Illegality Effect
Cases
Quinn -v- Irish Bank Resolution Corporation Limited (In Special Liquidation) & ors
[2015] IESC 29
Composition of Court:
Denham C.J., Hardiman J., O’Donnell Donal J., Clarke J., Laffoy J.
Judgment by:
Clarke J.
Status:
Approved
Judgments by
Link to Judgment
Result
Concurring
Clarke J.
Link
Appeal allowed – set aside High Court Order
Denham C.J., Hardiman J., O’Donnell Donal J., Laffoy J.
___________________________________________________________________________
Judgment of Mr. Justice Clarke delivered the 27th March, 2015.
1. Introduction
1.1 While the issues which arise on this appeal are of very considerable importance, both to the parties and in respect of the law generally, the question which this Court now has to answer is a relatively net one. In these proceedings, the plaintiffs/respondents (“the Quinns”) make a number of accusations against the first named defendant/appellant (which is, of course, a successor to Anglo Irish Bank plc and which I will refer to as “Anglo” because most of the events relevant to these proceedings occurred when that party bore the Anglo Irish name). In addition, certain claims are made which affect the interests of the second named defendant/appellant (“the Receiver”) in his capacity as Receiver over certain assets of the Quinns resulting from loans and securities put in place involving the Quinns and Anglo.
1.2 While a range of issues are advanced by the Quinns in these proceedings generally, one specific question was directed to be tried as a preliminary issue.
1.3 It will be necessary to set out some uncontroversial background facts in greater detail in due course. However, it is a matter of wide public knowledge that Seán Quinn senior (the first named third party in these proceedings, and the father or husband of each of the Quinns (“Seán Quinn”)) was involved in the acquisition of a very substantial indirect interest in Anglo by means of contracts for difference (“CFDs”). Such contracts, in simple terms, involve an agreement to exchange the difference between the current and future price of financial instruments such as shares. They, thus, entitle a party to benefit in the event that the share price of a relevant company goes up but equally require that the relevant person pays money in the event that the share price goes down. Such contracts can amount to a form of surrogate ownership of shares in the relevant company as the contracting party will be able to acquire shares at their current price by “topping up” the original price with the proceeds of a CFD. As the Anglo share price declined, Seán Quinn was required to make very substantial payments arising out of those CFDs. In that context, money was borrowed from Anglo. In addition, an arrangement was put in place that Seán Quinn’s indirect interest in Anglo, held through his CFDs, would be “taken out” by the purchase of shares in Anglo by a group of ten very wealthy investors who became known as the “Maple Ten” together with the Quinns.
1.4 One of the allegations made in these proceedings is that a series of lending transactions entered into in connection with Seán Quinn’s payment obligations under CFDs, together with the purchase of shares in Anglo designed to unwind Seán Quinn’s interest in the bank, amount to illegal contracts as being in breach of the Market Abuse (Directive 2003/6/EC) Regulations 2005 S.I. No. 342 of 2005 (“MAR”) and/or section 60 of the Companies Act, 1963 (“section 60”).
1.5 A preliminary issue was directed to be tried as to whether the Quinns had an “entitlement to rely” on any such alleged breaches in aid of the claims made concerning the invalidity of guarantees given by the Quinns, and security put in place by them, by which guarantees and security were said to have been given or put in place in connection with those transactions.
1.6 It is clear that, as with all cases where a preliminary issue is directed to be tried concerning a legal question, the Court is obliged to accept, for the purposes of argument, that the factual allegations made will be established at trial. That position is, obviously, without prejudice to the entitlement of the relevant defendant (Anglo in this case) to deny the facts and to reserve its position to fully contest those facts at trial. However, the underlying contention of Anglo, which led to the decision of the High Court to direct the trial of a preliminary issue, was to the effect that, even if the factual contentions put forward in their claim by the Quinns concerning breaches of either or both the MAR and section 60 were to be sustained, then the Quinns still could not succeed. That contention was based on a legal argument which, in substance, comes down to a contention that the application of relevant legal principles does not render lending transactions, guarantees or security void or unenforceable even if the relevant transactions are in breach of the MAR, or are in contravention of section 60, or are connected with transactions which breach those provisions. That net question is the issue which arose on the preliminary issue.
1.7 The High Court (Charleton J.) ruled in favour of the Quinns in terms which it will be necessary to address in due course (Quinn & ors v. Irish Bank Resolution Corporation & ors [2012] IEHC 36). Anglo and the Receiver have appealed to this Court against that finding. In order to more fully understand the precise issues which arise, it is necessary to refer both to some uncontroversial background facts and to the factual allegations which the Quinns make in these proceedings insofar as they are relevant to the question which the Court now has to decide.
2. The Factual Background
2.1 Seán Quinn was, of course, the founder and principal of what eventually became a complex set of companies which I will refer to as the Quinn Group. From September 2005, Seán Quinn began to indirectly purchase an interest in Anglo by means of the purchase of CFDs. A foreign corporate entity called Bazzely V Consultadoria Economica E Participacoes Sociedade Unipessoal LDA (“Bazzely”), which was registered in Madeira, was used to facilitate the purchase of the CFDs (it would appear that there were perceived tax advantages in the investment being made in that way). Funds were transferred to that company from other companies within the Quinn group in order to facilitate the purchase of the relevant CFDs. Bazzely was, it would appear, owned jointly by the first to fifth named plaintiffs/respondents (“the Quinn children”) although it is not clear that the Quinn children knew of their ownership for some time.
2.2 Seán Quinn originally, through Bazzely, invested in CFDs in Anglo but also in other companies so that, at that point, the risk was spread by positions being taken in a number of companies. By the end of 2005, Bazzely held CFDs in respect of six million shares in Anglo, which amounted to a relatively small percentage of the issued share capital of the bank. Seán Quinn continued to acquire CFDs in Anglo in 2006 and 2007. Any profits were used to increase existing CFD positions and to fund new CFD positions.
2.3 Bazzely began to dispose of those of its CFD positions which were not linked to Anglo in late 2006. At this time, Bazzely used any funds realised from the disposal of non-Anglo CFDs to fund Anglo CFDs. The funding for the purchase of the CFD positions during the period of October 2005 until September 2007 was provided by way of loans from companies within the Quinn Group. The CFDs were entered into between CFD service providers and Bazzely. However, as Bazzely did not have a bank account, the funds were transferred to the service providers by Quinn Group Family Properties Limited.
2.4 While the investments in CFDs in Anglo were initially profitable, from June 2007 the share price in Anglo began to fall. As the share price of Anglo declined, Bazzely was the subject of frequent calls to fund the margin on its CFD positions. On the 11th September, 2007, Seán Quinn and Liam McCafferty of the Quinn Group met with David Drumm and Seán Fitzpatrick, who were the chief executive and chairman of Anglo at the time. It would appear that Seán Quinn by that stage had arranged for the purchase of CFDs in Anglo shares which would amount to the equivalent of approximately 24% of the bank’s total issued share capital. Anglo appears to have been concerned by the scale of the Quinn interest at this stage. The Quinns contend that Dara O’Reilly, who was finance director of the Quinn Group, maintained regular contract with Elma Kilrane, a representative of Anglo, in the weeks following the 11th September meeting. According to the Quinns, during such contacts, Mr. O’Reilly and Ms. Kilrane discussed the margin calls for each day, the number of CFDs held, and the calls that had to be met.
2.5 Over the following months, funds were advanced by Anglo to companies within the Quinn Group to meet the negative margin calls. The documentation relating to these loans refer, inaccurately it would appear, to “property acquisitions”. Between 20th and 30th September, 2007, the Quinn group received loans of €100 million from Anglo. In December, 2007, €500 million was advanced by Anglo to Quinn Finance, a company within the Quinn Group, in order to discharge loans advanced by Quinn Group companies to meet such margin calls.
2.6 Around this time (it is alleged that this may have been December 17th, 2007), the Quinn children signed many security documents in favour of Anglo in respect of that €500 million loan. It is said that no legal or financial advice was offered by Anglo, or sought by the Quinn children, in advance of signing the relevant security documentation.
2.7 It should also be noted that at about the same time, Barlo Financial Services Limited, another Quinn Group company, replaced Quinn Group Family Properties Limited as the company which transferred the relevant funds to the CFD providers. The substantive CFD transactions, however, remained between the CFD providers and Bazzely, although the funds were transferred from Barlo Financial Services.
2.8 Seán Quinn continued to indirectly add to his portfolio of CFDs in Anglo into 2008. Further negative margin calls were made as the share price continued to decline. A number of new facility letters were sent to Dara O’Reilly during this period and were signed by the Quinn children. In March 2008, a significant drop in the share prices of Anglo saw Quinn Finance receiving separate loans of €50 million, €20 million, €220 million and €60 million from Anglo. These loans were apparently described by the bank as funding development projects in Russia and India. The loan funds were transferred to Barlo Financial Services, with the monies then being transferred to the CFD providers.
