19, rule 5(2) of the Rules of the Superior Courts provides:

In all cases alleging, fraud, breach of trust, wilful default or undue influence and in all other cases in which particulars may be necessary, particulars (with dates and items if necessary) shall be set out in the pleadings.

In Hanly v Finnerty [1981] ILRM 198, Barrington J held that, because of the seriousness of the allegations, O 19, r 5(2) requires a plaintiff to clearly set out in pleadings the facts which will be relied upon at trial, as it would be unfair to require a defendant to appear in court without an inkling of the allegations. Although, in Sun Fat Chan v Osseous Limited [1992] 1 IR 425, McCarthy J stated:

By way of qualification of the jurisdiction to dismiss an action at the statement of claim stage, I incline to the view that if the statement of claim admits of an amendment which might, so to speak, save it and the action founded on it, then the action should not be dismissed.

The rule in Foss v Hardbottle (1843) 2 Hare 461 holds that, as a company is a separate legal entity from its shareholders, a shareholder cannot take proceedings on behalf of a company for an injury suffered by the company. Since 1843, however, the courts have recognised five exceptions. The fifth exception being that the courts should allow an action to proceed where the justice of the case demands.

Supreme Court

Before the Supreme Court, there was no disagreement between the parties as to the applicable law. But Keaney argued that the trial judge erred in law and in fact in applying the relevant principles to the facts. He argued that the trial judge erred in not reading the statement of claim as a whole and in not allowing an amendment of pleadings after discovery, and that she erred in not finding that his case fell under the fifth exception in Foss v Hardbottle.

Dismissing the appeal (here), Dunne J held that the trial judge had applied the relevant principles of law correctly.

She stated that Hanley v Finnerty is authority that a plaintiff alleging fraud, etc. must clearly set out in pleadings the facts and circumstances upon which the allegation is based: the absolute privilege of legal proceedings is not a licence to make unsubstantiated allegations. And as Keaney had fallen far short of the threshold of providing the defendants with a reasonable picture of his allegations, and as he had already been twice allowed to amend his pleadings, Dunne J said that it was difficult to see what purpose could be achieved by allowing him another opportunity.

In addition, Dunne J stated that, as O’Neill v Ryan [1993] ILRM 557 is authority that the fifth exception to the rule in Foss v Hardbottle does not permit a shareholder to take proceedings for loss to the value of shares, she could see no basis upon which it could avail Keaney.

In the matter of JD Brian Limited (in Liquidation): Court points to “defect in the drafting” of the Companies Act 2014

Context-Button-300x300There is no rule of law precluding parties to a debenture creating a floating charge from agreeing, as a matter of contract, that the floating charge will crystallise into a fixed charge upon an agreed event or step taken by the chargee; and a fixed charge created in that way will have priority over preferential creditors referred to in s 285(1) to (6) of the Companies Act 1963. Whether a floating charge can crystalise into a fixed charge is a matter of interpretation of the security documents in a “text in context” method: that a charge is referred to as a fixed charge does not mean it is–the court must look at the security document to ascertain if it achieved the intention of the parties.

Background

In December 2005, the Company entered the Debenture with Bank of Ireland giving the Bank a charge over all of its property and assets, both present and future including goodwill and uncalled capital. The Debenture created a mortgage over scheduled property and a floating charge over all the Company’s current assets. Clause 10 provided that the Bank could convert the floating charge into a fixed charge if, in the opinion of the Bank, the property was in jeopardy.

In October 2009, the Bank served notice on the Company stating that it believed the property and assets to be in jeopardy and gave notice that it was converting the floating charge into a fixed charge under Clause 10 of the Debenture. In November 2009 the Company petitioned the High Court for a winding up order which was made in December. In 2010, the Liquidator applied to the High Court under s 280 of the 1963 Act for direction confirming that the floating charge validly crystalised and the assets subject to the fixed charge lay outside of the liquidation.

