Allotment
Ooregum Gold Mining Co of India v Roper
[1892] AC 125 Lord Halsbury LC said the following.
“the Act of 1862… makes [it] one of the conditions of the limitation of liability that the memorandum shall contain the amount of the capital with which the company proposes to be registered, divided into shares of a certain fixed amount. It seems to me that the system thus created by which the shareholder’s liability is to be limited by the amount unpaid upon his shares, renders it impossible for the company to depart from that requirement, and by any expedient to arrange with their shareholders that they shall not be liable for the amount unpaid on their shares. ”
Lord Watson noted that otherwise, ‘so long as the company honestly regards the consideration as fairly representing the nominal value of the shares in cash, its estimate ought not to be critically examined.’
Re Wragg Ltd
[1897] 1 Ch 796 Lindley LJ wrote
“It has, however, never yet been decided that a limited company cannot buy property or pay for services at any price it thinks proper, and pay for them in fully paid-up shares. Provided a limited company does so honestly and not colourably, and provided that it has not been so imposed upon as to be entitled to be relieved from its bargain, it appears to be settled… that agreements by limited companies to pay for property or services in paid-up shares are valid and binding on the companies and their creditors…
It is not law that persons cannot sell property to a limited company for fully paid-up shares and make a profit by the transaction. We must not allow ourselves to be misled by talking of value. The value paid to the company is measured by the price at which the company agrees to buy what it thinks it worth its while to acquire. Whilst the transaction is unimpeached, this is the only value to be considered.”
Smith LJ concurred, saying if the consideration is ‘not clearly colourable nor illusory, then, in my judgment, the adequacy of the consideration cannot be impeached by a liquidator unless the contract can also be impeached’.
Lake Communications Ltd -v- Companies Acts
[2011] IEHC 455 Laffoy J. wrote
3.1 Section 89 of the Act of 1963 (as substituted by s. 227 of the Companies Act 1990), which deals with validation of invalid issue, redemption or purchase of shares, insofar as is relevant for present purposes, provides as follows:
“If a company has created or issued shares in its capital, . . . , and if there is reason to apprehend that such shares were invalidly created, issued . . . , as aforesaid, the court may, on the application of the company, . . . declare that such creation, issue . . . shall be valid for all purposes if the court is satisfied that it would be just and equitable to do so and thereupon such shares shall from the creation, issue . . . thereof, . . . be deemed to have been validly created, issued . .”
The apprehended invalidity in this case arises from the fact that the Petitioner purported to issue shares over and above its entitlement to do so having regard to its authorised share capital and to allot them without complying with s. 20 of the Act of 1983. Section 68 of the Act of 1963 provides that a company limited by shares, if so authorised by its articles of association, may in general meeting alter the conditions of its memorandum to provide, inter alia, for the increase in its share capital by new shares of such amount as it thinks expedient. It is expressly provided in the Petitioner’s memorandum of association, at clause 4, that the Petitioner has power from time to time to increase or reduce its share capital and to issue any shares in the increased capital.
3.2 The only Irish authority to which the Court was referred on the application of s.89 was the decision of the High Court (Keane J.) in Re Sugar Distributors Ltd. [1995] 2 I.R. 194. In that case, the application by Sugar Distributors Ltd. to validate the issue of shares by it and their allocation to a subsidiary, so as to create the necessary subsidiary relationship which would enable it to obtain the benefit of the manufacturing tax rate, in circumstances where meetings had not taken place and resolutions had never been passed, although minutes purported to record such meetings and resolutions, which was objected to on behalf of the Revenue Commissioners, was refused. As the headnote in the report succinctly records, Keane J. held that the discretion conferred by s. 89 must be exercised in a judicial manner, in accordance with appropriate criteria, and, in particular, with regard to the underlying policy of the section. He held that the underlying policy of the section is the avoidance of hardship to persons who had innocently subscribed for shares which were invalid due to a defect in their title, provided the shares could be validated by the Court in a manner which was not unjust or inequitable having regard to the interests of third parties who might be affected. He held that Sugar Distributors Ltd. and its associated company were seeking to gain a tax advantage and that was not a purpose for which the procedure under s. 89 was intended to be used.
3.3 A number of Australian authorities had been cited in Re Sugar Distributors Ltd. and counsel on behalf of the Petitioner cited further Australian authorities in support of the Petitioner’s application pursuant to s. 89. It was submitted that an Australian authority, Re Farnell Electronic Components Pty Ltd. (1997) 25 ACSR 345, is very similar on the facts to this case. That was a decision of the Supreme Court of New South Wales, Equity Division. The problem addressed by the court arose because, in 1990, the plaintiff, after a meeting of directors held by telephone, purported to issue 3,500,000 redeemable preference shares for $1 each. At the time, the plaintiff’s authorised capital was $100,000. Resolutions were passed in 1997 altering the memorandum and articles of association, increasing the authorised capital of the plaintiff and providing that the redeemable preference shares could be redeemed at par at the request of the holder. The plaintiff then sought an order validating the allotment of redeemable shares pursuant to s. 122 of the Companies (NSW) Code, which the court noted was virtually identical with s. 194 of the Corporations Law. In dealing with the application to validate, Young J. stated:
“As I have already mentioned, the Court of Appeal in Moran’s case suggested that one does need to find something justifying validation where there has been simply a disregard of basic procedures. . . .
I consider that the true rule is that a court does have a wide discretion under s. 194 of the Corporations Law or its predecessor in the Code. If there is an ex parte case where all interested parties join in and no one is prejudiced, then the court may very well make an order for validation notwithstanding that there has been some extremely casual work done at the time of the allotment. However, if there is a contested case and the parties do not all agree that a validation is proper, then it is necessary for the person seeking the validation to point to some factor which justifies it over and above the fact that there was a careless allotment.”
On the facts of the case, Young J. held that, as no party had been detrimentally affected by the allotment of the redeemable preference shares, it was appropriate to make the order validating the allotment.
3.4 In a decision of the Supreme Court of New South Wales, Court of Appeal, which was considered, and referred to in the passage quoted in the next preceding paragraph, by Young J. – Moran v. Moranco Enterprises Pty Ltd. (1996) 22 ACSR 65 – the text of s. 194 of the Corporations Law is set out as providing:
“Where a company has purported to issue or allot shares and:
(a) the creation, issue or allotment of those shares is invalid by reason of any provision of this or any other Act or of the memorandum or articles of the company or for any other reason; or
(b) . . . .the Court may on application by the company . . . on being satisfied that in all the circumstances it is just and equitable so to do, make an order:
(c) validating the purported issue or allotment of those shares; or
(d) confirming the terms of the purported issue or allotment of the shares;
or both.”
That case was a contested case where the shares in the Petitioner had originally been issued to several members of the same family, but subsequently a resolution was passed at a meeting, of which not all of the shareholders were given notice, purporting to issue additional shares to one member of the family. The Court of Appeal upheld the decision at first instance that it was not just and equitable to validate an issue of shares when not all of the shareholders had a chance to participate in the decision to issue the shares.
3.5 Counsel for the Petitioner also referred the Court to a more recent decision of the Federal Court of Australia in Re Onslow Salt Pty Ltd. (2003) 45 ACSR 322. The statutory provision which was invoked in that case did not incorporate the requirement that it be just and equitable to make the validating order. However, in delivering judgment, French J. referred to an earlier Australian decision, which was cited with approval by Keane J. in Re Sugar Distributors Ltd. – Millheim v. Barewa Oil and Mining NL [1971] W.A.R. 65. French J. quoted the following passage from the judgment of Burt J. in that case, which was also quoted by Keane J. (at p. 207):
“[The section] is designed to enable the court to make good what is really a defective title to shares in a company – using the words ‘defective title’ in the quite non-technical sense.
It is directed to cases where the shares have been issued, which represent a bundle of rights proprietary in character and valuable in terms of money, and where it appears for some reason or other there has been an irregularity in the issue or the allotment which in strict law would result in the issue of the shares being, as the section says, ‘invalid’.”
In acceding to the application before him, French J. stated:
“The question remains whether or not the order sought should be made. Both shareholders support it. The application is non-contentious. There is no basis for inferring any prejudice to any person arising out of the validation. Nor is there any ground for inferring that the failure to comply with the statutory requirement was anything other than an oversight at the time it occurred. I note that the affidavit material did not explain the oversight. In the ordinary course such an explanation should be proffered. In this case however, there is no reason to suspect that the shares were issued other than with a careless failure to have regard to the requirements of the law. The terms of the resolution itself indicate a slap-dash approach to its form and content. But I do not think that the non-compliance reflects a reckless or blatant disregard of the law which attracts the public policy considerations referred to earlier. Nor is there any indication on the materials before me of any purpose, served by the application, which could be characterised as unworthy or contrary to public policy.”
3.6 By way of general observation, I have found the approach adopted by the Australian courts to be persuasive.
John J. Nash v Lancegaye Safety Glass (Ireland), Ltd
.; James Ryan; Thomas J. Ryan: Brendan Doyle: Michael M. Ryan and Daniel Breen
High Court
31 July 1956
[1955 Nos. 704 P and 721 P.]
[1958] 92 I.L.T.R 11
Dixon J.
Dixon J., in delivering judgment said:— The Plaintiff, who is a director of the Defendant Company, questions the allocation of shares in that company to the defendant James Ryan. The remaining defendants are fellow-directors of the company who were parties to one or both of the two resolutions, passed at meetings of the board of directors, which dealt with these shares and which are both impugned. The defendant directors, Dr. Thomas J. Ryan, Brendan Doyle and Daniel Breen, supported the first resolution; that of 17th May, 1955; and these directors, together with the defendant director, Dr Michael Ryan, supported the second resolution; that of the 16th June, 1955. In each instance, the plaintiff opposed the resolution.
The association of the plaintiff with the defendant company (which I shall for shortness refer to as “Lancegaye”) goes back to the foundation of the company in 1937, at which time he was a member of a committee *17 interested in setting up local industries. He was one of the original shareholders and a director from 1945. Lancegaye was formed to carry on the business of manufacturing and processing glass, in particular toughened, reinforced and non-splinterable glass and has its office and works at Templemore, Co. Tipperary.
The association of the defendant, James Ryan, with Lancegaye is of considerable relevance. Of Irish origin, he appears to have had a very successful business career in England, principally in connection with a company known as Rybar Laboratories, Limited (which I shall call for shortness “Rybar”). He was one of the founders of this concern and a director and life-chairman until his resignation from these positions in May, 1955. With members of his family, he had the controlling interest in Rybar until March of 1954, when he transferred his interests in Rybar to members of his family. Since then, members of his family have held the controlling interest. Amongst those members are the two defendants, Dr. Thomas J. Ryan and Dr. Michael Ryan, who are two of his sons. One other son and at least two daughters also hold shares in Rybar. One of these daughters was, for a short period in 1952, a director of Lancegaye.
James Ryan retired from active business in England in 1948 and settled in Thurles, Co. Tipperary. In 1950 he was persuaded by the plaintiff, who thought his business experience and standing would be of great value to Lancegaye, to join the Board of Lancegaye. This he did as a result of an agreement recorded in a written minute of a conference on 5th November, 1950, between himself, the plaintiff and the defendant Daniel Breen, and initialled by all three. This contemplated that Mr Breen would resign his Chairmanship of the Board in favour of Mr. Ryan and that Mr. Breen would get a 15-year contract to act in an advisory capacity. At the Board Meeting of 27th November, 1950, Mr. Ryan became a director and Chairman. Mr. Breen resigned as Chairman and was later granted his contract by Lancegaye. The position of Chairman carried a salary of £500 per annum. As from 29th August, 1951, Mr. Ryan became managing director with the salary of £1,000 per annum from the beginning of 1951. This amount was reduced in July, 1952, to £500 per annum, as from the beginning of 1952. He resigned the position of managing director as from 7th November, 1953, his son, Dr Michael Ryan, taking over the position on that date. He resigned as Chairman on 22nd November, 1954, and as a director on 14th December, 1954. On his original appointment as Chairman, the Board entrusted him, according to the minutes, with “full and complete plenipotentiary powers”. There is some conflict of opinion and doubt as to how extensive those powers were intended to be and for how long they were intended to continue or did in fact continue. There is no doubt, however, that Mr. Ryan himself interpreted that in a very wide sense and claimed and exercised an independence of action and decision not usually appropriate or permitted to a director or a director-chairman. There is no doubt also, on the other hand, that he played a very large, if not a decisive, part in the development and progress of Lancegaye while he was associated with it. This independence, involving in many instances the complete disregard of his co-directors and a lack of orthodoxy or formality in his methods, led ultimately to conflict with the plaintiff, another strong personality.