2.9 From March or April 2008, it is said that Anglo put pressure on Bazzely to reduce its CFD exposure in Anglo. Margin calls continued to be made and the closing price of Anglo shares continued to fall.
2.10 In June 2008, it is said that the Quinn Group came under pressure both from banks and from bondholders who had loaned to the Quinn Group, in the absence of additional funding, to make detailed disclosure of the investment holdings of the Quinn family, including the CFD positions in Anglo shares. Anglo advanced €200 million to Quinn Finance in order to facilitate the repayment of funds to the Quinn Group, it is said, in order to prevent negative publicity which might have had a serious effect on the Anglo share price. In a facility letter of 28th June, 2008, Anglo imposed a pre-condition on the advance of the relevant funds, being that share pledges would have to be provided by the Quinn children in respect of their shareholding in Quinn Group (ROI) Limited. The details of those share pledges (in respect of which the Receiver was later appointed) are as follows:-
• a share pledge of the 10th March, 2009 between the third named plaintiff/respondent (“Brenda Quinn”) and Anglo in respect of her shares in Slieve Russell Hotel Ltd.,
• a share pledge dated the 19th December, 2008, between the fifth named plaintiff/respondent (“Seán Quinn Jnr.”) and Anglo of his shares in Quinn Quarries Ltd.,
• a share pledge dated the 19th December, 2008, between the second named plaintiff/respondent (“Colette Quinn”), Seán Quinn Jnr., the first named plaintiff/respondent (“Ciara Quinn”), the fourth named plaintiff/respondent (“Aoife Quinn”) and the third named plaintiff/respondent (“Brenda Quinn”) and Anglo of their shares in Quinn Group (RoI) Ltd.,
• a share pledge dated the 19th December, 2008, between the same parties of shares in Quinn Finance Holding,
• a share pledge dated 14 January 2003 between the fourth named plaintiff/respondent (“Aoife Quinn”) and Anglo in respect of her shareholding in Quinn Group Properties Limited (the “2003 Pledge”).
2.11 Earlier share pledges, being a share pledge of the 14th January, 2003, between Aoife Quinn and Anglo in respect of shares in Quinn Group Properties Ltd. and a share pledge dated 6th January, 2005, between Colette Quinn and Anglo of her shares in Quinn Group Hotels Ltd., are also impugned in these proceedings. While the share pledge dated 14th January, 2003, and the share pledge dated 6th January, 2005, were in place to support borrowings not associated with meeting margin calls on Bazzely’s CFD positions in Anglo, both those share pledges are alleged to have remained in place to secure borrowings advanced for Bazzely’s CFD positions.
2.12 In July 2008, it is said that David Drumm of Anglo demanded that the exposure of Seán Quinn connected entities to Anglo be reduced. Anglo arranged a placing of 10% of Bazzely’s CFD position on the international market through Morgan Stanley, but this was not taken up by investors. At this time, the total number of Anglo shares represented by CFDs acquired and held by Bazzely is said to have been 215,619,414 which, it appears, represented approximately 28% of the entire shareholding in Anglo. The Bazzely position in CFDs in Anglo was mostly unwound into actual shares. A portion of those shares (102,000,000) was purchased by a syndicate of investors, known as the Maple Ten, who were put together by Anglo. From 14th July to 21st July, 2008, another portion (108,625,000) of the remaining shares was purchased for the Quinns. The balance of the position was retained as a CFD position until Anglo was nationalised in January, 2009. The funding for these transactions was met by refunds of €302,748,991 from CFD providers and additional loans from Anglo of €175,700,517.
2.13 A refinancing occurred in October 2008. It is said that for tax reasons, the Quinns’ shareholding in Anglo was transferred to six Cypriot companies. Each of these companies was wholly owned by an individual member of the Quinns, although the Quinns claim to have had no knowledge of their ownership of these companies until September 2010. A total of approximately €498 million was advanced to the Cypriot companies by Anglo, €175 million of which had previously been advanced by Anglo, with the reminder coming from a refinancing of a facility to Quinn Finance.
2.14 In October 2008, as part of the arrangement included in unwinding the relevant CFD positions, the Quinns entered into personal guarantees in order to support the borrowing by the Cypriot companies from Anglo. The personal guarantees executed by the Quinns in relation to the Cypriot companies are as follows:-
• Ciara Quinn guaranteed the liabilities of Lud Investments Ltd., a company incorporated under the laws of Cyprus to Anglo.
• Colette Quinn guaranteed the liabilities of Moshaid Investments Ltd., a company incorporated under the laws of Cyprus, to Anglo.
• Brenda Quinn guaranteed the liabilities of Opawa Investments Ltd., a company incorporated under the laws of Cyprus, to Anglo.
• Aoife Quinn guaranteed the liabilities of Pahu Ltd., a company incorporated under the laws of Cyprus, to Anglo.
• Seán Quinn Jnr. guaranteed the liabilities of Tarata Enterprises Ltd., a company incorporated under the laws of Cyprus, to Anglo.
• The sixth named plaintiff/respondent (“Patricia Quinn”) guaranteed the liabilities of Morboneto Holdings Ltd., a company incorporated under the laws of Cyprus, to Anglo.
2.15 These guarantees were expressed to be designed to cover the repayment of loan facilities to Anglo and to enable the respective borrowers to part fund interest on the relevant facility:-
• In relation to Lud Investments Ltd., the amount of the facility was in two parts: the first part was in the amount of €76,040,000 and the purpose of it was said to be to “enable the borrower to repay facilities with the Bank in the name of Ciara Quinn and Quinn Finance”, and the second part was for €1,303,000, the purpose of which was cited as “to enable the Borrower to part fund interest on the facility”.
• In relation to Moshaid Investments Ltd. the amount of the facility was in two parts: the first part was in the amount of €76,040,000 and the purpose of it was said to be to “enable the borrower to repay facilities with the Bank in the name of Colette Quinn and Quinn Finance”, and the second part was for €1,303,000, the purpose of which was cited as “to enable the Borrower to part fund interest on the facility”.
• In relation to Opawa Investments Ltd., the amount of the facility was in two parts: the first part was in the amount of €76,040,000 and the purpose of it was said to be to “enable the borrower to repay facilities with the Bank in the name of Brenda Quinn and Quinn Finance”, and the second part was for €1,303,000, the purpose of which was cited as “to enable the Borrower to part fund interest on the facility”.
• In relation to Pahu Investments Ltd., the amount of the facility was in two parts: the first part was in the amount of €76,040,000 and the purpose of it was said to be to “enable the borrower to repay facilities with the Bank in the name of Aoife Quinn and Quinn Finance”, and the second part was for €1,303,000, the purpose of which was cited as “to enable the Borrower to part fund interest on the facility”.
• In relation to Tarata Investments Ltd., the amount of the facility was in two parts: the first part was in the amount of €76,040,000 and the purpose of it was said to be to “enable the borrower to repay facilities with the Bank in the name of Seán Quinn Jnr, Patricia Quinn and Quinn Finance”, and the second part was for €1,303,000, the purpose of which was cited as “to enable the Borrower to part fund interest on the facility”.
• In relation to Morboneto Holdings Ltd., the amount of the facility was in two parts: the first part was in the amount of €100,461,000 and the purpose of it was said to be to “enable the borrower to repay facilities with the Bank in the name of Patricia Quinn”, and the second part was for €1,721,000 the purpose of which was cited as “to enable the Borrower to part fund interest on the facility”.
2.16 In respect of the five of the Cypriot companies whose liabilities were guaranteed by the Quinn children, the amount borrowed was €77,343,000 in each case. The amount borrowed in respect of Morboneto Holdings Ltd., which was guaranteed by Patricia Quinn, Seán Quinn’s wife and the mother of the Quinn children, was €102,275,357. Aside from those personal guarantees, share mortgages were also put in place in favour of Anglo from each of the Cypriot companies in respect of Anglo shares owned by the respective Cypriot companies.
2.17 On April 14th, 2011, Anglo appointed the Receiver as Share Receiver in respect of the share pledges. The details of the share pledges, in respect of which the Share Receiver was appointed, are outlined above. On his appointment, the Receiver exercised his apparent right to remove various directors of a number of companies within the Quinn group, specifically those of Slieve Russell Hotel Ltd., Quinn Group (ROI) Ltd., Quinn Finance Holding, Quinn Group Hotels Ltd., Quinn Group Properties Ltd. and Quinn Quarries Ltd. The Receiver likewise appointed new directors in their place.
2.18 The principal claim made by the Quinns in these proceedings, for the purposes of the present issue, is an allegation that the “sole or dominant motivation of Anglo in making these advances [in connection to the CFD transactions] was to support and maintain its share price”. Further, the Quinns claim that the funds advanced to the Cypriot companies by Anglo in October, 2008, were for the purpose of the purchase of shares in Anglo. For these reasons, the Quinns allege that the personal guarantees and the share pledges are unenforceable and are of no legal effect.