High Court

In the High Court (here), Finlay Geoghegan J held that there was a two part test to be applied: first the court must ascertain the intentions of the parties as to the rights and obligations created by the Debenture; secondly, the court must determine whether those rights and obligations were consistent with a fixed charge [13]. She then determined that the Notice did not prohibit the Company from carrying on its business of selling stock and making payments from cash in the bank, and that was inconsistent with the existence of a fixed charge. She determined therefore, that the Notice did not have the effect of crystalising the floating charge into a fixed charge. The Liquidator appealed that decision to the Supreme Court.

Supreme Court

In the Supreme Court, the Liquidator argued that the effect of the Notice was that it brought to an end the Company’s right to deal with its property and assets without the consent of the Bank. The Bank submitted that the parties intended, by use of specific legal terminology, that notice of conversion would prohibit the Company from disposing of its property or assets without the consent of the Bank. The Revenue Commissioners (preferential creditors) submitted that the Debenture did not provide for the equitable assignment of the Company’s assets or prohibit the Company from dealing with those assets in the usual course of its business. It argued that Clause 10 was a trigger event which triggered the Bank’s right to appoint a receiver.

Allowing the appeal, LaffoyJ (here) held that interpretation of Clause 10 required a “text in context” approach:

…  an arrangement must be considered as part of the overall assessment of the intention of the parties in the light of the words which they have used to express their agreement, so must all due regard be paid, in that exercise, to how the parties describe the arrangement concerned. That is not, of course, to say that if, properly construed, the entirety of the agreement creates a set of rights and obligations which makes it inconsistent to characterise that agreement in the way in which it is described by the parties, the Court is not required to depart from the term which the parties have chosen to use. But it would be wrong to suggest that the term used by the parties may not, in many cases, be important and can, at least in some cases, be decisive [67].

She held that, on the plain wording of Clause 10, the intention of the parties was that where the Bank, in its sole judgement, considers the property or assets in jeopardy it could serve notice on the Company converting the floating charge into a fixed charge [73]. As the floating charge had crystalised before the winding-up of the Company by court order, the Bank held a fixed charge over the Company’s assets at the time of winding-up. Therefore the Bank has priority [77]. She held that, for a preferential creditor to hold priority over the holder of a floating charge that crystalised into a fixed charge prior to winding-up would be to rewrite s 285(7)(b) of the 1963 Act–and that could only be done by the Oireachtas [78].

Laffoy J also rejected the Revenue Commissioner’s submission that, as s 617(7) of the Companies Act 2014 reenacted s 285(7) of the 1963 Act, and as that was enacted after the High Court decision which held that preferential creditors had priority over holders of floating charges that converted into fixed charges on winding-up, to overturn the High Court decision would undermine the will of the Oireachtas [94]. She described that as a “defect in the drafting” perpetuated by the 2014 Act.

Laffoy went on to outline two concerns arising from this decision: one, a form of false crystalisation could be contrived, where a fixed charge is crystlised but a company is allowed to continue to trade in its assets–but she suggests possible equitable remedies against that [97]; and two, there is no requirement to register a crystalised fixed charge, and that raises transparency issues [98].

Buzreel and the Companies Act 1963: Van Hool orders, legal finality and liquidator’s sale of company assets

liquidation-saleIn this case (here) the Court clarified its jurisprudence on Section 231(2) and 231(3) of the Companies Act 1963: for the benefit of creditors, the Court must try to guarantee that liquidators get the highest price possible from the sale of company assets. That should not, however, contravene procedures (such as a Van Hool order) that the courts have implemented to bring absolute finality to court involvement in the sale.

Background

Buzreel was the publisher of Buy and Sell. Midland Web Printing was its printer. Midland successfully petitioned the High Court for the winding up of Buzreel. As a magazine title loses its value quickly while it is out of circulation, the Liquidator advertised quickly for the sale of the Buzreel’s assets. The sale narrowed to two prospective purchasers. Midland was one of those bidders; Demirca was the other. A dispute arose as to which had submitted the highest legitimate bid. Hogan J, in the High Court, decided to issue a Van Hool Order: an order that another round of bids take place to conclusively establish the highest offer. The Order stated:

1. Demirca and Midland Web Printing be each at liberty to provide sealed unconditional bids together with signed contracts to the Provisional Liquidator, Mr. Neil Hughes, by 5.00p.m. on Monday 28th April 2014.