About the time that Mr. Ryan joined Lancegaye, a large block of shares in Lancegaye was held by another company which decided to dispose of them. In July of 1951, the plaintiff purchased this block and pooled the shares with Mr. Ryan. The shares were bought at 7/- and 6/- per share. Mr. Nash retained and still retains his half of this block. Mr. Ryan, at the beginning of 1952, transferred the large majority of his half to Rybar at a figure of 10/6d. per share. This transaction represented a considerable profit for Mr. Ryan personally, as something between 30,000 and 40,000 shares were involved. As he frankly said in evidence, he fixed the price at which Rybar bought.
The result of these transactions was that the plaintiff has held since then approximately one-third of the issued capital of Lancegaye and Rybar has held approximately another third. The defendant James Ryan only retained in his own name a comparatively small number of shares.
The authorised capital of Lancegaye was £48,000 divided into 144,000 6% preferred ordinary shares of 5/- each and 48,000 deferred ordinary shares of 5/- each. The issued capital was £32,000 divided into 96,000 preferred Shares and 32,000 Deferred shares. Under the Articles, the preferred shares carried a right to a fixed preferential dividend of 6% per annum together with two-thirds of the profits available for dividend after paying that 6% and paying a dividend of 6% per annum in respect of the deferred shares, which latter shares were then entitled to the remaining one-third of those profits. Only *18 the preferred shares carried any right of voting.
Of the other defendants, Daniel Breen was a director of Lancegaye from 1939 and chairman of the Board of Directors for some years up to 1950. Dr Michael Ryan became a director on 31st May, 1952, and Dr. Thomas J. Ryan a director on 13th September, 1952. Mr. Doyle had been Secretary of Lancegaye from 1947 and became general manager and secretary from 27th July, 1951. As from 24th October, 1953, he ceased to be secretary, the position being taken by Mr. McNicholl, but continued to be general manager. He became a director on 22nd November, 1954. Under the Articles, the number of directors was to be not less than three and not more than seven.
The resolution of 17th May, 1955, which is challenged reads as follows: “that the company increase its capital by the issue of the unissued portion of share capital and that in view of Mr. Ryan’s offer, he be allowed to take up a maximum of £5,000 at par, the remaining shares to be offered to the shareholders in proportion to their holdings”. As already seen, the unissued portion of the share capital was £16,000, divisible into 48,000 preferred ordinary shares and 16,000 deferred ordinary shares.
At the time of this board Meeting, Mr. James Ryan had ceased to be chairman or a director for about six months. His place as chairman had been taken by his son Dr. Thomas Ryan. Mr. Ryan was still “honorary financial adviser” to Lancegaye, which position had been conferred on him at the meeting of 14th Dec. 1954, on the occasion of his retirement. His services in this capacity do not appear to have been availed of in the intervening six months.
According to the Minutes of the Meeting, “Mr. Doyle brought up the subject of Mr. Ryan’s past services to the Company, of the value of such services and of the savings he had effected. He was of opinion that as Mr. Ryan had not drawn from the Company commensurate with his endeavours, and as he had voluntarily reduced his salary during his period of office, the Board should consider either making good the £1,000 approximately not drawn by Mr. Ryan or some such appropriate action. The Chairman informed the Board of Mr. Ryan’s willingness to subscribe up to £5,000 to increase the Company’s Capital and that he thought that to allow Mr. Ryan to take up at par, £5,000 would in some way compensate Mr. Ryan for his past endeavours on the Company’s behalf”. The resolution now in question was then agreed, Mr. Nash opposing.
According to Mr. McNicholl, the Secretary of the Company, this minute was a conscientious record of what took place. His practice was to take notes at the meetings and prepare the minutes from the notes. His notes are not available. The minutes, as drafted, were read and signed at the meeting of 4th June, 1955 at which the directors who had taken part in the prior meeting, and also Dr. Michael Ryan, were present. The only criticisms of the minutes were offered by Mr. Nash and his proposed amendment of them was defeated, the Chairman stating (according to the minute of this meeting) “that the Board was adamant that the minutes as recorded were correct”.
The Chairman’s view has apparently not since altered, as, in evidence, he maintained that the minutes were correct. Mr. Doyle, on the other hand, in cross-examination, expressed the view that the minutes did not give a true picture but said that it did not occur to him when he heard them read at the next meeting, or indeed until the matter arose in this action, that they might give a false picture. There is little doubt as to the picture the minutes give and it is one that is inconsistent with the account given by Dr Ryan and Mr. Doyle. Mr. Breen professed to have no clear recollection of what preceded the passing of the resolution. The plain meaning of the minute is that, as an alternative to rewarding Mr. Ryan for his past services by paying him £1,000, he should be allowed to take up £5,000 worth of shares at par and in priority to the existing shareholders. The version given by Dr. Ryan and Mr. Doyle amounted to asserting that the matter of a recompense to Mr. Ryan had been, as it were, interpolated in a general discussion of the capital position and had been turned down on the ground that nothing was due to Mr. Ryan; that the discussion of the capital position had then been resumed and that the offer of £5,000 by Mr. Ryan was merely mentioned as a means of raising capital and dealt with without any idea of conferring a benefit or advantage on Mr. Ryan. Mr. Doyle, in his evidence, said that, when the question of capital expenditure was being discussed, he thought it an opportune moment to mention the claim of Mr. Ryan but not, he said, for the purpose of having any provision made for it, but simply to have the matter ruled on so that he would have an answer to Mr. Ryan’s importunities on the subject. I find this—as indeed, much of the evidence of Dr. Thomas Ryan and Mr. Doyle—unconvincing and unacceptable. I believe Mr. Doyle did raise the matter as an item of capital expenditure for which some provision *19 would have to be made. I do not accept that the Chairman, as he and Mr. Doyle stated in evidence, ruled out the claim as having no legal or moral basis, and that, therefore, the matter was at an end and had no bearing on the allocation of the shares. Such a view would be inconsistent, apart altogether from the minutes, with the admitted statement by the Chairman that there might be some appreciation in the shares which would meet Mr. Doyle’s point. Such an important view or ruling would, I feel, have been recorded in the minutes. Mr. McNicholl, in his account of the meeting in evidence, made no reference to any such view being expressed and gave a short summary which was not inconsistent with a distinct relationship between the £1,000 and the proposed issue of shares Finally, the account of Mr. Nash, which I accept, fully bears out the apparent meaning and implications of the minutes. I accept that he was the only person at the meeting who queried the validity of the claim and the legality or propriety of making any payment, that Mr. Doyle referred to the power under the Articles of giving gratuities to past employees, that the Chairman said the Board could do it if they wished but that he would suggest an alternative method, the alternative method being to allow his father to take the shares at par.
There was certainly no legal validity in the claim of Mr. Ryan. Whether it had any moral force is a matter of opinion. It apparently related to the circumstances that, in July of 1952, he had agreed to his remuneration as managing director being reduced from £1,000 per annum to £500 per annum as from 1st January, 1952. That voluntary reduction was related to the increase of Mr. Doyle’s salary as general manager, which then was increased by £150 per annum as from 1st January, 1952. As Mr. Ryan ceased to be managing director in November, 1953, his claim would appear to be that he had foregone nearly £1,000 over the two years 1952 and 1953. An alternative basis would be that he was not paid his salary of £500 as managing director as from 1st January, 1953; but this was because, on Mr. Ryan’s representation and request, Dr. Michael Ryan, although only appointed managing director in November of 1953, was paid the salary as from 1st January, 1953. Neither claim would, therefore, appear to be well founded. Whatever the basis of it, the matter seems to have become an obsession with Mr. Ryan. It was a topic that he mentioned at the Annual General Meeting of 3rd November, 1954, his view being that, instead of the critical and ungrateful attitude of the shareholders at that meeting towards his conduct of the affairs of the company, he should have been complimented and, in view of the good prospects for the next year, promised that the amount would then be voted to him. It was a grievance which, it was clear during the course of Mr. Ryan’s evidence, still rankled It was also a consideration which, even according to himself, was in his mind, in March of 1955, when he discussed the question of investing £5,000 in Lancegaye with Dr. Thomas Ryan. Both he and Dr. Ryan gave evidence as to this discussion. Dr. Ryan rather gave the impression that his father had volunteered to invest £5,000 and that the matter had been discussed from the point of view of the soundness of the investment. Mr. Ryan’s evidence gave more the impression that he had been asked by Dr. Ryan to help the company financially and was induced to do so but he also stated, significantly, that he had lost £1,000 which he wanted to get back, that he debated whether he could get it back if he took shares, and that he calculated that an appreciation or profit of 1/- per share on £5,000 worth at par would give him back the £1,000. His affidavit for the purposes of the interlocutory application put the matter simply as that he agreed to subscribe for the shares solely to encourage other shareholders to subscribe for shares also and so assist the company to secure the additional finances it needed. If this were his attitude, he could have been equally helpful by underwriting an issue of shares to that extent. It was in this affidavit that he swore categorically that the document drawn up prior to his co-option to the Board—which could only have been the minute of the agreement between himself, Mr. Nash and Mr. Breen—was one which did not concern him and to which he was not a party. In view of this, it is hard to receive any of his evidence without reserve.
Other, not insignificant, matters are that the balance sheets for 1954, which were then in draft and would show a substantial improvement in the position of Lancegaye, including a trading profit of over twice the amount in the previous year, were discussed between father and son in March, 1955; and that, at the meeting of 17th May, 1955, transfers were before the Board showing dealings with shares at over 6/- a share, which fact was commented upon by the Chairman as showing that there was some public confidence in the Company.
I find it impossible to escape the conclusion that, in voting to allow James Ryan to take up £5,000 worth of shares at par, the directors, Dr. Thomas J. Ryan, Daniel Breen *20 and Brendan Doyle, were largely influenced by the desire and intention of conferring a benefit or privilege, of appreciable monetary value, on James Ryan in reward for past services or to meet some supposed claim on moral grounds to compensation. This was, of course, a distinct prejudice to the position and interests of the existing shareholders. Of the £16,000 unissued capital, there would only be available for issue to these shareholders £11,000, £5,000 having been allotted in priority to one relatively small shareholder. Apart from depriving the shareholders of the opportunity of taking up nearly one-third of the unissued capital, the issue of this one-third to one holder in priority was liable to depreciate the value of their existing holdings.
This transaction could not be justified under the power—referred to at the Meeting by Mr. Doyle—under Article 124 (14) of the Articles of Association of giving retiring gratuities, pensions or annuities to exemployees of the Company. The only provision it could be justified under is Article 6 which, so far as material, reads: “Subject as aforesaid the shares shall be under the control of the directors who may allot or otherwise dispose of the same to such persons. On such terms and conditions, and at such times, as the directors think fit——” In contrast, Article 48 which deals with the issue of new shares on an increase of capital, provides that “subject to any direction to the contrary that may be given by the meeting that sanctions the increase of capital, all new shares shall be offered to the members in proportion to the existing shares held by them, and each offer shall be made by notice specifying the number of shares to which the member is entitled, and limiting a time within which the offer, if not accepted, will be deemed to be declined, and after the expiration of such time, or on the receipt of any intimation from the member to whom such notice is given, that he declines to accept the shares offered, the directors may dispose of the same in such manner as they think most beneficial to the Company”. This Article laid down a fair and reasonable method of issuing new capital. It was eighteen years since the formation of the Company and the original issue of the capital in 1937 and the method of Article 48 might, in the circumstances, have seemed more appropriate to the issue of the unissued portion of that capital in 1955. The plaintiff, however, does not dispute the power of the directors to deal with the unissued capital under Article 6, so long as the power is properly exercised. He relies on the well-established principle that the directors are trustees of the powers entrusted to them, including that of allotting shares, and that the Court will intervene in the case of an improper use of the abuse of any of their powers: see e.g. Punt v. Symons & Co. [1903], 2 Ch. 506, Piercy v. Mills & Co. [1920], 1 Ch. 77; York and North Midland Railway v. Hudson 16 Beav. 485.
In addition to this matter of a reward to Mr. Ryan, there is also the question of the alteration of the voting strength of the Ryan family and their supporters, including therein Rybar. The effect of the issue of shares to James Ryan would have been to confer on him 15,000 votes in respect of that number of preference shares. Unless, which was clearly not contemplated, the balance of the unissued shares were issued and allotted before the next general meeting of the Company, the total of votes would have been increased from the existing 96,000 to 111,000 of which about 13½% would have been freshly issued to one small shareholder. As will be seen, and can be assumed for the moment, this would almost certainly have assured an effective majority of the voting strength to the Ryan interests.