2.19 The basis of that contention is the allegation that the loan transactions engaged in by Anglo in relation to the positions maintained by Bazzely and/or the Cypriot companies, “were tainted by illegality” and/or were “for an illegal purpose”, of which Anglo was aware.
2.20 Having regard to these factors, the Quinns allege that the shares charges should be declared invalid, unenforceable and of no legal effect, and seek an order for rescission if necessary. The Quinns also seek declarations that the appointment of the Receiver as Share Receiver in respect of the relevant shares is invalid, unenforceable and of no legal effect. Further, the Quinns seek an order setting aside and declaring the appointment of the Receiver as null and void in respect of the shares specified above and restraining him from acting any further in this capacity.
2.21 Finally, the Quinns seek a declaration that the guarantees entered into by each of them in relation to the Cypriot companies are invalid, unenforceable and of no legal effect, and, if necessary, they seek an order for rescission of same.
2.22 It is also necessary to say something briefly about aspects of the procedural history which are relevant to understanding how this issue comes to be before the Court.
3 Relevant Procedural History
3.1 Anglo brought an application before the High Court, in which it was sought that a number of preliminary issues be directed to be tried. The first issue raised concerned the Quinns’ standing or entitlement to rely on the alleged breach of the MAR and/or section 60. It was that aspect of the application which succeeded. However, it should be noted that, at the same time, Anglo sought but failed to have a number of further issues tried as preliminary issues. These concerned the legality of the loans to Quinn companies in dispute, the recoverability, in whole or in part, of such loans, the effect on share charges if the loan is, as a matter of law, irrecoverable in whole or in part, whether the October 2008 refinancing of the July 2008 facilities or the loans to the Cypriot companies constituted a breach of the MAR or section 60, whether, if any of the loans or part of the loans advanced pursuant to the refinancing of October 2008 constituted a breach of the MAR or section 60, same meant that the loan or part of the loan is irrecoverable by Anglo, and the effect of personal guarantees where such a loan is deemed to be irrevocable in whole or in part.
3.2 As noted, Kelly J., on the 16th of December, 2011, refused to direct the trial of the majority of these preliminary issues. Kelly J. did, however, direct the trial of the first preliminary issue raised, which concerned the Quinns standing or entitlement to rely upon the alleged breach of the MAR or section 60. This issue was set out in the following terms in the order of Kelly J. of that date:-
“Do the Plaintiffs or any of them have the standing or entitlement to rely upon the alleged or any breach:
(a) of the Market Abuse Regulations; or
(b) Section 60 of the Companies Act, 1963,
in aid of any of their claims for declarations of invalidity, unenforceability or no legal effect in respect of any Charge [on] Shares or any Personal Guarantees herein?”
3.3 It was this issue with which Charleton J. was solely concerned at the substantive hearing. It was, of course, an issue which Anglo had requested be tried on a preliminary basis. It follows that, for the purposes of deciding that issue, it was and remains necessary to assume that Anglo was guilty of the illegality alleged. Anglo denies any illegality but the whole point of the preliminary issue is that Anglo also argues that the Quinns cannot escape liability on foot of the relevant loans, guarantees and security even if illegality is proven. In addressing this preliminary issue, Charleton J. was satisfied that “[i]t would be contrary to public policy were the Quinns …to be shut out from responding to the flagrant illegality which they allege against Anglo and Seán Quinn”. The order of 21st March, 2012 (made at the conclusion of the hearing of the preliminary issue) states:-
“And the Court being satisfied that it would be contrary to public policy were the Plaintiffs in the within proceedings to be shut out from responding to the flagrant illegality which the Plaintiffs allege against the first named Defendant and the first named Third Party
And the matter coming before the Court on this day in respect of costs
IT IS ORDERED that the first named Defendant do pay the Plaintiff’s costs of this hearing and the said Order as to costs be stayed pending the final determination of the within proceedings.”
3.4 The reasons which led Charleton J. to make that order are to be found in his judgment delivered on 23rd February, 2012. I, therefore, turn to that judgment.
4 The High Court Judgment
4.1 Charleton J., in addressing that preliminary issue, was, of course, concerned with the circumstances in which, as a matter of law, illegal contracts can be deemed unenforceable. Having examined the relevant jurisprudence, Charleton J. noted the comments of Lord Mansfield C.J. in Holman v. Johnson (1775) 1 Cowp. 341 at p. 343, in which it was held that an objection that a contract is illegal or immoral is not sustained for the benefit of the defendant, but rather is founded in the principles of policy (“ex dolo malo non oritur actio”). In that judgment, Lord Mansfield C.J. further stated that “[n]o court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act”.
4.2 However, turning to the general principles of illegality and the principles of statutory construction, Charleton J. came to the view that the rules on the unenforceability of illegal contracts are not simple, and their applicability is not predictable. In some circumstances, he considered, the legislature makes it clear that the enforcement of a contract which breaches a certain provision of law is not permitted. Having regard to this fact, Charleton J. stated that the task of the Court was to “ascertain the intention of the legislature as derived from disparate statutory terms”.
4.3 Charleton J. had regard to the comments of Mason J. (in the High Court of Australia) in Yango Pastoral Co. Pty. Ltd. v. First Chicago Australia Ltd. (1978) 139 C.L.R. 410 (at p. 429), in which Mason J. commented that there may be cases in which the “plaintiff stands to gain by [the] enforcement of rights gained through an illegal activity far more than the prescribed penalty” for committing the illegal act. In that case, Mason J. suggested that the true basis of the principle may be that a court will refuse to enforce a transaction that has a fraudulent or immoral purpose. In this regard Mason J. was of the view that “the common law principle of ex turpi causa can be given an operation consistent with, though subordinate to, the statutory intention, denying relief in those cases where a plaintiff may otherwise evade the real consequences of a breach of a statutory prohibition”. Charleton J. found that this statement echoes the contrast between the alleged actions of Anglo and Seán Quinn, which involved hundreds of millions of euro, on the one hand, and the administrative and monetary penalties which would apply for the breach of the law, on the other.
4.4 Having adopted the principles espoused by Kirby J. (again in the High Court of Australia) in Fitzgerald v. Leonhardt (1997) 189 C.L.R. 215 on the proper approach to statutory construction, Charleton J., at para. F5 of his judgment, was of the view that the question he was required to consider was:-
“whether the legislature in setting up a series of norms in relation to market abuse and financing of the purchase of a company of its own shares intended to create a self-controlled island of regulation or, instead, wished to influence the general matrix of litigation through recasting public policy”.
4.5 Charleton J. then considered the application of that general approach to the MAR. The MAR were adopted for the purpose of giving effect to Council Directive 2003/6/ EC of the 28th January 2003 on insider dealing and market manipulation (market abuse) (“the Directive”). The MAR were brought into force under s. 30 of the Investment Funds, Companies and Miscellaneous Provisions Act 2005 (“the 2005 Act”). Having reviewed the directive, the MAR and the 2005 Act, Charleton J., at para. G11, was of the view that the 2005 Act was a directive to the courts to “respond under the illegality principle to contracts which flagrantly breach its provisions”.
4.6 Charleton J. did not accept the argument put forward by Anglo that the introduction of unenforceability would introduce chaos into the marketplace or disturb the scheme of regulation which was founded on the legislation. Charleton J. found that “weighing heavily on the balance” against the success of Anglo’s argument was the removal of a proportionate remedy against Seán Quinn and Anglo, and additionally, the prevention of unjust enrichment through market manipulation.
4.7 Turning to section 60, Charleton J. found that this section embodies “a fundamental rule of company law” that a company should not buy its own shares. Section 60(15) provides the penalties for breaches of the rule, but Charleton J. found that these penalties “are hardly sufficient responses to the situation alleged in this case”. Subsection 14 provides that a transaction in breach of section 60 is voidable at the instance of the company against any person who had notice of the facts which constitute the relevant breach. On that basis, Anglo argued that the relevant transaction is valid unless the company in question treats it as void. It follows, it was said, that the illegality rule was deliberately excluded by the legislature. On that question, and having analysed subsections (1) and (14) of section 60 and the arguments of Anglo, Charleton J. concluded, at para. H6:-
“I am not persuaded that s. 60 of the Companies Act 1963, which forbids a company from purchasing its own shares, or from offering financial assistance in that regard, is self-contained in its remedies and cannot impact on public policy. In a case such as that pleaded herein, the general law of illegality of contracts is entitled to respond in an appropriate and proportionate way so that loss caused through the manipulation of the share price of Anglo to those directly at the receiving end of that conduct, namely the Quinns, can be appropriately responded to.”
4.8 Finally, Charleton J. held that the Quinns, as plaintiffs, bear the burden of proving the illegality which they allege, its effect on the share price, and their lack of involvement in the acts alleged.