2. the Provisional Liquidator is entitled to accept the highest bid tendered which is cash backed and for the avoidance of doubt the Provisional Liquidator is entitled to reject a bid not accompanied by a bank draft or its equivalent or a letter from a senior official from a bank of standing confirming that the funds are available for immediate transfer to the Provisional Liquidator on completion of the contract for sale.

3. that the matter stands adjourned to this Court for final approval

Midland placed the highest bid. Demirca disputed that it was a legitimate bid, as Midland lodged part of the funds after the deadline, did not submit a signed contract with its bid and added a condition. Hogan J held (here) that Midland’s bid was sufficiently compliant with his Order and held that it was the winning bid. Demirca appealed that decision to the Supreme Court.

Law

In In Re Hibernian Transport Companies Limited [1972] 1 IR 190 the Court upheld a High Court decision to permit the liquidator to complete the sale of company assets even though a higher bidder emerged, as the court had approved the sale before the higher bid was placed. The reasoning of the Court was that the High Court must keep faith with its earlier order.

Later, in Van Hool McArdle Limited v Rohan Industrial Estates Limited [1980] 1 IR 237 the Court determined that the High Court had erred in proceeding with the sale of company property where a higher bidder emerged before the court had made any order regarding the sale. On appeal, the Supreme Court made an order (Van Hool Order) that another round of bids take place to conclusively establish the highest legitimate bid and get the maximum proceeds for the company’s creditors.

Argument

Demirca argued that Midland’s bid was not in compliance with the terms of the Order. And, even if it was, the Court should allow another round of bids if that could recover more funds for the creditors. Midland argued that its bid was sufficiently compliant with the Order and was in accordance with the process set out by the High Court.

Decision

Clarke J, with Laffoy and Dunne JJ concurring, held that the Court must be consistent with Hibernian Transport and Van Hool, which set out two principles: a court must try to maximise the return for creditors, and a court must keep faith with its own process and earlier orders. The central issue in this case was whether the Hogan J’s Order set out an unimpeachable process. On examination of the wording of that Order, the Court held that the language used did not set out a process to establish absolute finality: the Liquidator was entitled to accept or reject the highest bid and the court retained the right to final approval.

Unlike Hibernian Transport, the High Court had not brought about finality in its Order therefore the Court was obliged to try obtain the highest return for Buzreel’s creditors. The Court ordered that the Liquidator take another round of bids.

Dunne & Ors v Mahon & Ors, SIAC v Companies Act, Grassland Fertilisers v Flinter Shipping

Dunne & Ors v Mahon & Ors

In this case (here), the Court held that the High Court was incorrect in holding that, unless it is stated otherwise, there is an implied term in the rules of clubs which allows a simple majority of members to pass a resolution to dissolve the club.

Nor can a simple majority change the rules of a club. A long standing rule that was introduced by the vote of a simple majority, though, can become binding under equitable estoppel. The courts do have an equitable jurisdiction to order the dissolution of a club. But where the rules of a club do not make provision for its dissolution, and where a minority can continue to achieve the purpose of the club, an overwhelming majority of the members entitled to vote is required to pass a resolution to dissolve it before a court should exercise its equitable jurisdiction to do so.

SIAC v Companies Act

In this case (here), the Court dismissed an appeal by GDDKiA, the Polish roads authority, to the proposal by the Examiner to SIAC. Under the plan, unsecured creditors would receive 5% of their claims. Creditors, however, cannot claim for interest, penalties, damages or surrogated claims. SIAC’s main difficulty arises from losses suffered under a contract with GDDKiA, from which SIAC claims it is owed €113 million. GDDKiA, however, claims that it has a counter claim for breach of contract against SIAC, and, in effect, SIAC owes it €49 million. GDDKiA also claimed that it is obliged, under Polish law, to pay SIAC’s subcontractors.

GDDKiA claims that the restructure unfairly prejudices it as compared to other creditors, as its debts are in the form of damages and it cannot claim under the plan. The Court held, though, that as GDDKiA is a debtor to SIAC, it can counterclaim against SIAC’s action in the Polish courts. That distinguishes it from the other creditors that can only recover 5% of their claims. And looking at all the circumstances, GDDKiA is not unfairly prejudiced.