The Plaintiff contends that this was not only the effect of the allotment but was also its object. A clash of interests and outlook had clearly developed at the slightly stormy general meeting in November 1954 at which Mr. Ryan clearly felt he had been treated with base ingratitude on the part of the shareholders and with open disloyalty on the part of a fellow-director, the Plaintiff. So far as it is material, I think the major part of the trouble, such as it was, at that meeting was occasioned by the autocratic and offensive attitude of Mr. Ryan himself, as Chairman of the meeting, and his highly misleading statement as to his not having drawn money from the Company for two years. But, wherever the justice of the matter lay, it would have been obvious to persons far less intelligent than Mr. Ryan and the directors who supported him that a struggle for control of the Company was developing and that the next general meeting might see a serious attempt to curb their power and influence if not to oust them altogether. This intention clearly appeared from the requisition of 10th June, 1955, by a number of the shareholders, including the plaintiff, for an extraordinary general meeting, at which it was proposed, among other things, to increase the number of directors to twelve and to appoint new directors. This, however, was of course, subsequent to the resolution of 17th May, but it, and the knowledge of the rather formidable number of proxies which had been *21 entrusted to the plaintiff, preceded the resolution of 16th, June, effecting the actual allotment.
The defendant directors take up the position that the sole object of the resolution of 17th May, 1955, was to avail of an offer of fresh capital made at a time when fresh capital was not only needed but needed urgently. There can be a legitimate difference of opinion as to whether fresh capital was necessary. The plaintiff took the view, which he expressed at the meeting, that an issue of shares was quite unnecessary; and the expert witnesses differed in their views as to whether it was necessary or not. It is hard, however, to see how the issue could reasonably be regarded as an urgent necessity. Mr. Breen both in evidence and when he learnt of the offer from Dr. Thomas Ryan before the meeting, expressed the view that it was “Manna from Heaven” and that it should be accepted at once lest Mr. Ryan should change his mind. In that connection, it is one of the curiosities of this case that no formal application for shares was ever made by or required from Mr. Ryan and that, according to himself, he did not subsequently regard himself as having offered to take shares and was reluctant to do so only that he felt the family honour was involved. The professed attitude of Mr. Breen and the other defendant directors was, naturally, that the position and prospects of the company were so poor that any offer of help should be gratefully and unhesitatingly accepted. This was a curious appraisal of the fortunes of a company which, between 1948 and 1954, had been able to increase its fixed assets by over £40,000, while also increasing its excess of assets over liabilites to the position that this excess in 1954 was twice the issued capital, which had been able to write off £14,000 worth of stock which had paid a dividend of 6% or more for every year except 1953 (in which year a dividend could have been paid), while putting back over £26,000 in undistributed profits into the business, and which was about to declare a trading profit of more than twice that of the previous year. A more just appreciation of the position, but one inconsistent with this professed attitude of theirs, was shown by these directors in their appeal for proxies of 16th June, 1955 in which they stated, probably correctly, that the company “has never been in a sounder position nor run on more efficient lines”. The suggestion of urgency was sought to be related to necessary capital expenditure, out of the items discussed at the meeting of 17th May, only a few amounting to a comparatively small figure which could easily be met out of undistributed profits, were agreed on. The two matters, alleged to have been the occasion of Mr. Ryan’s offer in the discussion in March, 1955, between him and his son, and on which so much stress was placed in evidence as matters of urgent and large expenditure were, in fact, not decided on at the meeting but postponed on a rather indefinite basis. One of these, the question of the replacement of a furnace, was left over to await the result of an examination of the furnace to take place in August. The other, and heavier item of expense, was the installation of a Vinyl plant, but it was decided that it was imperative that the company should obtain a long term agreement with Messrs Fords (who were the only customers who wished to have Vinyl glass) before undertaking further expense in the matter. This item is again referred to in the minutes of the subsequent meeting of 16th June, according to which “the Chairman outlined a letter received from Messrs Ford concerning the use of Vinyl”. There is no record of any decision as to the installation of the plant or anything to suggest the matter had become more urgent or indeed that the plant would ever need to be installed. Of the items actually agreed on at the meeting, one, an engineering lathe at £800, represented about half the total amount, and was admitted by Dr. Thomas Ryan in evidence not to be strictly necessary although he thought it would be an excellent addition to the factory and could be a source of considerable profit Finally, although the overdraft of the company with its bankers would appear high if considered without relation to the general financial position of the company, there was no suggestion that the bankers were in any way pressing in the matter or had expressed any dissatisfaction nor does it appear that there was any definite intention or idea of paying off the overdraft.
I find the suggestion of urgency wholly unconvincing and quite inadequate to explain the somewhat indecent haste with which the matter was put through. No agenda or notice of any resolution was sent out beforehand, and in the agenda circulated at the meeting the only heading the matter could be related to was “capital position”, which was an item appearing in the agenda and discussed at nearly every meeting. Mr. Nash’s plea for adjournment and an opportunity of further consideration was rejected rather summarily. The board meeting was being held at a time when the draft accounts for the year 1954 had been prepared—they were, in fact, discussed at the meeting—and the annual general meeting of the company was due to be held within a month or so. Was *22 there any good or compelling reason why the matter should not have been held over and the whole position put before the company as a whole at that meeting? The defendant directors took and take the position that if money were required (and they say it was), past history had shown the futility of appealing to the shareholders. In his somewhat exaggerated way, Dr. Thomas Ryan said they had “tried and tried” unsuccessfully with the shareholders over all the years. In fact, only one appeal had been made to the shareholders to take up an issue of shares, that of October, 1953, made by Mr. Ryan on his own initiative and in a form settled by him. His object was, allegedly, to test the pulse of the shareholders but, if that were genuinely the object of the appeal, it was very inept for its purpose. It is unnecessary to go into the detailed criticism that had been made of it. It is enough to quote a sentence from the advice of one of the two stockbrokers whom Mr. Ryan and Mr. Breen were, unknown to the other directors, consulting about the same time. He said 17th November, 1953): “I do not, however, consider that this circular from the company could attract possible new subscribers of capital”. It is not unreasonable to suppose that, if the matter were put properly and fairly before the shareholders and in the light of the progress and prospects of the company as of May or June of 1955, the response would have been very different. The defendant directors did not choose to take that course but, if the matter were merely one of a legitimate difference of opinion or even of an error of judgment, their action could not be impugned. The net question in this case, however, is whether their action was taken in good faith in what they believed to be in the interests of the company On the evidence, and in all the circumstances, I am of opinion that it was not so taken. I believe their action was primarily inspired by the dual desire to confer a privilege or benefit on James Ryan and to increase the voting strength of the Ryan interests.
Against this view two practical considerations were urged. One was that control, if desired, could have been obtained at any time previously in a manner that could not have been questioned. The only such manner, however, that could be suggested was the issue of a debenture giving, as it legitimately could, a controlling interest. It is useful to recall in this connection, that the issue of such a debenture to Rybar was actually mooted by Mr. Ryan, at the meeting of 3rd May, 1952, as an alternative to the proposal of Mr. Nash to seek accommodation from Lancegaye’s bankers, or if such accommodation were refused. The suggestion of Mr. Ryan, according to Mr. Nash, was that Rybar, if it took a debenture, should get a controlling interest in Lancegaye or on the board. This was denied by Dr. Ryan while Mr. Ryan stated in evidence that he was never anxious that Rybar should take a debenture. I accept Mr. Nash’s evidence on the point. I also accept his evidence, although it does not appear in the minute that it was he who was to approach the Bank. It is highly significant that, notwithstanding this, Mr. Ryan wrote to the Bank two days later a letter couched in terms which courted a refusal and which, but for the intervention of Mr. Nash resulting in the bank manager not putting the actual letter before his board, would almost certainly have evoked a refusal of accommodation. In the event of such refusal, I feel little doubt in that Rybar would have taken a debenture with a controlling interest. In the actual event, nothing further was heard from Rybar although Dr. Thomas Ryan had stated at the meeting of 3rd May that he would investigate the matter on his return to England and inform Lancegaye. In his evidence, Dr. Thomas Ryan said he did discuss the matter later with his father but they decided it would be foolish to make a large investment in Lancegaye, notwithstanding that, as he says he then told his father, Rybar had ample funds available—a fact which his father would have known better than himself. I believe this episode was a deliberate and well planned attempt to gain control of Lancegaye which failed only by reason of Mr. Nash’s insistence on first approaching the bank and by reason of the bank granting the accommodation which Mr. Ryan did his best to ensure it would not grant. At any later stage, the difficulty if taking a debenture that a large sum would first have to be paid to discharge the bank overdraft, might have been a real obstacle, At the time in question, it was only an apparent one, because the overdraft was limited, prior to May, 1952, to £10,000 and securities were held amounting to approximately the same sum. Dr. Thomas Ryan mentioned a sum of £60,000 as then necessary but this is arrived at by the device of relating figures of later years to that time. Lancegaye did not then require £30,000 nor was the bank overdraft, as has been seen, anywhere near another £30,000. I cannot, therefore, accept the reason he now gives as having operated then against taking a debenture. I believe the resolution of May 1955, was a belated attempt to secure the same *23 result as the abortive effort three years earlier.
The other practical consideration urged was that, in fact, the amount of shares agreed to be issued was insufficient to secure an absolute majority of the total voting strength of Lancegaye. This is so, but the amount was insufficient to ensure a strong liklihood of an effective or working majority. At the annual general meeting in November of 1954, the resolution supported by Mr. Nash had been defeated on a poll by about 5,000 votes, and it might have seemed that a further 15,000 votes would ensure an ample majority. Again, the subsequent success of Mr. Nash in mustering such a large measure of support was, possibly, not to be anticipated.
I have endeavoured to approach the question under consideration without paying regard to matters which mainly arose subsequent to the meeting of 17th May and, therefore, would not necessarily have a bearing on the motives inducing the resolution of that date. Those matters do, however, indicate an intention to put the transaction through and to retain control of Lancegaye at all costs, and, to that extent, they are at least consistent with the existence of such an attitude of 17th May. One of these matters was the determination to hold the annual general meeting before the extraordinary general meeting which had been requisitioned. This was for the ostensible purpose of putting the whole position of the directors before the shareholders so that their actions could be approved or disapproved. It is not very clear why this could not be done as satisfactorily at the extraordinary meeting, but the course adopted ensured that there would not be time for the shareholders to nominate new directors Again, the earlier date fixed for the annual meeting—in breach of, if not an undertaking, at least a very plausible representation to the Plaintiff—was sought to be justified by a supposed obligation to hold the extraordinary meeting within twenty-one days of the requisition. In the event, it was not fixed for a date within the twenty-one days nor did the articles require that it should be. Neither is it likely that anyone would have made any point, even if there had been any substance in it, as to a date being fixed outside the twenty-one days. The rapidity with which the printing for the annual meeting was accomplished—the possibility of which must always have been known to Mr. Doyle—confirms the impression that the date of the annual meeting was deliberately fixed to frustrate so far as possible the wishes and intentions of the shareholders and to ensure the confirmation or re-election of the existing directors. The place of the meeting was fixed for Dublin, instead of, as normally, at Templemore, and Mr. Breen made no secret of the fact that this was for the purpose of making it as difficult as possible for the local shareholders to attend.
Another matter of some relevance in this connection is the attempt, at the meeting of 25th June, 1955 to secure the position of Mr. Doyle by granting him a ten-year contract as general manager, which would bind the company. This was on the eve of a meeting of the company which might well have been so dissatisfied with his services as not to have wished to retain him at all.
One other matter which extended over the period both before the meeting of 17th May, 1955, and after it, was the curious circumstances of Mr. Breen’s application for a revision of his agreement with the company and the withdrawal, amounting to suppression, of the application and the correspondence. The only thing that can be said about it is that the general air of obscurity and concealment about the whole matter is in keeping with other actions of the defendant directors. The evidence as a whole tends to the conclusion, that, in many of their actions, these directors and Mr. Ryan were lacking in a sense of responsibility as to their fiduciary position and as to their duties to the shareholders and to the company and were concerned only with their own interests.
This attitude appears also from the lack of any consideration of the possible detrimental effect on the shares and shareholders of the company, in respect of Stock Exchange quotation or income tax relief, of the issue of shares in the manner adopted. In his letter of 17th June, 1955, the Secretary of the Stock Exchange said: “the allotment of shares in a public company to an individual in this way is most unusual and is a procedure which is not favoured by my committee unless the consent of shareholders is first obtained and the reason for such allotment clearly explained to them”.