4.9 Having regard to these factors, Charleton J. concluded, at para. L1, that, on his assessment of the legislation, the situation which arises in the present case was not one where “a declaration of illegality by statute is to be confined to the remedies which the legislation promulgating it provides”.
4.10 Against that background, Anglo and the Receiver appealed to this Court. While the Receiver filed written submissions, counsel on his behalf confined himself to addressing one narrow issue at the hearing of the appeal. That issue was concerned with the question of whether, even if the Quinns’ contention of unenforceability or voidness due to illegality were to be made out, there could be any unwinding of actions already taken by the Receiver on foot of what was said to be an apparently valid appointment. That issue clearly only arises in the event that the underlying contention of the Quinns is sustained. Therefore, the principal, and first issue which the Court was required to address was the competing positions of the parties on the primary question of whether the Quinns are entitled to rely on the alleged breaches of the MAR and section 60. In that context, I turn to the position adopted by the Quinns and Anglo on that issue.
5 The Position of the Parties
5.1 Anglo contended that the Quinns do not have standing or are not entitled to rely on the alleged breaches of the MAR or on the alleged breach of section 60 in their claims for declarations in respect of the share charges and guarantees. Anglo put forward this contention on a number of bases.
5.2 First, Anglo contended that the statutory frameworks in relation to the MAR and section 60 do not, in contrast to other statutory codes, expressly provide that transactions in breach of their terms are illegal, invalid or void. Anglo argued that the question to be determined is as to whether these regimes incorporate “implied remedies” of the kind sought to be invoked by the Quinns.
5.3 In this regard, Anglo contended that it was for the Court to determine whether the MAR and section 60 provide a complete code by which infringements are to be addressed or whether it has been left open to the courts to impose other sanctions. Anglo contended that there is no express provision in the MAR or section 60 or any other basis from which it can be implied that there should be a remedy in the form of a declaration of unenforceability or no legal effect. Indeed, Anglo submitted that such remedy would be inconsistent with the relevant legislative provisions.
5.4 Second, Anglo argued that the share charges and guarantees on which the Quinns rely are not in themselves unlawful, and extend to the borrowings of all the companies concerned, not just the borrowings which relate to the allegations of share manipulation. Anglo submitted that the MAR do not provide that any particular type of transaction is prohibited. Rather, it was said that the MAR provide that a person “shall not engage in market manipulation” or use inside information and it follows, it was argued, that while those acts are prohibited, the contracts or transactions themselves are not prohibited.
5.5 Third, Anglo claimed that the share charges, which are the subject of the proceedings, are fully executed and that title has passed. In those circumstances it was contended that the Quinns now seek to rely on a prohibition against these transactions as a basis for seeking positive declaratory relief, rather than for the purpose of seeking to resist enforcement of a transaction. Such positive reliance is said to be impermissible on the basis that illegality is argued to be solely a matter of defence. Anglo argued that the facts of the present case can, in that context, be distinguished from those which were the subject of the judgment of Knox J. in Chase Manhattan Equities Limited v. Goodman [1991] B.C.L.C. 897 in this regard.
5.6 Because the share charges have been executed and the Quinns have performed their obligations thereunder, Anglo can, it is said, exercise its rights pursuant to those share charges without recourse to the courts. In doing so, Anglo relied on the judgment of the House of Lords Tinsley v. Milligan [1994] 1 AC 340 and the judgment of Lord Denning in Singh v. Ali [1960] AC 167 which are said by Anglo to confirm the common law principle that illegality does not prevent the passing of title.
5.7 Fourth, Anglo argued that the contention that the share charges and the guarantees are invalid is inconsistent with the regime of EU law which underlies the MAR and with relevant general principles of EU Law. The EU regime is contained in the Directive, which sets out framework principles and relevant implementing measures. Anglo contended that nowhere in the provisions of the Directive is there a suggestion that private civil law actions are “necessary or desirable”. On the contrary, Anglo argued, the emphasis is on administrative and public law provisions in order to promote a consistent framework of enforcement and cooperation. This is, in Anglo’s submission, a feature of the continued centralisation and harmonization of European Financial Services law.
5.8 While Anglo acknowledged that the Directive permits civil sanctions, it is said to be a fundamental principle of European law that a Member State is not permitted to undermine the provisions or the object and purpose of a directive. Anglo submitted that a civil remedy which renders transactions pertaining to the purchase or sale of financial instruments invalid, illegal, or unenforceable would be tantamount to undermining the Directive. Additionally, Anglo claimed that such a remedy would be inconsistent with the principles of legal certainty and proportionality.
5.9 On these points, Anglo submitted that the trial judge incorrectly suggested that the Court had to determine whether the legislature wished to influence litigation “through recasting public policy”. Anglo contended that it is the legislation which gives expression to public policy and, where a comprehensive system of sanctions is provided, there is, Anglo suggested, no room for a “judicial recasting of public policy” to apply additional sanctions.
5.10 Additionally, Anglo submitted that the trial judge failed to apply one of the principles identified by Kirby J., in the High Court of Australia in Fitzgerald v. Leonhardt, which states that, in circumstances where legislation provides for detailed sanctions and remedies for breach of its terms, courts will require good reason to add additional civil penalties not specified in the legislation itself. Anglo argued that the Court’s view on the inadequacy of sanctions in a particular case cannot answer the question of whether there is a self-contained statutory framework. Anglo submitted that Charleton J. failed to address the legal consequences arising from the fact that the security transactions were not of themselves unlawful and that legal title had, therefore, passed to Anglo, meaning that, it was argued, Anglo is entitled to exercise all rights conferred by the security. Additionally, Anglo submitted that while Charleton J. acknowledged the general principle that illegality should continue to be used only as a defence, he incorrectly, in the submission of Anglo, concluded that this principle is not universally applied.
5.11 The Receiver submitted that his appointment and the steps taken by him cannot be affected by an illegality, such as that alleged by the Quinns, that is, “one asserted positively in respect of the executed transactions.” The Receiver argued that if that is a question of standing, then the Court should resolve it in favour of Anglo and against the Quinns. The Receiver principally suggested that even if the arrangements between Anglo and the Quinns were tainted by illegality to the point of rendering the various securities unenforceable, same could not retrospectively affect the validity of the Receiver’s appointment or acts, otherwise valid, carried out by him as receiver to date.
5.12 In relation to the first argument made by Anglo, the Quinns argued that Anglo committed illegal acts prohibited by section 60 and the MAR, and that at common law, a contract entered into for an unlawful or illegal purpose is unenforceable. In the present case, it is argued, the contracts at issue are the loan transactions comprising of facility letters and security for those loans which were alleged to be for the express and intended purpose of funding margin calls on CFD positions in Anglo shares, in order to allegedly support Anglo’s share price, and to purchase Anglo shares. These transactions, in the submission of the Quinns, fall within section 60 and the MAR. The Quinns submitted that Anglo is not entitled to benefit from these transactions by taking control of the Quinn Group and its assets through share charges, as this entitlement is allegedly based on an illegal and unenforceable contract.
5.13 On the basis of the case law, the Quinns argue that there are two separate means by which agreements may be found to be illegal. First, the Quinns submitted that the share charges and guarantees are tainted with illegality as they are closely connected with the alleged unlawful loan transactions which had the purpose and effect of maintaining the share price of Anglo, in breach of section 60 and the MAR. Second, the Quinns contended that, as the share charges and guarantees were entered into for an illegal purpose and so are unlawful and unenforceable, they offend the common law rules on illegality. The Quinns argued that the application of this common law principle can be seen in Chase Manhattan Equities Ltd. v. Goodman [1991] B.C.L.C. 897. Additionally, the Quinns argued that the maxim ex turpi causa non oritur actio prevents Anglo from relying on the share charges in defence of the Quinns’ claims for declaratory relief.
5.14 Having regard to the contention of Anglo that the MAR constitute a self-contained administrative enforcement regime, the Quinns argued that the transposition of the Directive must be considered against the 2005 Act. The Quinns submitted that the fact that the Oireachtas enacted legislation separate to the MAR, which refers to and gives effect to certain aspects of the MAR, demonstrates that the MAR are not a self-contained administrative enforcement regime.
5.15 The Quinns agued that section 33(3) of the 2005 Act, which states that subsections (1) and (2) of that section “are without prejudice to any other cause of action which may lie against the person for contravening a provision concerned” signifies a clear intention to afford remedies to individuals affected by market abuse beyond the confines of the MAR.
5.16 In addition, the Quinns submitted that, contrary to the submissions made by Anglo, the term “cause of action” in section 33(3) of the 2005 Act does not preclude the conclusion that the transaction is invalid or void. It is said that to seek to set aside transactions on the basis of illegality is a “cause of action” within the meaning of that subsection. The Quinns relied in that context on Hortensius Ltd. v. Bishop and ors [1989] I.L.R.M. 294 in which the plaintiff company, having failed to fulfil its obligations under a mortgage and anticipating the bank acting upon the mortgage and personal guarantee, initiated proceedings on the basis of an alleged illegality in the transfer of the relevant securities. It will be necessary to return to Hortensius in due course.