Grassland Fertilisers v Flinter Shipping

In this case (link to follow), the Court determined that it does not have an inherent jurisdiction to hear an appeal against a High Court Order issued under the Arbitration Act 2010 and declined to hear the appeal.  The Court followed authority that, except questions on the constitutional validity of any law, the Constitution does allow the Legislature to pass laws removing the appellate jurisdiction of the Supreme Court. Such laws, though, must be clear and unambiguous. The Arbitration ACT 2010 is sufficiently clear in removing the right of appeal against a High Court order to stay proceedings pending arbitration.

Ellen Construction (in Receivership): Wallace v Fortune & Anor

DivorceThe Court held, firstly, that the High Court judge did have jurisdiction under s 316 of the Companies Act 1963 to hear this case, where the Defendants/Appellants (Fortune) argued the dispute was between them and a third party (Ulster Bank), as Ellen Construction had an interest in the disputed property. And secondly, the High Court judge’s finding was correct: Fortune did not establish in evidence that the three parties had a concluded agreement.

Background

The Richmond Partnership consisted of Fortune and his co-appellant Barden, along with Michael and Martin Doran who were directors in Ellen. Richmond purchased land in Roslare on which Ellen constructed 45 houses. By agreement, as Ellen sold each property, Richmond would execute a deed of transfer to the purchaser; Richmond would receive a “site fine” of €162,000 and Ellen would keep the balance of the sale price. Ulster Bank provided the finance for both parties, separately. However, Richmond provided a guarantee for Ellen’s debts.
By 2009 33 of the houses were sold, and Richmond had cleared its debt to Ulster Bank. Fortune and Barden claimed that Ellen had negotiated an agreement with Ulster Bank whereby Fortune and Barden would personally receive the full sale price of three of the remaining homes in return for Richmond surrendering its site fine on the remaining nine houses. Wallace, as receiver of Ellen, issued proceedings under s 316 of the Companies Act 1963 seeking a direction that Ulster Bank did not release its security over the three properties.

Legal argument

Fortune and Barden argued that the High Court did not have jurisdiction under s 316 to hear this case as it was a matter of agreement between them and Ulster Bank. The Court rejected that argument as Ellen had a licence to purchase each site and an equitable interest in the property from spending money on the land. The substantive issue, whether there was an agreement which bound all three parties, was a matter of evidence. And Clarke J, writing for the Court, held that Fortune and Barton had not established in evidence that such an agreement had been concluded.

IBB Internet Services v Motorolla

imagesIBB v Motorola

IBB is a loss making telecommunications provider with substantial assets. It is suing Motorola for over €100 million for breach of contract. Under s. 390 of the Companies Act 1963, Motorola was seeking €4.5 million in security for costs before the courts allow proceedings to progress. The issue for decision was whether McGovern J, in the High Court, had correctly interpreted the test in s. 390. The Supreme Court held that he was correct.

The Law

S. 390 sets out a three part test on the award of security for costs. The defendant/applicant must establish a prima facia defence and, should the applicant win, the plaintiff’s inability to pay costs. If the applicant does so, the plaintiff, to avoid the order, must show that there are special circumstances which justify the court exercising discretion.

Argument

The High Court held that Motorola had established a defence but had not demonstrated IBB’s inability to pay costs. There, McGovern J assessed the evidence from both parties before making his decision. Motorola, on appeal, argued that it only had to show credible evidence that IBB could not pay, and once it had done so, the court must make the order (unless there are special circumstances). IBB argued that the judge was correct; the onus is on the applicant to show that, on the balance of probabilities, it could not pay costs.

Decision

The Supreme Court, looking to precedent from the Court of Appeal in England, held that it is not sufficient for an applicant to show that there is a significant danger that the plaintiff cannot pay, but neither is it necessary to establish it on the balance of probabilities. The applicant must demonstrate that, under all the circumstances, there is reason to believe the plaintiff will not be able to pay at the time when the issue of costs will arise. The Court assessed the evidence of both parties and concluded that, even in the worst case, IBB had sufficient assets to cover its debts and the likely costs of the trial. The Court dismissed the appeal and affirmed the order of the High Court.

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