This was an unequivocal disapproval which might have led to serious consequences. Again, the preferred shares originally issued enjoyed an income tax remission under Section 7 of the Finance Act, 1932, and Section 7 of the Finance Act, 1935, and the deferred shares were subject to the requirements of a nationality declaration for the purposes of the Control of Manufacturers Acts. Both of these matters were ignored and serious prejudice could have resulted to the shareholders and to the Company. *24
Another element of irresponsibility emerges in connection with the addendum to the resolution of 17th May, viz.“subject to the action in so allocating shares be regular” (sic). Mr. Nash, in opposing the resolution, had expressed his opinion that it was irregular and improper, that the existing shareholders were being deprived of the valuable right of first preference in taking up a large portion of the unissued capital, and that the only regular and fair method was to offer this capital to the existing shareholders in proportion to their holdings in the first instance The board were not willing to accept this advice of the plaintiff, who was also their solicitor, but, presumably, the addendum meant that they were going to get competent advice on the matter. No legal advice was obtained by the board but, at the next meeting, it was stated that Mr. Breen had obtained such advice but the advice, other than the effect of it, was not disclosed. In the meantime, the chairman, Dr. Ryan, had discussed the matter with Mr. Klingner, the company’s auditor, who had previously advised him that the action would be within the powers of the board. Mr. Nash had also obtained legal opinion, to the contrary effect, as he mentioned at the same meeting. In these circumstances, it could hardly be said that the advice contemplated by the addendum had been obtained but, nevertheless, the board went ahead with the matter.
The resolution of 17th May, was defective, not only as to its being conditional in the sense just mentioned, but also because it did not specify the number and type of shares to be issued to Mr. Ryan. The share capital of Lancegaye as already noted was divided in the Memorandum of Association between preferred and deferred shares in the proportion of three to one, and the original issue had been made on this basis; but it did not necessarily follow, nor could it be implied, that an issue of portion of the unissued capital must be made on that basis. The new shares were, in fact, issued on this basis and James Ryan was entered in the share register of Lancegaye on 2nd June, 1955, as the holder of 15,000 preferred shares and 5,000 deferred shares. For the two reasons mentioned, the resolution of 17th May, was not valid to justify this issue or registration and there was no other justification or authority.
An attempt was made at the meeting of 16th June, 1955, to remedy this matter by passing a resolution, particularising the shares. It was in the following terms: “that the following shares, 15,000 6% Preferred Ordinary Shares numbered 96,001 to 111,000 inclusive and 5,000 6% Deferred Ordinary Shares numbered 32,001 to 37,000 inclusive be and are hereby allocated at par to Mr. James Ryan, these above numbered shares to rank for dividend as from 1st July, 1955”. At the time of this meeting, one of the present actions had already been commenced and the summons served on some of the defendants. The resolution of 16th June, was clearly subsidiary and ancillary to that of May 17th, and tainted with the same lack of good faith and the same lack of due consideration of the matters revelant to be considered by directors in exercising their discretionary and fiduciary powers, and it must stand or fall with the resolution of 17th May.
For the defendants, reliance was placed on Foss v. Harbottle 2 Hare 461 but I do not think the principle of that case applies to the present proceedings. It, and the cases which have followed and applied it, were concerned with wrongs alleged to be done to the company as a whole and in respect of which it was, therefore, for the company, as such to complain or not. See Edwards v. Halliwell [1950] 2 All E. R. 1064. In the present case, particular wrong has been done to individual shareholders, including the plaintiff, by the lack of good faith on the part of the directors in the purported exercise of their discretionary powers. In Clark v. Workman [1920] 1 I. R. 107, Ross, J., held, notwithstanding Foss v. Harbottle having been cited, that the transfer of a controlling interest in a company is not a matter of mere internal management, it may involve a complete transformation of the company, and consequently such a transfer may in a proper case be restrained. Again, the decision of Peterson, J., in Piercy v. S. Mills & Co. Ltd [1920] 1 Ch. 77. is very much in point here. He there held that directors are not entitled to use their power of issuing shares merely for the purpose of maintaining their control, or the control of themselves and their friends, over the affairs of the company, or merely for the purpose of defeating the wishes of the existing majority of shareholders.
Part of the principle of Foss v. Harbottle, if not the main feature of it, is that, in the case of a matter capable of being legalised or regularised by a majority of the shareholders, the person complaining of some action by the directors of the company, should await and abide by the outcome of a general meeting of the company; and, for this reason, it was contended that the present action was premature and unsustainable. I think, in the circumstances of the present case, this argument overlooks the fundamental point *25 that it was precisely the question whether the 15,000 votes of James Ryan could be used at the general meeting that was in issue. By the time of the commencement of the action, in June 1955, the forces on each side had been mustered and it was agreed, at the hearing, that the respective figures were approximately 51,000 votes for the plaintiff and his supporters, and nearly 53,000 for the Ryan family and their supporters. This 53,000 would include the 15,000 from the allotment to James Ryan. If he were entitled to use these votes, the Ryan family and supporters would not thereby have an absolute majority of the issued capital but there is little doubt that they would have had an actual majority at the meetings. Without the 15,000 votes ranking, the plaintiff would have had an absolute majority (51,000 out of a total voting strength of 96,000), but the general meeting would not have had power to undo or reverse what had been done by the directors in the exercise of the power and discretion delegated to them. On the other hand, a majority at the meeting could have approved, if so minded of what had been done but this would leave the question undetermined and still outstanding whether the directors had acted in bad faith to the prejudice of individual shareholders. This position is, I think, recognised in the following portion of the passage from Buckley on the Companies Acts, dealing with the principle of Foss v. Harbottle and cited by Danckwerts, J., in Pavlides v. Jenson [1956] 2 All E. R. 518, at p. 521—“. . . . . it is idle to say that a meeting ought to be called in which the alleged wrongdoers should not vote, for that would be trying the question of fraud as a preliminary step for ascertaining the form of the action in which it is to be tried”. Again, if I am right in my view that the entry of James Ryan in the register of shareholders on 2nd June, 1955, was invalid, the plaintiff was entitled to bring the first action when he did without waiting for a general meeting to consider the matter. For these reasons. I think the proceedings were not premature or unsustainable. A somewhat similar position arose in Punt v. Symons & Co. Ltd. [1903] 2 Ch. 506 and Byrne, J. there held that, where share had been issued by directors, not for the general benefit of the company but for the purpose of controlling the holders of the greatest number of shares by obtaining a majority of voting power, the directors ought to be restrained from holding the meeting at which the votes of the new shareholders were to have been used. He considered and distinguished Foss v. Harbottle. It makes no difference to my view, in this respect, that in fact the number of shares issued would not have been sufficient to ensure an absolute majority. I am concerned with motive and it is irrelevant to that consideration whether the object would have been fully achieved.
Having the two-fold object, as I hold, of conferring a privilege or advantage on James Ryan and also increasing the voting strength of the Ryan family, is it of any avail to the defendant directors that they may also have had the object, other things being equal, of benefitting the company. This was certainly not, in my view, their sole object and I cannot say that it, in fact, contributed to their decision. Even if it did, it was conceded in argument that would not suffice to validate the resolutions if the motives were partly improper. If this matter were not conceded, the case of Portland v. Thompson 11 H. L. C. 32, particularly at p. 54, would have been in point.
I have arrived at the conclusion that the resolutions of 17th May, and 16th June, 1955, were not an honest exercise of the directors’ powers in the interests of either the shareholders or the company, and cannot be allowed to take effect, and the entry of James Ryan in the share register was invalid and must be set aside.
One of the defendant directors, Dr. Michael Ryan, is in a different position to the others, inasmuch as he was not present at the meeting of 17th May. He, however, voted for the resolution of 16th June, has stood over both resolutions and cannot, I think, be acquitted of complicity in the aims and objects of his fellow-directors.
The defendant James Ryan is also in a different position as he was not a director at the revelant times. To appearances, he was merely a shareholder who agreed to take up, and did take up, an issue of shares for valuable consideration, and might, in different circumstances, be able to claim that he was not concerned with questions of the internal management of the company, provided he acted in good faith and innocence in the matter. In the case, however, of such a closely-knit family as the Ryans appear to be, and in which he was clearly the dominating influence, such an attitude would be difficult for him to take up. One would have to overlook the whole history of his association with Lancegaye from 1950 to the end of 1954 when, even then, he did not wholly disassociate himself but became the company’s honorary financial adviser, his intimate knowledge of the affairs and finances of the company, his pre-knowledge of the trading figures for 1954, and his efforts to secure, if *26 not control, at least the large ascendancy of his family in the affairs of Lancegaye. Apart from the episode already mentioned of the proposed debenture to Rybar, he successively introduced his two sons and for a short period one daughter, into the directorate, without it appearing what special qualifications or experience any of them could bring to the service of Lancegaye. One of these sons lived and has always lived in England, but, notwithstanding this, was appointed chairman in succession to his father in November of 1954, and, at the meeting of 17th May, 1955, assumed the position of managing director unto himself. The other son came from England to live in Templemore in 1951 or 1952. He was sole managing director from November of 1953, and joint managing director with Mr. Nash from March of 1954, until 22nd November of 1954 when, following the annual general meeting, his father declared the position to be redundant and a motion to that effect was carried. In the light of all this, and of the whole of the evidence, it is impossible to accept that Mr. Ryan was no party to the “Scheme” alleged in the statement of claim to increase the voting power of the Ryan family. The point was taken, on behalf of Mr. Ryan, that, as framed, the statement of claim did not allege that he was a party to the scheme. This is only a pleading point due to some ambiguity and lack of clarity in the phraseology of the statement of claim but it was treated, in the defence of Mr. Ryan, and as it was clearly intended, as an allegation against him also. The point is not one of substance nor was Mr. Ryan misled in any way as to it. So far as Mr. Ryan might rely on being a purchaser for value in good faith, I do not feel satisfied as to his good faith in the matter.
In the result, therefore, for the reasons given, I hold that the plaintiff is entitled to an Order:—
(1) Declaring that neither of the resolutions of 17th May, 1955, and 16 June, 1955, was a bona fide exercise of their powers by the directors or constituted a valid or effective allotment of shares to the defendant James Ryan.
(2) Declaring the entry in the share register of the defendant James Ryan on 2nd June, 1955, to be irregular and invalid,
(3) Directing the rectification of such register by the deletion of such entry,
(4) Directing the cancellation of the share certificates, if any, issued to the defendant James Ryan pursuant to such resolution;
(5) An injunction restraining the defendants, other than James Ryan, from proceeding further with or taking any steps under either of the said resolutions and restraining the defendant James Ryan from exercising any voting or other rights in respect of the shares issued to him pursuant to such resolutions.
In the Matter of Sugar Distributors Ltd and
1995 No. 129 Cos
High Court
2 October 1995
[1996] 1 I.L.R.M. 342
(Keane J)
KEANE J
delivered his judgment on 2 October 1995 saying: This is an application by Sugar Distributors Ltd (hereafter ‘SDL’) for an order pursuant to s. 89 of the Companies Act 1963 as amended by s. 227 of the Companies Act 1990 declaring that an allotment of 900,000 convertible redeemable preference shares in the capital of SDL to Irish Sugar plc during the financial year ending 30 September 1990, is and was valid.
S. 89(1) of the Companies Act 1963 as subsequently amended provides that:
If a company has created or issued shares in its capital, or acquired any of its shares by a redemption or purchase in purported compliance with Part XI of the Companies Act 1990, and if there is reason to apprehend that such shares were invalidly created, issued or acquired as aforesaid, the court may, on the application of the company, any holder or former holder of such shares or any member or former member or creditor, or the liquidator, of the company declare that such creation, issue or acquisition shall be valid for all purposes if the court is satisfied that it would be just and equitable to do so and thereupon such shares shall from the creation, issue or acquisition thereof, as the case may be, be deemed to have been validly created, issued or acquired.
On 29 May last, on an application for directions as to the parties to whom notice of the application should be given, McCracken J ordered that Christopher Comerford, Michael Tully and the Revenue Commissioners should be joined as notice parties. The former were joined because they were at the time of the events giving rise to the application officers of both Irish Sugar plc and SDL. The Revenue Commissioners were joined because of a possible interest in the outcome of the application, the nature of which will become clearer from the outline of the facts which immediately follows.