5.17 The Quinns further argued that the entitlement to rely on section 33(3), as opposed to section 33(2), is not limited to those who have acquired or disposed of final instruments, and because of this, this subsection is argued to be in addition to the administrative regulatory regime monitored and enforced by the Central Bank under the MAR.
5.18 In response to the reference by Anglo to the requirement on Member States to ensure “effective, proportionate and dissuasive” measures in implementing the Directive, the Quinns argued that the maximum civil penalty for a breach of the MAR is €10 million, which cannot, it is said, represent an “effective, proportionate and dissuasive” measure in the context of the present case. In those circumstances, the Quinns argued that the Oireachtas purposely enacted section 33(3) in order to ensure that requirements of the Directive were met in that persons wronged by “extraordinary cases” of market abuse would not be deprived of an effective remedy.
5.19 The Quinn’s contested the suggestion by Anglo that section 60 is a self contained provision. In this regard, the Quinns argued that a company such as Anglo can be held to account by persons such as the Quinns for perpetrating an unlawful act. The Quinns claim that if it had been the intention of the Oireachtas to exclude other persons from holding a company to account for an alleged breach of section 60, this would have been clearly and expressly stated in the section. The construction of section 60(1) put forward by the Quinns is said to accord with the common law principle that contracts for an unlawful purpose are unenforceable, as there is no express qualification as to who is entitled to rely on the section.
5.20 The Quinns accepted that section 60(14) applies to a company only, and so cannot be availed of by the Quinns, but argued that this does not preclude another party to the transaction from seeking to have a transaction declared unenforceable by virtue of section 60(1). To adopt the construction advocated by Anglo would, it is said, have the effect of restricting the constitutional right of access to the Courts. The Quinns submitted that, as they are parties to transactions that allegedly fall foul of section 60(1), they have standing and are entitled to rely on section 60(1) in support of their claim that the share charges and guarantees pursuant to those transactions are unenforceable.
5.21 The Quinns further argued that, through section 60(1), the Oireachtas has declared that “as a matter of public policy”, certain transactions are unlawful, and nothing in the section was said to disarm the court from dealing with breaches of section 60(1) by applying common law principles applicable to unenforceable contracts.
5.22 The Quinns argued that Anglo cannot raise the issue of whether the Quinns are entitled to have executed transactions set aside. The Quinns submitted that this issue does not fall for determination according to the order of Kelly J. directing a preliminary issue to be tried, and that Anglo did not raise that issue in its Notice of Motion for the trial of a preliminary issue. The Quinns submitted that the issue as to whether legal title has passed is “not an inherent or necessary aspect to the section 60 and MAR matters for consideration herein”. Furthermore, the Quinns submitted that, if Anglo did apply for such an issue to be determined, it would not have succeeded as this issue is not, it is said, suitable for determination on a preliminary basis as they asset that it cannot properly be considered until a finding is made as to whether the impugned security can be set aside.
5.23 Notwithstanding that argument, the Quinns made certain points in relation to the submissions of Anglo. They argued that the default on €2.35 billions of loans was not a default by the Quinns personally, but rather the default by the companies within the Quinn Group. Additionally, the Quinns submitted that, if a court finds that the loans were for an illegal purpose, the security for those loans is unenforceable. The Quinns further argued that, under the doctrine of rescission, the contracts may be set aside whether they are complete or not, based on fraudulent misrepresentation. The Quinns contested the submission of Anglo that it was entitled to act on foot of the impugned security and appoint a Share Receiver in circumstances in which Anglo knew that the letters for demand were sent in respect of what the Quinns allege to be illegal loans, and in which the Quinns were not afforded a reasonable opportunity to consider the letter of demand and to consider their options.
5.24 The Quinns argued that Anglo cannot place reliance on the House of Lords decision in Tinsley v. Milligan [1994] 1 AC 340 as, in doing so, the Quinns claim, Anglo is attempting to rely on its own purported illegal acts having “knowingly and intentionally operated an illegal scheme in that regard”. The Quinns also contend that the case of Singh v. Ali [1960] AC 167 can be distinguished from the present case as the parties in that case conspired to affect a fraudulent or unlawful purpose.
5.25 Against the background of those positions I now turn to a discussion of the important legal issues which they raise.
6 Discussion
6.1 It will be necessary to review the jurisprudence from a number of jurisdictions in due course. However, I think it would be fair to say that the underlying problem, with which all of the case law is concerned, stems from an attempt to reconcile or balance two competing but potentially equally legitimate principles. On one side there is the understandable reluctance of the courts to be seen to be coming to the aid of a person in relation to a transaction which was in breach of the law. Old maxims about “clean hands” are at the heart of the issue. The Latin maxim “ex turpi causa non oritur actio ” explains this aspect of the Court’s jurisprudence. A party should not, in accordance with that principle, be entitled to come to court and seek to enforce a transaction which is tainted with illegality in some form.
6.2 There is, however, another, and potentially conflicting, consideration, which is of considerable importance. Since the early case law on illegal contracts was developed, the extent of regulation by statute has expanded to an exceptional extent. The number of regulatory regimes is significant. The areas of life which are subject to regulation are corresponding large. The number of ways in which a party might be said to be in breach of some element of a regulatory regime is many and varied. Furthermore, the range of breaches which can arise stem across a spectrum from the minor and technical to the substantive and extremely grave. At one end of the spectrum, a party may simply not have a licence to conduct a particular activity in circumstances where they were clearly entitled to the licence concerned, and perhaps had held one in the past, where the failure of the relevant party was simply a short term oversight in renewing the relevant licence. Strictly speaking, the carrying on of the activity concerned may well, in those circumstances, be illegal, for the relevant statute may well specify that it is unlawful to carry on the activity concerned without the relevant licence.
6.3 At the other end of the spectrum, there may be a deliberate and serious breach of important obligations imposed in the public interest by the relevant regime. Furthermore, it is necessary to recognise that, depending on the nature of the regulatory regime concerned, all or many parties to a relevant transaction or series of transactions may either be culpable or may be aware of the illegality concerned, or at least of the facts which render the relevant activity illegal. It must also be kept firmly in mind that the broad application of the law in relation to illegal contracts also extends to cases where the relevant illegality derives from the ordinary criminal law. This can, of course, be so even where it might be said that the contract is illegal by statute, for much criminal activity is now covered by statutory offences. The weight to be attached to the public policy requirement that the courts refrain from enforcing contracts tainted by illegality is obviously very significant in such cases where they involve serious criminality.
6.4 As a review of the case law will reveal, it has always been acknowledged that the application of a strict rule of unenforceability can give rise to potential injustice. However, such an approach has, at least in the past, been taken to be justified as being required as a matter of public policy, both to deter illegality and to prevent the courts from being seen to act in aid of those who might be found guilty of illegal activity.
6.5 However, there is at least the potential of a real risk of injustice if the courts were to continue to adopt an absolute “hands off” policy to all cases of illegality by reason of the breach of a regulatory regime. It must be recognised that, where a court decides that it will not entertain any legal proceedings solely because it can be said that there was some element of illegality about the transaction which underlies the proceedings concerned, this, in effect, means that, for the parties, the results must lie where they fall. If, for example, one party has already obtained most of the benefit which it was intended to obtain as a result of the relevant transaction, but the other party has received little or none, then the consequences of a “hands off” approach by the court is that the party who is lucky enough to have obtained the benefit of the transaction gets a very significant gain at the expense of the party who, often as a matter of chance, has not as yet obtained the benefit. That consequence may well have little to do with the degree of blame which might be said to attach to the respective parties and a lot to do with luck. It may be that such a result can simply be regarded as a consequence of the parties engaging in a contract which is tainted with illegality. However, in a highly regulated age, it is clear, also, that there is significant potential for injustice in a system which automatically adopts a hands off approach and which recognises, as a necessary consequence, that some parties to an illegal transaction may benefit and others lose out.
6.6 But reconciling those two competing principles, that is the reluctance of the courts to become involved in being seen to enforce contracts which might be said to be tainted by illegality, on the one hand, and the recognition that a complete “hands off” approach might lead to serious injustice, on the other, is not necessarily an easy task.
6.7 It also needs to be recalled, as a review of the jurisprudence will disclose, that much of the initial development of the law concerning illegal contracts as a matter of common law was concerned with contracts which were considered by the common law itself to be illegal as a matter of policy or to involve criminal activity. It is the evolution of the approach of common law courts to the concept of illegality by statute which gives rise to the competing considerations which I have just sought to address. In that context, it must also be noted that there have been questions over the precise type of illegality which engages the doctrine of ex turpi causa so as to render affected contracts unenforceable. For reasons which will be touched on in due course, the modern view would appear to be that the relevant illegality must either involve a breach of the criminal law or be quasi criminal in nature. However, that, to some extent, begs the question. Very many regulatory regimes create technical offences or quasi criminal technical breaches for a whole range of activities. Such measures may well be taken to be a necessary part of the enforcement of the regulatory regime concerned. However, the wide range of breaches which may give rise to an offence or other public illegality potentially leads to the very difficulty with which this Court is now faced, being that courts are consequently required to consider whether such breaches ought to lead to the relevant contracts being treated as unenforceable. In order to gain assistance as to how the questions thus raised should be answered, it is of assistance to conduct a review of the relevant jurisprudence.