Irish Sugar plc (hereafter ‘Irish Sugar’) was originally a semi-state body, all *348 its shares being owned by the Minister for Finance. In June 1990, the minister exchanged all the shares which he owned in the company for shares in a new company, Greencore Group plc, as part of the process of privatising the enterprise. The shares in the latter company were then the subject of a stock exchange flotation, as a result of which 70% of the shares are now held by private investors, the remaining 30% being still in the ownership of the minister.
The principal business of Irish Sugar was and is the manufacture of sugar from sugar beet. The principal business of SDL was and is the distribution of the sugar products manufactured by Irish Sugar. The precise relationship, present and past, of Irish Sugar and SDL is somewhat complicated and is of importance in the context of the present application.
100% of the shares in SDL were at all times held by a company called Sugar Distributors (Holdings) Ltd (hereafter ‘SDH’). Until 22 March 1990, the shares in SDH were held as to 51% by Irish Sugar and as to 49% by a company called Gladebrook Co. Ltd (hereafter ‘Gladebrook’). The shareholders of Gladebrook at all material times were Charles Lyons, Thomas Keleghan, Charles Garavan, Michael Tully and a company called Talmino Ltd. In January 1990, Irish Sugar agreed to acquire from the shareholders of Gladebrook all the issued share capital in Gladebrook and that acquisition was completed on 22 March 1990. As a result, Irish Sugar owned, directly or indirectly, all the issued share capital in SDL as from that date.
In 1988, the financial and legal advisers to Irish Sugar considered the possibility of restructuring the share capital of its associated companies so as to improve its tax position. Under ss. 38 to 51 of the Finance Act 1980, a company is entitled to manufacturing tax relief on its profits arising from the sale of goods manufactured by itself within Ireland. Where such relief is available, the corporation tax rate of a company is effectively reduced to 10% in respect of the profits arising from such activities. S. 39 provides that where there are two companies, one of which manufactures goods (called the ‘manufacturing company’) and the other of which sells the goods in the course of its trade (called the ‘non-manufacturing company’), the goods sold by the non-manufacturing company are deemed to have been manufactured by it if one of the companies is a 90% subsidiary of the other or both companies are 90% subsidiaries of a third company. The term ‘90% subsidiary’ is defined by s. 156 of the Corporation Tax Act 1976 which provides that:
A company shall be deemed to be a 90% subsidiary of the other if and so long as not less than 90% of its ordinary share capital is directly owned by that other company.
Since 90% of the share capital of SDL (the non-manufacturing company) was not held by Irish Sugar (the manufacturing company), it was obvious that *349 the manufacturing tax relief would not be available. Three options were considered, one of which was the issuing by SDL to Irish Sugar of 900,000 redeemable preference shares of £1 each. The share capital of SDL consisted of 100,000 ordinary shares of £1 each, which, as already noted, were held by SDH. Because of the definition of ‘ordinary share capital’ in s. 155 of the Corporation Tax Act 1976, the issue of the redeemable preference shares to Irish Sugar would mean that, for the purposes of that Act, 90% of the ordinary share capital was held by them, provided certain conditions were met in relation to the issue of the shares. Since the redeemable preference shares would not carry any voting rights, the position as to control of SDL for all other purposes would remain as before, i.e. 51% of the voting shares being owned by Irish Sugar and 49% by Gladebrook. Senior counsel, the late Mr Raymond O’Neill, advised that, if carried out in this form the transaction would enable the desired tax relief to be obtained, while leaving the actual control of SDH and, through it, SDL as it was.
The transaction was not carried out in that form at that time. However, following the agreement already referred to under which Irish Sugar agreed to acquire the entire issued share capital in Gladebrook, the tax advisers to SDH and SDL, Messrs Pannell Kerr Forster (hereafter ‘PKF’) advised Mr Mark Maguire, the secretary of SDL, that they were seeking on their behalf from the Revenue Commissioners a concession by virtue of which the manufacturing tax relief would be available to SDL, notwithstanding the indirect nature of the 90% holding of the shares by Irish Sugar. PKF also advised Mr Michael Tully that, if the concession sought from the Revenue Commissioners was not forthcoming it would be necessary to establish the 90% direct subsidiary relationship between Irish Sugar and SDL, either by way of a transfer of shares in SDL from SDH to Irish Sugar or by way of an issue of shares by SDL to Irish Sugar. At the time of the sale of the shares in Gladebrook to Irish Sugar, PKF prepared a document setting out the projected earnings of SDH and its subsidiaries on the assumption that SDL would be entitled to manufacturing tax relief for the entire of the period ending on 28 September 1990.
On 19 June 1990, the Revenue Commissioners advised PKF that they were not prepared to grant the concession requested. On 21 June 1990, at a board meeting of Irish Sugar, the following decision was recorded in the minutes:
To obtain the maximum tax advantages for Sugar Distributors Ltd it was agreed to increase the share capital of Sugar Distributors Ltd.
On 26 June 1990, PKF advised Mr Maguire that it would now be necessary for SDL to issue the preference shares to Irish Sugar so as to establish the 90% direct subsidiary relationship between the two companies. With that letter there was enclosed draft documentation in connection with the transaction, including draft minutes of an extraordinary general meeting of SDL, draft minutes of a *350 meeting of the board of directors of SDL and forms of notices to be sent to the Companies Registration Office.
Mr Maguire thereupon prepared minutes of a board meeting of SDL and a shareholders’ meeting of SDL. These purported to record an extraordinary general meeting of SDL held on 22 March 1990 in St Stephen’s Green House, Dublin 2 at 9.30 a.m. attended by Mr Comerford and Mr Tully at which it was resolved by special resolution to increase the share capital of the company from £350,000 to £1,250,000 divided into 100,000 ordinary shares of £1 each, 250,000 redeemable preference shares of £1 each and 900,000 convertible redeemable preference shares of £1 each. It was also recorded in these minutes that article 7 of the articles of association had been deleted and replaced by a new article 7 containing various provisions applicable to the convertible redeemable preference shares. He also prepared minutes of a meeting of the board of SDL, which recorded the meeting as having been held at the same venue at 10.00 a.m. and Mr Comerford and Mr Tully as having been present. These minutes recorded that an application for 900,000 convertible redeemable preference shares of £1 had been received from Irish Sugar and that the secretary had been instructed to prepare share certificates in respect of the allotment of these shares. There were also prepared minutes of a special meeting of the board of SDH, which recorded the meeting as having been held at the same venue on 22 March 1990 and as having been attended by Mr Comerford, Mr Lyons and Mr Tully. Those minutes record a proposal by Mr Comerford, seconded by Mr Lyons, that the share capital of SDL be increased by 900,000 convertible redeemable preference shares of £1 each to be issued to Irish Sugar and authorising Mr Comerford and Mr Tully to attend an extraordinary general meeting of SDL and to pass the necessary resolutions giving effect to this transaction, which resolution was recorded as having been carried at the meeting. The minutes of this meeting were signed by Mr Comerford as chairman and dated 25 May 1990. The minutes of the two earlier meetings were also signed by him, but not dated.
None of these meetings ever took place. No such resolutions were ever proposed, seconded or carried.
The head office journal voucher of Irish Sugar recorded the sum of £900,000 as having been paid for the shares on 29 June 1990. On 26 July 1990, it was recorded at a meeting of the board of Irish Sugar that the share capital of SDL had been altered so as to ensure the ‘efficient tax treatment’ of the company’s profits. On 20 August 1990, Mr Maguire sent by post to the capital taxes branch of the Revenue Commissioners a notice of the allotment of the shares on which capital duty was assessed at £9,000 with interest of £450 and paid by SDL. He also sent to the Companies Registration Office in Dublin on 22 August 1990 the relevant forms in relation to the increase of the nominal share capital of SDL, the alteration of the articles of association of SDL and the allotment to Irish Sugar of redeemable preference shares, which also referred to the relevant *351 meetings as having been held and the necessary resolutions passed on 22 March 1990. On 5 September 1990, Mr Maguire wrote to the secretary of Irish Sugar, John F. Hughes, enclosing with the letter a share certificate in respect of the preference shares dated 22 March 1990 and signed by Mr Comerford and Mr Tully.
On 27 June 1991, PKF submitted to the Inspector of Taxes, Kilkenny District, the relevant tax documents under the self-assessment system. This claimed manufacturing tax relief for the entire accounting period ended 28 September 1990 in the amount of £417,976. The notice of assessment issued by the inspector of taxes on the basis of this information showed a refund of tax owing of £203,039.
The following year, on 22 August 1991, the inspector of taxes wrote to PKF pointing out that on 19 June 1990, they had been advised that SDL was not entitled to manufacturing relief, that the Revenue Commissioners were not prepared to grant any concession and that, accordingly, they had been aware for more than twelve months that no manufacturing tax relief was available.
On this basis, the inspector of taxes stated that SDL was liable for tax in the sum of £544,635 in respect of the relevant year and was not entitled to the refund of £203,039. An amended assessment was issued by the Revenue Commissioners on this basis in respect of which an appeal was subsequently lodged by SDL. On 19 September 1991, PKF wrote to the inspector of taxes stating that an examination of the accounts for the year ended 28 September 1990 would show a shareholding reflecting a 90% direct ownership and requesting them to cancel the amended assessment and replace it with the original assessment.
On 12 September 1991, as a result of media publicity given to certain proceedings instituted by Mr Comerford, the Minister for Industry and Commerce appointed Mr Maurice Curran as an inspector under s. 14 of the Companies Act 1990, to investigate and report on the membership of certain specified companies, including Irish Sugar, SDH and SDL and to report on the persons who were in control of those companies. Mr Curran presented an interim report to the Minister for Industry and Commerce dated 22 October 1991, and a final report dated 4 December 1991. On 16 September 1991 the High Court appointed Mr Ciaran Foley SC and Mr Aidan Barry as inspectors under s. 8 of the Companies Act 1990 to investigate the affairs of Irish Sugar and subsequently extended that investigation to other related companies, which included SDH and SDL. Interim reports were delivered by the inspectors to the High Court on 7 October 1991 and 11 November 1991 and the final report was delivered by the inspectors on 25 February 1992.
In their final report, the inspectors stated:
We find that the meetings of SDL and SDH stated as having taken place on 22 March 1990 did not in fact take place on that date. As a consequence, we find that the actions stated as having been carried out at those meetings were not in fact carried out.
In making that finding, we believe that since the meeting did not take place to amend the articles of association of SDL for an increased nominal share capital, the company was precluded from issuing the 900,000 convertible redeemable preference shares on the grounds that no such class of shares existed.
We are satisfied beyond doubt, that the directors of SDL did not make a decision on 22 March 1990 to issue shares. We find that SDL did not institute the correct procedures to issue those shares through Siúicre Éireann and consequently that the backdating arrangements which were entered into some time following PFK’s letter of 26 June 1990 have the effect of precluding the company from ratifying an action which was tainted with deliberate deceit and made with the intention of defrauding the Revenue Commissioners.
The Revenue Commissioners have, in the result, refused to allow SDL’s claim for manufacturing tax relief for the period ended 28 September 1990 or for any subsequent period for which it was available.
The present application is grounded on an affidavit of Mr Anthony Heaphy, the chairman and managing director of Irish Sugar and the managing director of SDH and SDL. An affidavit was also sworn by Mr Maguire, in which he deposed that he had been told by Mr Tully that the relevant documents which he had received from PKF on 26 June 1990 should be dated as of March 1990. He said that he specifically asked Mr Tully for a particular date in that month and was told by him that he was to use the date of the acquisition of Gladebrook by Irish Sugar which he advised him was on 22 March 1990. Mr Maguire also deposed that at no stage did he intend to defraud the Revenue Commissioners in making the relevant returns.
Mr Tully also swore an affidavit in which he said that, in taking the steps he had, he was not aware that he was doing anything unlawful and that, with hindsight, he believed that his judgment was probably affected by the fact that the board of Irish Sugar had considered the matter of 10% tax relief on 22 March 1990. He also deposed that there was never at any stage any intent to make a fraudulent claim upon the Revenue Commissioners. He did not expressly controvert in that affidavit Mr Maguire’s statement that he had been told by him (Mr Tully) to date the documents as of 22 March 1990. An affidavit was also sworn by Mr Comerford, in which he said that he had been ill for a period of the relevant time from 13 June 1990 and had not been attending to the business of any of the relevant companies to any significant extent during that period. He said that the first occasion upon which he became aware of the backdating of the relevant documentation was during the course of his examination by the High Court inspectors. He accepted that he had signed the minutes without question, but said that there never was any valid reason for the minutes to have *353 been backdated to 22 March 1990 and that, if there had been an intention to backdate the minutes so as to make it appear that the acts in question had been done on 22 March 1990, it would have made no sense to go to the board of directors of Irish Sugar on 21 June 1990 to seek approval for the increase in the issued share capital of SDL. He said that he had given instructions to the various persons concerned that SDL was to achieve the 10% tax rate and that the necessary steps were to be taken to do this. He said that the delegation to Mr Maguire of the duty of taking the relevant steps was, in his view, appropriate. He said it was never intended by him, or, so far as he was aware, any other officer of Irish Sugar, SDL or SDH to advance a fraudulent claim to the Revenue Commissioners. He supported the application for an order under s. 89.
Mr Heaphy in his affidavit also deposed that at no time was it ever intended by the board of directors of SDL, SDH or Irish Sugar that a fraudulent claim would be advanced to the Revenue Commissioners.
An affidavit was sworn by Mr Patrick O’Connell, who is employed in the office of the Chief Inspector of Taxes of the Revenue Commissioners, on behalf of the Revenue Commissioners. He said that it was the view of the Revenue Commissioners that the findings of fact and conclusions of the High Court inspectors were correct and suggested that the transactions referred to, in these circumstances, should not be validated by the court.
On the hearing of the application, Mr O’Keeffe SC and Mr Rory Brady on behalf of Irish Sugar, SDH and SDL made submissions in support of the application. Counsel on behalf of Mr Comerford and Mr Tully did not advance any submissions to the court. Mr John Cooke SC on behalf of the Revenue Commissioners made submissions in support of their view that the relief sought should not be granted by the court.
Mr O’Keeffe and Mr Brady submitted that it was clear from the memorandum and articles of association of SDL that SDL had power to increase its share capital and that, the share capital having been so increased, the board of directors of SDL were empowered to issue preference shares and to allot them to Irish Sugar. They further submitted that the sequence of events already referred to demonstrated that, on the balance of probabilities, Irish Sugar was registered as a member of SDL on or about 22 August 1990.
They further submitted that where all the corporators agree to a certain course then, however informal the manner of their agreement, it is an act of the company and binds the company subject to only two prerequisites. The two necessary prerequisites are:
1. That the transaction which the corporators agree should be intra vires the company and
2. That the transaction should be honest.
They relied in support of this submission on Parker & Cooper Ltd v. Reading [1926] Ch 975 and Peter Buchanan Ltd v. McVey [1954] IR 89. In the present *354 case, they submitted that the sequence of events showed that there was assent from Irish Sugar and SDH to the increase in the capital of SDL, the issue of the preference shares and their allotment to Irish Sugar.
They further submitted that where, as here, shares have in fact been issued and all the corporators had consented both to their issue and to the increase in capital which was the necessary precondition to their issue, it was immaterial that the relevant meetings had not taken place. They relied in support of this submission on the decision in In re Athenaeum Life Assurance Society (1858) 4 K & J 305.
They further submitted that, since Mr Tully and Mr Comerford had authority from SDH and Irish Sugar to exercise the powers of SDL and its members in the increase in the capital of SDL and in allotting the preference shares to Irish Sugar, it was open to SDL to ratify the acts of its agents. They submitted that the acknowledgements in the minutes of the meeting of the board of directors of Irish Sugar on 26 July 1990 that the share capital of SDL had been altered so as to ensure the efficient tax treatment of SDL profits and the adoption by SDL of the financial statements at its annual general meeting on 23 June 1992 constituted ratification of these acts. They relied in support of the submission on the decision in Bank of Ireland Finance Ltd v. Rockfield Ltd [1979] IR 21 and Bowstead on Agency (15th ed.), pp. 53–55.
They further submitted that Irish Sugar, to whom the shares were allotted, was a third party which was entitled to rely upon s. 8 of the Companies Act 1963, and the European Communities (Companies) Regulations 1973 (SI No. 163 of 1973) since it was an innocent party who had subscribed for the shares in good faith and with no actual knowledge of the irregularities in question. They relied in support of this proposition on the decision in Northern Bank Finance Corporation Ltd v. Quinn [1979] ILRM 221. They further relied on the rule in Royal British Bank v. Turquand (1856) E & B 327 that an innocent third party should not be affected by internal irregularities in the manner in which the transaction had been effected and on the decisions in Allied Irish Banks Ltd v. Ardmore Studios International (1972) Ltd, High Court 1973 No. 206 (Finlay J), 30 May 1973 and Ulster Investment Bank Ltd v. Euro Estates Ltd [1982] ILRM 57. They also submitted that the knowledge of Mr Comerford and Mr Tully as directors should not be imputed to Irish Sugar, SDH and SDL and they relied in support of this proposition on the decision of the Supreme Court in Superwood Holdings plc v. Sun Alliance Insurance Group, Supreme Court 1991 No. 348, 27 June 1995.
They submitted that in exercising its discretion under s. 89, the court should give the expression ‘just and equitable’ a liberal meaning. They relied in support of this proposition on two Australian decisions of In re Alpha Resources Ltd [1987] ACLR 57 and In re Swan Brewery Co. Ltd (No. 2) [1976] ACLR 168 and the decisions in Ebrahimi v. Westbourne Galleries Ltd [1973] AC 370 and *355 In re Murph’s Restaurants [1979] ILRM 141. They also relied on certain observations of Lynch J in Minister For Justice v. Siúicre Éireann [1992] 2 IR 215.
As to the findings of the inspectors appointed by the High Court, they submitted that, SDL and SDH should not be found guilty of fraud in circumstances where the ‘directing mind and will’ of the company had not been responsible for any fraud there might have been. They submitted that it had never been the position in Irish law that the knowledge of a director was ipso facto imputed to a company. They relied in support of this submission on the decision in Superwood Holdings Ltd plc v. Sun Alliance Insurance Group.
Mr Cooke SC on behalf of the Revenue Commissioners submitted that, if the applicants’ concern was that the issue and allotment of preference shares was invalid, this could be rectified by holding the necessary meetings and passing the appropriate resolutions and did not require the intervention of the court. The purpose of the present application was not to remedy a possible defect in the title to shares but to enable the applicants to argue that the sham transactions carried out in 1990 should be regarded as real so as to enable SDL to obtain a particular tax advantage. He submitted that it was not the intention of the legislature that s. 89 should be availed of for such a purpose.
Mr Cooke submitted that it was not simply a question of bona fide mistakes having been made as to dates in the filling in of documents. Representations had plainly been made to the Companies Registration Office and the Revenue Commissioners that meetings had taken place which had never taken place and that resolutions had been proposed and carried which had never been proposed or carried. He said that it was in no sense ‘just and equitable’ for the court to treat all these specious transactions as if they were real transactions, not in order to meet the apprehensions of persons who might genuinely be concerned as to whether shares they owned had been validly issued, but simply to assist the applicants in their dealings with the Revenue Commissioners. He relied in support of these submissions on another Australian decision of Millheim v. Barewa Oil and Mining Company NL [1971] WAR 65.
It would appear that there are no Irish decisions of which counsel are aware on s. 89. Nor, since this section has no equivalent in English legislation, is any assistance to be derived from authorities in that jurisdiction.
While it is envisaged by the section that the court may make an order under the section where it is satisfied that it is ‘just and equitable’ to do so, it does not follow that the discretion conferred by the section is unrestricted. The court undoubtedly has a wide discretion under the section, but it is a discretion which must be exercised in a judicial manner and in accordance with appropriate criteria. In particular, it is relevant, in my view, to have regard to the underlying policy of the section when one is exercising the discretion.
That policy is quite clear. A share in a company is, in effect, a bundle of *356 proprietary rights which can be sold or exchanged for money or other valuable consideration. If it should transpire that shares were created, issued or transferred in circumstances which gave rise to doubts as to the validity of the transaction in question, persons who had innocently subscribed or paid for the shares could find that they had spent their money for no return, because of a defect in the relevant transaction of which they had no knowledge and could not be expected to have any knowledge. It seems clear that s. 89 was enacted in order to enable the possible hardship involved to such persons to be avoided, if it could be done in a manner which would not be unjust or inequitable having regard to the interests of any other persons who were or might be affected by the transactions in question.
This was the approach adopted by Burt J in the Australian case of Millheim v. Barewa Oil and Mining NL which was referred to in the course of argument. While the provision with which the court was concerned in that case is not in identical language to s. 89(1), it is broadly similar. In that case, the issue of the shares had clearly been invalid, since there were no directors of the company at the relevant time. The applicant sought to have the allotment of shares to him validated for the sole purpose of presenting a petition for the winding up of the company. It was accepted that the applicant had in good faith been acting as a director of the company on the assumption that he was a shareholder. Burt J said that the section:
is designed to enable the court to make good what was really a defective title to shares in the company — using the words ‘defective title’ in the quite non-technical sense.
It is directed to cases where the shares have been issued, which represent a bundle of rights proprietary in character and valuable in terms of money, and where it appears for some reason or other there has been an irregularity in the issue or the allotment which in strict law would result in the issue of the shares being, as the section says, ‘invalid’.
In those cases the section operates to enable a judge to make an order which validates the proprietary interest which is apparently represented by the share certificate.
He refused the application in that case. I think that is also the approach which should be taken to s. 89(1). It would, accordingly, be, in my view, just and equitable within the meaning of the section to grant the applicants the relief sought, if the object of the application were to validate the defective title to the redeemable preference shares already issued so as to ensure that money already subscribed for the shares by innocent persons in good faith had not been *357 expended for no return. I am satisfied beyond doubt that that is not the object of the present application. If the concern of Irish Sugar was that it had expended monies on redeemable preference shares which, because of the irregularities attending their issue and allotment, had never been validly created, that could have been met, as Mr Cooke correctly points out, by the taking of the necessary steps by SDL, a company of which it retains complete control. The object of the application is quite different: it is to enable SDL and its associated company to gain a tax advantage by the retrospective validation of the seriously irregular transactions undertaken in June 1990. I am quite satisfied that it was never intended that the procedure under s. 89 should be available for such a purpose.
It is, of course, the case that the present private shareholders in Greencore Group plc, were wholly unaware when they subscribed for or acquired their shares in that company for valuable consideration that the financial position of one of its associated companies might have been overstated, as a result of a possible tax liability, because of the irregular issue of the preference shares. But it would, in my view, be extending the ambit of s. 89(1) far beyond what was contemplated by the legislature to permit its invocation in circumstances where the persons in whose interests the jurisdiction is allegedly invoked never paid any monies in respect of, or indeed acquired any proprietary interest in, the shares which, it is apprehended, were defectively created or issued.
I have already mentioned that the applicants cited in support of their submissions a passage in the judgment of Lynch J in Minister for Justice v. Siúicre Éireann. Having referred to the possibility that the issue of shares might have been invalid and additional tax be owed, he commented at p. 227:
If the State now recovers, through the Revenue Commissioners, these monies, the State will benefit on the double at the expense of the innocent public subscribers on privatisation, and perhaps indeed benefit trebly if substantial penalties are imposed. On the other hand, if, notwithstanding the inspectors’ strongly expressed views to the contrary …, where they refer to fraud and forgery, the enterprise succeeds in avoiding these tax payments as they say they are going to attempt to do, by retrospectively ratifying the invalid issue of the 900,000 shares and the other steps taken invalidly to qualify for the manufacturing tax rate, the State still does not lose anything because it privatised the enterprise on the basis that no such liabilities arose, and accordingly the State had the benefit of those retained monies in the enterprise in the sale price of the shares in Greencore.
Lynch J made those remarks in the context of an application by the Minister for Justice for the reimbursement by the respondent companies of the costs of the investigations by the inspectors. He rejected the application on the ground that the irregularities in question had occurred while Irish Sugar was wholly owned by the State and was drawing attention in this passage to some of the *358 anomalies that would arise if the State was indemnified as to the costs by the innocent private shareholders. It does not lend any support to the application now being made.