7 The Case Law
7.1 It is important to commence any review of the case law by recalling that the underlying issue, with which this Court is concerned, is as to whether the Quinns can rely on the alleged illegality of the various lending transactions which are at the heart of these proceedings to establish that they are not obliged to meet the obligations which would otherwise arise under the guarantees and security under challenge. The circumstances in which contracts may be regarded as illegal, void or unenforceable in common law countries are many and varied. There is no unique classification of all of the relevant headings. However, in order to understand the aspect of the broad area of “unenforceability on the grounds of illegality” with which this case is concerned, it is necessary to start by saying just a little about the area of illegal contracts as a whole. The authors of Chitty on Contract, 31st Ed., volume 1 suggest, at para. 16-005, that contracts may be invalidated for any one of five reasons, being: first, that the object of the relevant contract is treated as illegal by common law or by legislation; second, that the objects are injurious to good government; third, that the objects interfere with the proper working of the machinery of justice; fourth, that the objects are injurious to marriage and morality; and fifth, that the objects are, for economic reasons, against the public interest. However, as the authors go on to point out, not all cases fit neatly into one of the relevant boxes.
7.2 Furthermore, the authors note that contracts may be regarded as illegal either in their formation or in their performance. Contracts may be regarded as illegal as to their formation when they cannot be performed in accordance with the terms agreed without committing an illegal act. In contrast, contracts may be illegal as to performance where one or both of the parties intend to perform the contract in an illegal manner or to affect some illegal purpose.
7.3 The aspect of the jurisprudence in question, with which this Court is now concerned, involves an allegation that relevant contracts are illegal, and thus, unenforceable by reference to statute. This is said to be so by virtue of the fact that the contracts in question are alleged to have been intended to give effect to an illegal purpose, being, in the case of section 60, the giving of loans for the purchase of shares in the lender, and in the case of the MAR, lending designed to unlawfully maintain the share price of Anglo.
7.4 It is important to understand the reason why it is proper to characterise the issues in this case in that fashion. As was debated it the course of the hearing before us, the contracts which are at the heart of these proceedings are not, in and of themselves, unlawful in any way. They are contracts to lend money on terms and contracts to provide guarantees or security to back up those lending transactions. If, for example, identical transactions, including guarantees and security, were entered into for the simple and straightforward purpose of permitting Quinn entities to purchase shares in the ordinary way in a company wholly unconnected with Anglo, then no question of illegality would arise. Furthermore, none of the specific types of policy considerations considered by the common law itself (independent of statute) to render contracts void or unenforceable have been said to exist in this case.
7.5 I am satisfied that, at least in very broad terms, the framework within which the common law approaches these questions in this jurisdiction is the same as in the United Kingdom and, indeed, other common law jurisdictions such as Australia. However, that broad framework is not really in dispute between the parties to these proceedings. Rather, it is the precise way in which a court should go about determining the enforceability or otherwise of a contract which is said to be affected by an illegality imposed by statute that requires to be considered. In what way should a court approach the public policy question of enforceability while paying proper regard to the need to avoid being seen to enforce illegality or fail to discourage same while at the same time according appropriate weight to the policy of the relevant statute? Likewise, the application of that methodology to the statutes in question in this case needs to be addressed. Against the background of those very general observations I now turn to the case law.
7.6 The doctrine of illegality is often traced back to Holman v. Johnson, although the law thus articulated was well established before the time of that decision. Indeed, Charleton J. cited that judgment in his decision in this case in the High Court. The principle was put by Lord Mansfield in the following terms, at p. 343:-
“The objection, that a contract is immoral or illegal as between plaintiff and defendant, sounds at all times very ill in the mouth of the defendant. It is not for his sake, however, that the objection is ever allowed; but it is founded in general principles of policy, which the defendant has the advantage of, contrary to the real justice, as between him and the plaintiff, by accident, if I may so say. The principle of public policy is this; ex dolo malo non oritur actio. No Court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act. If, from the plaintiff’s own stating or otherwise, the cause of action appears to arise ex turpi causa, or the transgression of a positive law of this country, there the Court says he has no right to be assisted. It is upon that ground the Court goes; not for the sake of the defendant, but because they will not lend their aid to such a plaintiff. So if the plaintiff and defendant were to change sides, and the defendant was to bring his action against the plaintiff, the latter would then have the advantage of it; for where both are equally in fault, potior est conditio defendentis.”
7.7 Lord Mansfield, therefore, acknowledged that it was possible that a defendant might obtain what might be seen to be an unfair advantage by being able to rely on the principle of illegality. However, as has been acknowledged in many other cases, and indeed, noted by the trial judge in this case, the principle is one of policy rather than being based on attempting to do justice between the parties.
7.8 However, the more modern approach of the courts of the United Kingdom can be seen from a series of cases over the last 75 years or so. In Archbolds (Freightage) Limited v. S. Spanglett Limited [1961] 1 Q.B. 374 at p.389, Devlin L.J. expressed the approach in the following terms:-
“The statute does not expressly prohibit the making of any contract. The question is therefore whether a prohibition arises as a matter of necessary implication. It follows from the decision of this Court in Nash v. Stevenson Transport Ltd. that a contract for the use of unlicensed vehicles is prohibited. In that case the plaintiff held “A” licences which the defendant wanted to purchase. But the Act of 1933 provides that licences may not be transferred or assigned, and it was therefore agreed that the defendant should run the vehicles in the plaintiff’s name so that they might obtain the benefit of his licences. It was held by the court that that was an illegal agreement because the defendant was the person who was using the vehicles and the plaintiff the person who was licensed to use them; thus the user was not the licensee. In the present case there was no contract for the use of the vehicle”.
7.9 Devlin L.J. went on to note that it did not follow that, because it is an offence for one party to enter into a contract, the contract itself is void. In that context, the Court reaffirmed the position which had been adopted in St. John Shipping Corporation v. Joseph Rank Limited [1957] 1 Q.B. 267, a case to which I will shortly turn.
7.10 Next, in Shaw v. Groom [1970] 2 Q.B. 504, the Court of Appeal reiterated the approach previously adopted by the House of Lords in Vita Food Products Inc. v. Unus Shipping Company Limited (In Liquidation) [1939] AC 277, where Lord Wright said, at p.293:-
“Nor must it be forgotten that the rule by which contracts not expressly forbidden by statute or declared to be void are in proper cases nullified for disobedience to a statute is a rule of public policy only, and public policy understood in a wider sense may at times be better served by refusing to nullify a bargain save on serious and sufficient grounds”.
7.11 Other cases, such as Ailion v. Spiekermann [1976] Ch. 158, and Geismar v. Sun Alliance and London Insurance Limited [1978] Q.B. 383, are sometimes cited to the same effect. In that later case, it is worth noting that Talbot J., at pp.388 and 389, having made reference to the speech of Lord Macmillan in Beresford v. Royal Insurance Company Limited [1938] A.C. 586, and the decision in St. John Shipping suggested that is was of “the highest importance that courts do not attempt to extend the doctrine of public policy in order to hold that contracts are unenforceable thereby, and that it is necessary to look to the accepted application of that doctrine and not go beyond that”.
7.12 As will be noted by reference to recent Australian authority, a similarly broad approach has been adopted in that jurisdiction as well. However, a further broad question can well arise as to the extent to which an illegality may affect contracts which are not, of themselves, illegal, but where there is a connection with illegality.
7.13 Chase Manhattan Equities v. Goodman [1991] B.C.L.C. 897 involved a sale of shares by a person possessing insider information. Through a sham transaction involving a third party, it was sought to ultimately sell the shares to Chase Manhattan. Knox J. held that the share sale transaction (which had not, at the time of the proceedings, been completed) was unenforceable against Chase Manhattan on the grounds of illegality. The statute in question did not, of itself, render the share sale agreement in question void or unenforceable. Indeed, section 8(3) of the Company Securities (Insider Dealing) Act 1985 provided that no transaction was void or voidable “by reason only that it was entered into” in breach of the relevant insider trading provisions. A sale of shares was, of course, itself entirely legal. What made the contract illegal was the fact that the ultimate seller, Mr. Goodman, was in possession of insider information, and was selling the shares for the purposes of unlawfully benefiting by that information. As noted by Knox J., to enable Mr. Goodman to enforce the sale share contract against Chase Manhattan would have allowed Mr. Goodman to benefit by his own unlawful act. Section 8(3) was found to be designed to prevent the unwinding of completed stock exchange contracts and not, therefore, relevant to the case.