The submissions of Mr O’Keeffe and Mr Brady that the irregularities in the issue and allotment of the shares had been cured by the assent of all the corporators having been given to the issue and allotment are supported by the authorities to which they referred. So too is the proposition that the invalid issue and allotment were in any event ratified subsequently by the corporators. If the applicants were seeking no more than a declaration that there had been an assent by all the corporators and that the issue and allotment had been validly ratified, no doubt the court could in appropriate circumstances make such a declaration, although it would be quite superfluous here where the corporators are in any event capable of making a valid issue and allotment themselves at this stage without any assistance from the court. That, however, is not the objective of the present application. Its purpose is to secure a declaration by the court that the issue and allotments allegedly effected in 1990 actually took place so as to enable the applicants to assert, not simply that 100% of the ordinary share capital of SDL is now, for the purposes of the Corporation Tax Act 1976, owned by Irish Sugar, but that it was so owned during the year ending 28 September 1990. The court, in other words, is being asked to subscribe to the fiction that meetings took place which never took place and that resolutions were passed which were never passed. It is clear that the court cannot accede to such an application.
I have not expressed any view in this judgment on the findings by the inspectors appointed by the court that the transactions in question were effected with a view to deceiving and defrauding the Revenue Commissioners. Clearly, since those involved were advised by their tax advisers that the tax relief would be available for the whole of the year ending on 28 September 1990, although the change in share structure had taken place only during the course of that year, a question remains as to what the object was of backdating the share issue to 22 March 1990.
I express no view on this for two reasons. First, on the assumption that there was no intention to deceive or defraud the Revenue and that the date of 22 March 1990 was simply chosen because it was thought preferable that the change in share structure should be seen to date from the time that Irish Sugar became the owner of 100% of the share capital, directly or indirectly, of SDL, it would nonetheless not be appropriate for the court to exercise its discretion under s. 89(1) to validate that course of action retrospectively for the reasons already given. Secondly, there are pending before this Court other proceedings in which the credibility of some at least of the persons concerned may be under scrutiny.
It follows, however, for the reasons already given, the application must be refused.
In the Matter of Greenore Trading Company Ltd
and In the Matter of The Companies Act, 1963
1979 No. 3724 P
High Court
28 March 1980
[1980] I.L.R.M. 94
(Keane J)
These proceedings were commenced on 15 June 1979 by a petition presented on behalf of Adolph Parge, a shareholder in the company. The petition claimed inter alia:
(a) declarations that certain transactions relating to the issue and transfer of shares in the company to Omer Vanlandeghem were invalid:
(b) an order requiring Omer Vanlandeghem to purchase the shares of the petitioner in the company;
(c) in the alternative to (b), an order for the winding-up of the company under the Companies Act, 1963.
On 23 July 1979, on a motion for directions, it was ordered that a number of issues be set down for plenary hearing with the petitioner as the plaintiff and the company and Omer Vanlandeghem as the defendants. The trial of the issues took place before me last term when oral evidence was adducted by both sides.
The order on 23 July 1979 directs the trial of eighteen issues, but the principal matters in controversy between the parties can be reduced to three, viz:
(1) whether an issue of 10,000 ordinary shares of £1 each at par to Mr Vanlandgehem on 5 February 1975 was invalid,
(2) whether the transfer of 8,000 ordinary shares of £1 each in the company held by Sean Boyle to Mr Vanlandeghem in March 1978 was invalid,
(3) whether the affairs of the company were conducted or the directors’ powers exercised in a manner which was oppressive to the petitioner or in disregard of his interests as a member.
The facts of the case, so far as they are not in controversy, are as follows. The company was incorporated on 5 May 1963, under the name of International Estate Agents Ltd. The name of the company was changed to Greenore Trading Company Ltd on 3 August 1965. The first shareholders and directors of the company were the petitioner, who resided in Germany, and Mr Sean Boyle, who is an auctioneer. The capital of the company was originally £10,000 divided into 10,000 ordinary shares of £1 each. It was subsequently increased to £20,000 and then to £24,000. The company appears to have commenced life as essentially a property development enterprise, but in 1965 it embarked on what was to prove *96 its main business, namely, the provision of a service at the port of Greenore for exporters of cattle through that port. With this object in view, the company took a lease from the owners of the port, Greenore Ferry Services Ltd, of a site in the port area on which there were already cattle pens and on which they proposed to erect further pens.
In August 1965, i.e. very shortly after the company had commenced its new business, Mr Vanlandeghem became a customer of the company. He is a substantial livestock exporter and farmer and his becoming a customer of the company was and is acknowledged by all concerned to have been a significant asset to the company. Shortly after he became a customer, the suggestion was broached that he might acquire a financial interest in the business itself and, as a result, in January 1966, he became a director and shareholder. At that stage the capital of the company was increased to £24,000 consisting of 24,000 ordinary shares of £1 each, which were owned equally by the petitioner, Mr Boyle and Mr Vanlandeghem. The petitioner was the chairman of the company and both Mr Boyle and Mr Vanlandeghem were directors. Mr Boyle was the manager of the company and responsible for its day to day operations. On 14 January 1966 a resolution was passed at an extraordinary general meeting of the company which precluded any one shareholder from holding more than 8,000 ordinary shares in his name or in the name of his nominee. This resolution is important in the light of later events.
The company’s operations proved relatively successful, at least until the year 1973. Mr Vanlandeghem took the view that, as the company’s major customer, he should be given preferential treatment so far as rates for the shipment of his cattle were concerned. At a meeting of the directors on 1 December 1966 it was resolved that he should be given such preferential treatment for a specified time; and a further resolution to the same affect was passed on 28 May 1972 but subsequently rescinded on 21 September 1972.
While the petitioner visited Ireland at fairly regular intervals, he was obviously not as actively involved in the company as time went by as Mr Boyle and Mr Vanlandeghem. Differences between the two latter gentlemen began to occur with growing frequency and ultimately in the years 1973 and 1974 Mr Vanlandeghem withdrew his custom from the port entirely, although he remained, of course, a shareholder and director of the company. The company’s fortunes had already begun to decline due to the fact that they were not in a position to comply with the regulations which became effective so far as the export of cattle were concerned upon Ireland’s accession to the European Economic Community. Mr Vanlandeghem’s withdrawal of his custom was a major additional blow and by the year 1973 the company was in serious financial difficulties. An extraordinary general meeting was held on 20 January 1975, at which the petitioner, Mr Boyle and Mr Vanlandeghem were all present. At that meeting the petitioner and Mr Boyle both made it clear that they were unable to come to the rescue of the company financially. Mr Vanlandeghem enquired whether his co-directors would be willing to transfer their shares to him. The petitioner said that he could not do so, since his shares were pledged to a bank in Germany. Mr Boyle said that he was unwilling to transfer his shares to Mr Vanlandeghem. *97 Mr Vanlandeghem said that he was prepared to come to the assistance of the company, but on condition that he became a holder of the majority of the ordinary shares. As this was not possible, the suggestion was then made that Mr Vanlandeghem might take a debenture to secure the sum of £60,000 and undertake to discharge the present liabilities of the company. (The liabilities at that date were estimated to amount to £10,000 but it was anticipated that further monies be required from time to time to keep the company in business.) This appeared to be acceptable to all concerned. At this meeting the petitioner resigned as a director and Mr Vanlandeghem was appointed managing director. The meeting was then adjourned in order to enable the debenture to be prepared and executed. The meeting was resumed on 5 February 1975, but on this occasion the petitioner was not present, Mr John Kieran, solicitor, attending the meeting on his behalf under a power of attorney which had been executed by the petitioner in 1970. The company having been advised that their interests would be better protected if Mr Vanlandeghem’s advance was secured by an allocation of shares to him rather than by the execution of a debenture, 10,000 ordinary shares of £1 each were purportedly allotted to him at the adjourned meeting, and Mr Vanlandeghem paid a cheque for £10,000 to the company.
In the years that followed, the company’s trading position improved until the year 1978. In that year its fortunes went into decline again and it ceased trading entirely in August 1978. A major factor which contributed to this decline in the company’s fortunes was the existence of disagreements between the company and its lessors which, at one stage, led to litigation.
In 1978, Mr Boyle indicated to Mr Vanlandeghem that he would be willing to leave the company and sell his shares to Mr Vanlandeghem provided he got an acceptable sum. An agreement was reached under which Mr Boyle transferred his shares to Mr Vanlandeghem and was paid a total sum of £22,500. This was paid by two cheques, one for £8,000 drawn on Mr Vanlandeghem’s account and one for £14,500 drawn on the company’s account. The explanation given for payment being made in this fashion was that the £14,500 did not form any part of the consideration for the shares, but was in the nature of a severance payment to Mr Boyle on his leaving the company. The petitioner was not notified of this latter transaction and on learning of it instructed solicitors to protest to the company and Mr Vanandeghem. Solicitors on his behalf wrote to the company and Mr Vanlandeghem complaining both about this transaction and the manner in which it was alleged the affairs of the company had been conducted by Mr Vanlandeghem in a manner oppressive to the petitioner for a number of years. No reply having been received to those complaints, the present proceedings were then instituted. As I have already noted, the company ceased trading in August 1978, and Mr Vanlandeghem wished to use his shareholding in the company for the purpose of putting it into voluntary liquidation. Following an application to the court, however, Mr Vanlandeghem gave an undertaking that no step would be taken or resolution passed to put the company into liquidation pending the determination by the court of these proceedings.
I shall consider first the general complaint that the affairs of the company have been conducted and his powers as a director exercised by Mr Vanlandeghem in *98 a manner which is oppressive to the petitioner and in disregard of his interests as a member of the company. (It was further submitted that the transaction involving the purchase of Mr Boyle’s shares also constituted such conduct.) The general complaint is essentially based on two allegations: first, that Mr Vanlandeghem abused his position as a director and shareholder to obtain preferential treatment for himself as a customer of the company and, secondly, that he induced other customers of the company not to trade with it in order to obtain for himself the exclusive benefit of the company’s services. So far as the first allegation is concerned, it is common case that for a limited period, at least, Mr Vanlandeghem was, in fact, afforded preferential treatment so far as the rates of payment were concerned in respect of cattle exported by him through the port, but that this was with the express approval of his fellow directors and shareholders. It is also not in dispute that Mr Vanlandeghem’s custom was of very great importance to the company: it might not, indeed, be overstating the position to say that it was of paramount importance, to such an extent that, when he withdrew his custom in the years 1973 and 1974, the company did virtually no business.
It would not be surprising to find preferential treatment being accorded to such a customer; and I doubt very much whether Mr Vanlandeghem in seeking it could be said to be acting oppressively towards his fellow shareholders. It was claimed that in the post-1975 period, he was charged an all-in figure per head in respect of cattle shipped by him through the port, in contrast to his competitors who had to pay extra in respect of weighing, lairage etc. I do not think that the evidence went so far as to establish that the company to any significant extent afforded Mr Vanlandeghem preferential treatment because of pressure brought to bear on them by him. If he was afforded such preferential treatment — and it is not in dispute that at one stage it was given to him with the full accord of his fellow shareholders and directors — it was simply the consequence of his dominant position as a customer and as such did not, in any way, reflect oppressive treatment by him of the petitioner or any disregard of his interests.
It was also alleged that Mr Vanlandeghem systematically discouraged other exporters of cattle from using the port of Greenore with a view to securing a monopoly of the cattle trade out of the port. Doubtless if it could be established in evidence that Mr Vanlendeghem acted in a manner which was so patently detrimental to the company’s interests, this would constitute the sort of conduct envisaged by s. 205. The evidence in support of this allegation was principally that of Mr Boyle; and it was strenuously disputed by Mr Vanlandeghem. I think that the significant feature of this conflict of evidence was that no attempt was made on behalf of the petitioner to call any of the persons who were alleged to have been actively discouraged by Mr Vanlandeghem from exporting their cattle through Greenore. In my opinion, the petitioner failed to discharge the onus of proof resting on him so far as this allegation was concerned.
The two transactions concerning the share capital of the company which were challenged must next be considered. So far as the issue of 10,000 additional shares to Mr Vanlandeghem at the meeting of 5 February, 1975, is concerned, it was submitted on behalf of the petitioner that it was invalid for the following reasons: *99
(1) Although the allotment involved an increase in the capital of the company, no notice was given of any intention to propose a special resolution to that effect, nor was any such resolution passed
(2) the resolution of 14 January 1966 to the effect that the shareholding of individual members should not be increased beyond £8,000 was not rescinded
(3) although the meeting of 5 February 1975 was an extraordinary general meeting of the company and not a meeting of the directors, it purported to allot the shares to Mr Vanlandeghem, whereas this should have been done at a meeting of the directors alone.
I think that it is clear that each of these grounds of objection is well founded. It is also the case, however, that the issue of shares was made to Mr Vanlandeghem in order to given him some security in respect of the £10,000 which he was prepared to advance to the company in order to get it out of its serious financial problems. The money was made available by him when it became obvious that neither the petitioner nor Mr Boyle could nor would come to the rescue of the company. The petitioner was present at the commencement of the meeting on 20 January 1975, and was represented at the adjourned meeting on 5 February 1975 by his solicitor, Mr John Kieran, acting under a power of attorney. It was not seriously disputed that had Mr Vanlandeghem not been willing to advance the sum of £10,000 the company would have been in very serious financial trouble and might well have gone to the wall. The petitioner and Mr Boyle were obviously perfectly happy that Mr Vanlandeghem should come to the company’s assistance and were willing that he should be secured by the issue of the debenture. It was only when the company’s solicitors advised that it would be more in the interests of the company for Mr Vanlandeghem to be allotted the 10,000 shares that this course was adopted. It was not questioned by the petitioner until long afterwards. While the procedure adopted was technically not in conformity with the Companies Act, 1963 and the terms of the earlier resolution, the petitioner, although not present at the meeting when the shares were allotted, by his conduct clearly indicated that he was satisfied that the additional shares should be allotted to Mr Vanlandeghem, provided he came to the aid of the company financially. This Mr Vanlandeghem did: but if the contention advanced on behalf of the petitioner is well founded it means that, should the company go into liquidation, Mr Vanlandeghem will have to prove for his £10,00 as an ordinary creditor and will be without any security whatsoever. This would be the result of his having foregone the debenture, which would have made him a secured creditor, and which was abandoned simply because the company’s solicitor advised that it was against the company’s interest. The company, and the petitioner, will accordingly have had the benefit of Mr Vanlandeghem’s £10,000 while he will be deprived of all security in relation to it, although he had acted in the reasonable belief, which his fellow shareholders did nothing to dispel, that the transaction was not merely fully acceptable to them, but the only means available of saving the company.
It would seem to me entirely contrary to justice and to be singularly unfair and unreasonable that, in these circumstances, the petitioner could successfully assert that the issue of shares was invalid. I think, however, that in these circumstances the doctrine of estoppel in pais is applicable: because where a person has so conducted himself that another would, as a reasonable man, understand *100 that a certain representation of fact is intended to be acted on, and the other has acted on the representation and thereby altered his position to his prejudice, an estoppel arises against the party who made the representation, and he is not allowed to aver that the fact is otherwise than he represented it to be. This principle of law, which is to be found summarised in Halsbury’s Laws of England , Fourth Edition, Volume 16, paragraph 1505, is fully applicable, in my view, to the resolution of 14 January 1966. The petitioner, by his conduct, having led Mr Vanlandeghem to believe that he was treating that resolution as of no effect, and thereby induced him to alter his position to his prejudice, cannot now aver that the resolution is binding on the company. Similarly, he cannot now aver that the necessary notice was not given of an intention to pass a special resolution or that no such special resolution was passed; nor can he aver that the meeting was a meeting of shareholders only and not of directors. It is, of course, clear that a party cannot set up an estoppel in the face of a statute; but that principle does not seem to me to be directly applicable to a case such as the present, where the transaction in issue was not prohibited by law and its recognition or enforcement by the court would violate no principle of public policy or social policy. (See In re Stapleford Colliery Company, Barrow’s Case, (1880) 14 Ch D 432 at 441, Bradshaw v McMullan [1920] 2 IR 47, 412, 490, and Kok Hoong v Leong Cheong Kweng Mines Ltd [1964] AC 993.) In this case the petitioner is clearly estopped, in my opinion, from asserting the irregularity of a transaction which he tacitly approved of when it was being implemented, which does not offend against any principle of law and which was entirely for the benefit of the company
Different considerations entirely apply to the transfer of Mr Boyle’s shares to Mr Vanlandeghem. It is immaterial whether the real price paid for the shares was £22,500 or whether the sum of £14,500 represented compensation to Mr Boyle for quitting the company, as the respondent claim. If it was compensation of this nature, then the transaction was clearly unlawful having regard to the provisions of s. 186 of the Companies Act, 1963, since the proposed payment was not disclosed to the other member of the company (the petitioner) nor was it approved by the company in general meeting. Indeed, the illegality of the transaction, if this was its nature, was compounded by the fact that the sum paid in respect of compensation was not specified in the company’s accounts, as required by s. 191 of the Act. If, on the other hand, the sum of £14,500 did represent part of the consideration for the shares, the transaction was unlawful, since it was in violation of s. 60 of the Act, which prohibits a company from giving financial assistance for the purchase of its shares. On any view, accordingly, this transaction was not merely irregular, but grossly irregular.
I am satisfied that this latter transaction constituted conduct of such a nature as to justify, and indeed require, the making of an order under s. 205(3) of the Act. Prior to that transaction, Mr Vanlandeghem, as a result of the issue of 10,000 shares to him in 1975, was the holder of just over 50% of the issued share capital. Had the transfer of shares by Mr Boyle to him gone unchallenged, he would have become the owner of more than 75% of the company share capital. ‘Oppressive’ conduct for the purposes of the corresponding s. 210 of the English has been defined as meaning the exercise of the company’s authority ‘in a manner burdensome, harsh and wrongful.’ (See Scottish C.W.S. Ltd v Meyer [1959] AC 324 at p. 342.) The patent misapplication of the company’s monies for the purpose of giving Mr Vanlandeghem a dominant position in its affairs seems to me to be properly described as ‘burdensome, harsh and wrongful’quoad the petitioner. It cannot be equated to the allotment of shares in Re Jermyn Street Turkish Baths Limited [1971] 1 WLR 1042 which was treated by the Court of Appeal as being one entered into in good faith for the benefit of the company. Nor can the actual misapplication of the funds be properly treated as an isolated act of oppression (which would not normally be sufficient to justify relief under the section: see Re Westbourne Galleries [1970] 1 WLR 1378). As I have already noted, not merely were the company’s monies purportedly applied towards an unlawful purpose, i.e. the payment of compensation to a director for loss of office without the sanction of a general meeting: the payment of that compensation was not separately dealt with in the company’s accounts for the relevant year, as required by law.
It is true that the wording of the section envisages that the oppression complained of is operative at the time when the petition is launched. (See Re Jermyn Street Turkish Baths Ltd.) In this case the transfer of shares took place in March 1978. The accounts for the year were certified by the company’s auditors on 9 June 1978. The petition was presented just over a year later on 15 June 1979, after protests had been made in correspondence on behalf of the petitioner at the manner in which the company’s affairs were being conducted. The company had not merely failed to take any steps to deal with these gross irregularities in its affairs prior to the issuing of the petition; it had also wholly ignored letters written on behalf of the petitioner which clearly called for an answer. It seem to me that in these circumstances the oppressive conduct can properly be regarded as having continued up to the date of the issuing of the petition.
It is obvious that the present circumstances would justify an order being made for the winding up of the company under s. 213(f) and (g). It is agreed, however, that such an order, in the present circumstances, would not be in the interests of the members; and, accordingly, the remedy for the oppressive conduct must be the alternative remedy provided by s. 205. I think that the only effective method of bringing to an end the oppressive conduct of which the petitioner complains is an order for the purchase of his shares by Mr Vanlandeghem.
The shares, accordingly, must be purchased by Mr Vanlandeghem at a fair price; and it remains to consider what that price should be, in all the circumstances of the case. Having regard to the findings I have made, it is clear that the petitioner’s shareholding must be valued on the assumption that the purported purchase of Mr Boyle’s shares had not taken place. This would leave the petitioner owning 8,000 shares, Mr Vanlandeghem 18,000 and Mr Boyle 8,000 shares. I doubt very much whether a shareholder already in control of more than 50% of the share capital would, in the particular circumstances of this company, have paid more than their par value to acquire the shareholding of the petitioner. I do not think that the fact that Mr Boyle may have got £22,500 for his shareholding is of much assistance in determining the value of the petitioner’s shareholding. *102 In the first place, the purchaser was not willing to pay more than £8,000 for the shares from his own resources. In the second place, Mr Boyle was more conspiciously involved in the company’s affairs — usually in contest with Mr Vanlandeghem — and, accordingly, had more of a nuisance value from the point of view of Mr Vanlandeghem than the petitioner. In the third place, there remains the possibility that some, at least, of the consideration was genuinely, if illegally, related to compensation for the loss of office rather than the purchase price of the shares themselves. Having regard to the uncertain financial future of the company I doubt very much whether, from the point of view of the majority shareholder, if would have been worth paying more than £8,000 for the Petitioner’s shareholding; nor do I think that somebody buying an interest in the company, who had not already any interest in it, would have been willing to pay more than that sum.
That, however, does not conclude the matter, since it is clear that, in prescribing the basis on which the price is to be calculated, the court can, in effect, provide compensation for whatever injury has been inflicted by the oppressors. (See Scottish Co-operative Wholesale Society v Meyer [1959] AC 324.) The accounts in the present case show that the company had been pursuing a conservative policy in relation to the payment of dividends in the years immediately preceding the wrongful purchase of Mr Boyle’s shares; and this policy may well have been justified by the company’s uncertain trading future. There seem to me, however, no reason why the petitioner should be deprived of the share to which he would have been entitled of the £14,500 wrongfully applied in the transaction regarding Mr Boyle’s shares. It is immaterial whether that sum comes back to the company following these or other proceedings and is ultimately paid out by way of dividend or as a return on capital to the contributors, since the petitioner will derive no benefit from that once the shares have been purchased by My Vanlandeghem. It follows that he is entitled, in my view, to be paid a sum bearing the same proportion to that sum of £14,500 as his share-holding of £8,000 did to the total issued share capital of £34,000 prior to the unlawful transaction in relation to Mr Boyle’s shares; and I will order that sum to be paid, in addition to the sum of £8,000 representing the par value of his shares.
It follows that the issues directed to be tried by the order of Mr Justice Gannon dated 23 July 1979 should be determined, in my view, as follows:
(i) The issue of 10,000 ordinary shares of £1 each at par to the major shareholder was not invalid.
(ii) The company was not, since January 1975, carried on in such a way as to serve the interests of and benefit the major shareholder rather than the other shareholders of the company and the company itself, save to the extent hereinafter mentioned.
(iii) The rates at which the major shareholder’s cattle were shipped by the company were not maintained at preferentially low levels or at rates less than those which would be charged on an arm’s length basis betwen the company and the customer.
(iv) The rates charged by the company to the major shareholder were regularly reviewed and/or increased as would be consistent with the proper and consistent management and control of the company.
(v) Other potential customers of the company were not quoted excessive shipment rates in order to discharge them from using the company’s facilities to Greenore.
(vi) The company was not conducted for the immediate personal advantage of the major shareholder and to the financial detriment of the company.
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(vii) The accounts for the years ended 31 December 1976, and 31 December 1977, were prepared in accordance with and conveyed the information required by the Companies Act, 1963.
(viii) The sale of the 8,000 ordinary shares in the company held by Sean Boyle was not in breach of clause 9 of the Articles of Association of the company.
(ix) The object of the major shareholder in acquiring the shares held by Sean Boyle was to consolidate his ownership of the company and to facilitate the management and running of the company for his own personal advantage and was not in the interest of the company or its shareholders.
(x) The accounts of the company for the years ended 31 December 1976, and 1977 were not such that the profits well justified the recommendation and distribution of a dividend.
(xi) The affairs of the company were conducted and the powers of the directors of the company and in particular the powers of the major shareholder were exercised in a manner which was oppressive to the petitioner and in disregard of his interests as a member in so far as the company’s monies were wrongfully used either for the acquisition of the shares to Sean Boyle or for the payment of compensation to him for loss of office, the said payments were not disclosed as required by law in the company’s accounts and the said matters were not remedied when a complaint was made in relation thereto to the company.
(xii) It is equitable that an order should be made under s. 205 of the Companies Act, 1963.
(xiii) An order should be made by the court requiring the major shareholder to purchase the plaintiff’s shares.
(xiv) The company should not be wound up under the provisions of the Companies Act, 1963.
(xv) The directors should not be ordered to recommend for payment dividends and there should not be an order to pay such dividends.
(xvi) The issued share capital of the company is £34,000 dividend into 34,000 ordinary shares of £1 each, 18,000 of which are held by the major shareholder, 8,000 by the petitioner and 8,000 by Sean Boyle.
(xvii) The payment of £14,000 to Sean Boyle by the company is improper and contrary to ss. 186 and 191 of the Companies Act, 1963.
(xviii) The petitioner is not entitled to any further relief, but an order will be made that the purchase price of the shares of the petitioner should be calculated on the basis set out in foregoing judgment.
I will hear counsel as to what should be the appropriate order as to costs.