7.14 Those cases are, however, in reality, concerned with slightly different questions. The issue does not concern the question of whether public policy requires the courts to treat contracts as unenforceable as such, but rather concerns the reach of that policy requirement. How closely does a contract need to be connected to the relevant illegality in order that it may be treated as unenforceable, or can completed contracts be reversed? It might be said that these are but other aspects of the basic question. Does policy require that such contracts be treated as unenforceable, or reversed?
7.15 The current position in the United Kingdom can be seen from the judgments of the Supreme Court in Les Laboratoires Servier and anor v. Apotex Inc. and ors [2015] 1 All ER 671. The substance of the issue which arose in that case was as to whether an infringement of a foreign patent right constituted a relevant illegality or “turpitude” for the purposes of providing a defence. However, the Court did review the jurisprudence in respect of illegal contracts generally.
7.16 The principal judgment was given by Lord Sumption. Having traced the doctrine to Holman v. Johnson, Lord Sumption noted, at para. 14, that this area has given rise to “a large body of inconsistent authority which rarely rises to the level of general principle”. He also noted that the main reason for the disordered state of the case law is the distaste of the courts for the consequences of applying their own rules, consequences which he noted Lord Mansfield had pointed out two centuries ago. That is, indeed, the fundamental problem already identified in this judgment. A strict application of a rule of unenforceability in relation to all contracts tainted by illegality can have consequences which may appear very unjust on the facts of an individual case. That leads to attempts to find, normally by way of exception, a basis for avoiding the full rigours of the rule in cases where the consequence may appear to be particularly unjust.
7.17 Lord Sumption went on to consider a strand in the jurisprudence in the United Kingdom which emerged in more recent times, which sought to redefine the principle as a power vested in the court to be exercised in an appropriate case, rather than as a rule of law to be applied in all cases save those where there was an established exception or where, in accordance with the established jurisprudence, the rule did not apply because, for example, the transaction sought be rendered unenforceable was beyond the scope of the rule. In that context Euro-Diam Limited. v. Bathurst [1990] 1 Q.B. 1 is often cited.
7.18 The relevant line of authority suggested that the court had a power to decline to enforce contracts where it would be “an affront to the public conscience” to allow the plaintiff to succeed. As pointed out by Lord Sumption:-
“Under this “public conscience” test, the application of the illegality defence was not discretionary in law. But it was clearly discretionary in nature. In substance it called for a value judgment about the significance of the illegality and the injustice of barring the claimant’s claim on account of it”. (See para. 14)
7.19 However, that approach had been clearly rejected in Tinsley v. Milligan. On the question of the proper test, Lord Keith and Lord Goff, in Tinsley v. Milligan, had suggested a rule which would bar any claim arising out of a transaction which was sufficiently closely connected to the illegal purpose. Lords Browne-Wilkinson, Jauncy and Lowry adopted a test which barred a claim only if it was necessary to assert, as part of the plaintiff’s claim, facts which disclosed the relevant illegality.
7.20 In commenting on the two possible tests, Lord Sumption suggested the following at para. 18:-
“Both are intended to exclude those consequences of an illegal act which are merely collateral to the claim. Neither makes the application of the illegality defence dependent on a value judgment about the significance of the illegality or the consequences for the parties of barring the claim. For present purposes, it is enough to point out that neither test is discretionary in nature. Neither of them is based on achieving proportionality between the claimant’s misconduct and his loss, a concept derived from public law which is not easily transposed into the law of obligations. On the contrary, Lord Goff recognised, as Lord Mansfield had before him, that the practical operation of the law in this field will often produce disproportionately harsh consequences.”
Given that the Supreme Court of the United Kingdom was not invited, in Les Laboratoires Servier, to revisit Tinsley v. Milligan, and, for that reason, did not do so, it must be taken that the majority view in Tinsley v. Milligan as to the proper test remains the law in that jurisdiction.
7.21 Having reviewed an observation of Lord Hoffman in Gray v. Thames Trains Limited [2009] 1 AC 1339 to the effect that the ex turpi policy is not based on a single justification, but on a group of reasons, together with criticism of the position adopted in Tinsley v. Milligan by the English Law Commission, Lord Sumption came to the view, at para. 20, that the “discretionary” alternative favoured by some “makes the law uncertain, by inviting the courts to depart from existing rules of law in circumstances where it is difficult for them to acknowledge openly what they are doing or to substitute a coherent alternative structure”.
7.22 I should not leave the judgment of Lord Sumption without citing what is said at para. 28 of his judgment concerning the nature of the illegality which invokes the principle of unenforceability. In that paragraph the following is said:-
“Apart from these decisions, the researches of counsel have uncovered no cases in the long and much-litigated history of the illegality defence, in which it has been applied to acts which are neither criminal nor quasi-criminal but merely tortious or in breach of contract. In my opinion the question what constitutes “turpitude” for the purpose of the defence depends on the legal character of the acts relied on. It means criminal acts, and what I have called quasi-criminal acts. This is because only acts in these categories engage the public interest which is the foundation of the illegality defence. Torts (other than those of which dishonesty is an essential element), breaches of contract, statutory and other civil wrongs, offend against interests which are essentially private, not public. There is no reason in such a case for the law to withhold its ordinary remedies. The public interest is sufficiently served by the availability of a system of corrective justice to regulate their consequences as between the parties affected.”
7.23 Finally, before leaving Les Laboratoires Servier, I should note what is said by Lord Toulson at para. 57 as follows:-
“Servier relies on the often quoted statement of Lord Mansfield in Holman v Johnson in which he said that “The principle of public policy is this; ex dolo malo non oritur actio.” That statement made in 1775 remains a succinct statement of broad principle, but, as the cases over the last 340 years demonstrate, it does not provide a simple measuring rod for determining the boundaries of the principle. The case law is notoriously untidy. In deciding whether the principle should be applied in circumstances not directly covered by well-established authorities, it is right to proceed carefully on a case by case basis, considering the policies which underlie the broad principle. This has been said in the past by judges at the highest level.”
7.24 Thereafter, Lord Toulson went on to cite the passage from the speech of Lord Wright in Vita Foods already referred to in this judgment, the comments of Lord Hoffman in Gray v. Thames Trains and also a passage from the judgment of Lord Wilson in Hounga v. Allen [2014] 1 WLR 2889, where the following was said at para. 42:-
“The defence of illegality rests on the foundation of public policy. ‘The principle of public policy is this…’ said Lord Mansfield by way of preface to his classic exposition of the defence in Holman v Johnson (1775) 1 Cowp 341, 343. ‘Rules which rest on the foundation of public policy, not being rules which belong to the fixed or customary law, are capable, on proper occasion, of expansion or modification’: Maxim Nordenfelt Guns and Ammunition Co v Nordenfelt [1893] 1 Ch 630, 661 (Bowen LJ). So it is necessary, first, to ask “What is the aspect of public policy which founds the defence?” and, second, to ask ‘But is there another aspect of public policy to which application of the defence would run counter?'”
7.25 In the light of those considerations, Lord Toulson expressed the view, at para. 62, that the question was whether public policy considerations merited applying the doctrine of illegality to the facts of the instant case.
7.26 It is clear, therefore, that Tinsley v. Milligan remains the law in the United Kingdom notwithstanding the fact that it has been criticised, and notwithstanding the fact that it is accepted that the general application of this area of law has been, perhaps, problematic.
7.27 In Tinsley, Lord Browne-Wilkinson held, in rejecting the stance taken by Nicholls L.J. in the Court of Appeal, that “the consequences of being a party to an illegal transaction cannot depend … on such an imponderable factor as the extent to which the public conscience would be affronted by recognising rights created by illegal transactions”. Lord Browne-Wilkinson added, at p. 369:-
“Neither at law nor in equity will the court enforce an illegal contract which has been partially, but not fully, performed. However, it does not follow that all acts done under a partially performed contract are of no effect. In particular it is now clearly established that at law (as opposed to in equity), property in goods or land can pass under, or pursuant to, such a contract. If so, the rights of the owner of the legal title thereby acquired will be enforced, provided that the plaintiff can establish such title without pleading or leading evidence of the illegality. It is said that the property lies where it falls, even though legal title to the property was acquired as a result of the property passing under the illegal contract itself.”
7.28 Having examined the authorities which lay down the circumstances in which a legal proprietary interest acquired as a result of an illegal transaction will be enforced by the courts (Bowmakers Ltd. v. Barnet Instruments Ltd. [1945] K.B. 65, Ferret v. Hill (1854) 15 C.B. 207, Taylor v. Chester L.R. 4 Q.B. 309, Alexander v. Rayson [1936] 1 K.B. 169), Lord Browne-Wilkinson summarised the principles that emerged from those authorities (at p. 370):-
“(1) property in chattels and land can pass under a contract which is illegal and therefore would have been unenforceable as a contract; (2) a plaintiff can at law enforce property rights so acquired provided that he does not need to rely on the illegal contract for any purpose other than providing the basis of his claim to a property right; (3) it is irrelevant that the illegality of the underlying agreement was either pleaded or emerged in evidence: if the plaintiff has acquired legal title under the illegal contract that is enough.”
7.29 It is correct, as counsel for Anglo accepted at the hearing, that Tinsley has not been expressly followed in this jurisdiction, although Laffoy J., in Stanley v. Kiernan [2007] IEHC 242, gave some consideration to the approach adopted by Lord Browne-Wilkinson.
7.30 It is next worth looking at the way in which the general principle has been applied in the United Kingdom. First, it must be said that there has been recognition that there are some limitations on the extent to which contracts, which may in some way be connected with illegal activity, can properly be regarded as unenforceable. In St. John Shipping, the Court was concerned with an attempt by cargo owners to avoid paying monies to a freight company in circumstances where it had been discovered that the relevant ship was illegally overloaded. Devlin J., in considering the effect of a breach of the statutory prohibition on overloading of the ship concerned, stated (at p.288):-
“A court should not hold that any contract or class of contracts is prohibited by statute unless there is a clear implication, or “necessary inference,” as Parke B. put it, that the statute so intended. If a contract has as its whole object the doing of the very act which the statute prohibits, it can be argued that you can hardly make sense of a statute which forbids an act and yet permits to be made a contract to do it; that is a clear implication. But unless you get a clear implication of that sort, I think that a court ought to be very slow to hold that a statute intends to interfere with the rights and remedies given by the ordinary law of contract. Caution in this respect is, I think, especially necessary in these times when so much of commercial life is governed by regulations of one sort or another, which may easily be broken without wicked intent. Persons who deliberately set out to break the law cannot expect to be aided in a court of justice, but it is a different matter when the law is unwittingly broken.”
It is also important to note that Devlin J. pointed out that the principle of illegality:-
“cares not at all for the element of deliberation or for the gravity of the infraction, and does not adjust the penalty to the profits unjustifiably earned”. (See p. 281).
7.31 In addition to the limitations identified in St. John Shipping, the United Kingdom courts have also drawn attention to the fact that the growth in regulation can result in a range of breaches of regulatory law, some bordering on the innocent. For example, in Shaw v. Groom [1970] 2 Q.B. 504, a failure by a landlord to provide a tenant with a rent book did not result in the landlord being unable to obtain payment of rent.
7.32 The fact that non-enforcement may also lead to unjust enrichment was identified by Devlin J., in St. John Shipping, as a factor to be taken into account where he noted that the consequences of non-enforcement in that case would be that the relevant monies “will not go into the public purse but into the pockets of someone who is lucky enough to pick up the windfall or astute enough to have contrived to get it”.
7.33 Next, the United Kingdom courts have recognised that it is important to distinguish between statutes which, while prohibiting certain contracts, may be taken to recognise by implication that the parties are not equally at fault. This may be done, for example, by imposing a sanction for breach on only one of the parties. Thus, for example, in Anderson v. Daniel [1924] 1 K.B. 138 (at p.147) Scrutton L.J. said that:-
“When the policy of the act in question is to protect the general public or class of persons by requiring that a contract shall be accompanied by certain formalities or conditions, and a penalty is imposed on the person omitting those formalities or conditions, the contract and its performance without those formalities or conditions is illegal, and cannot be sued upon by the person liable to the penalties”.
7.34 However, it seems clear that much of the evolution of the common law as it is understood in the United Kingdom is not so much concerned with the enforceability of illegal contracts as such, but rather is concerned with the extent to which the consequences of partly or completely executed contracts, which may be tainted by illegality, can be undone or reversed. That question is, of course, relevant to one of the issues which potentially arises on this appeal, which concerns the question as to whether the Quinns are entitled, as moving parties, to seek to have the effect of the various securities which were put in place declared invalid or unenforceable.
7.35 It is clear that Devlin J., in St. John Shipping, was influenced by the growing extent of regulation. In that context, caution needs to be exercised against an overbroad rule of illegality which would render unenforceable a whole range of contracts because of an association with illegality.
7.36 Furthermore, Devlin J. noted an important distinction. First, there may be a contract which has, as he put it, “as its whole object the doing of the very act which the statute permits”. Such contracts can readily be distinguished from contracts which are, in themselves, entirely lawful, but where some other factor connected with the relevant contract (such as overloading in St. John Shipping) renders it illegal. It is also of some relevance to note that Devlin J. considered that the true question was really as to what might be taken to be impliedly found in the statute. Even though the statute is silent on whether a contract of a particular type is to be regarded as void or unenforceable, it may be much easier to infer that the statutory intention was that a contract may properly be regarded as unenforceable if the contract is to carry out the very act which the statute itself regards as illegal. On the other hand, such an inference can much less easily be drawn if the contract is lawful in itself and is only tainted by an indirect illegality deriving from something outside of the basic four walls of the contractual arrangements.
7.37 Furthermore, some of the case law seems to me to be more concerned with the question of the reach of the principle rather than its status. It is clear that contracts which are closely connected with the relevant illegality may be unenforceable, but contracts which are only tangentially connected may remain enforceable, not least because it may be possible for a party who wishes to enforce such a contract to mount a claim without placing any reliance on the illegality itself.
7.38 Also, it is important to note that there was a significant dissent in Tinsley. I will refer in more detail to that dissent in the context of the comments made on it by the High Court of Australia. It is, at least on one view, possible to discern something of a divergence of approach between, on the one hand, the United Kingdom and, on the other, Australia.
7.39 I, therefore, turn to the position in Australia. The Australian courts have given significant attention to the issue of illegal contracts over the last third of a century. In Yango Pastoral Company Pty. Limited and others v. First Chicago Australia Limited [1978] 139 C.L.R. 410, Mason J. in the High Court of Australia, said, at pages 429 and 430, the following:-
“However, in the present case Parliament has provided a penalty which is a measure of the deterrent which it intends to operate in respect of non-compliance with s.8. In this case it is not for the court to hold that further consequences should flow, consequences which in financial terms could well far exceed the prescribed penalty and could even conceivably lead the plaintiff to insolvency with resultant loss to innocent lenders or investors. In saying this I am mindful that there could be a case where the facts disclose that the plaintiff stands to gain by enforcement of rights gained through an illegal activity far more than the prescribed penalty. This circumstance might provide a sufficient foundation for attributing a different intention to the legislature. It may be that the true basis of the principle is that the court will refuse to enforce a transaction with a fraudulent or immoral purpose: Beresford v. Royal Insurance Co. Ltd. On this basis the common law principle of ex turpi causa can be given an operation consistent with, though subordinate to, the statutory intention, denying relief in those cases where a plaintiff may otherwise evade the real consequences of a breach of a statutory prohibition.
Nevertheless, the principle that the court will not enforce a contract at the suit of a party who has entered into it with the object of committing an illegal act does not avail the appellant in this case.”
7.40 The case in question involved a secured loan which was given in circumstances where it was accepted by the lender, First Chicago Australia Ltd., that it did not have the proper authorisation required by law for the carrying out of the relevant banking business.
7.41 Gibbs A.C.J., in the same case, said the following at page 413:-
“There are four main ways in which the enforceability of a contract may be affected by a statutory provision which renders particular conduct unlawful: (1) The contract may be to do something which the statute forbids; (2) The contract may be one which the statute expressly or impliedly prohibits; (3) The contract, although lawful on its face, may be made in order to effect a purpose which the statute renders unlawful; or (4) The contract, although lawful according to its own terms, may be performed in a manner which the statute prohibits.”
7.42 Additionally, Jacobs J. stated, at p. 432:-
“In other cases the prohibition against carrying on a business may not be able to be construed as either an express or implied prohibition against the making of a particular contract. Nevertheless in such a case the courts may not enforce such a contract but, if they do not, it is not because the contract itself is directly contrary to the provisions of the statute by reason of an express or implied prohibition in the statute itself but because it is a contract associated with or in the furtherance of illegal purposes, for instance, the purposes of a business being carried on illegally…One then enters the field of contracts not themselves unlawful but made for an illegal purpose. Of these the classic case is Pearce v. Brooks. The refusal of the courts to regard such contracts as enforceable stems not from a legislative prohibition but from the policy of the law, commonly called public policy. It is of these contracts that Lord Wright said in Vita Food Products Inc. v. Unus Shipping Co. Ltd.:
‘Nor must it be forgotten that the rule by which contracts not expressly forbidden by statute or declared to be void are in proper cases nullified for disobedience to a statute is a rule of public policy only, and public policy understood in a wider sense may at times be better served by refusing to nullify a bargain save on serious and sufficient grounds.'”
7.43 It is clear that in Australia, a distinction is also made between contracts which have as their central object the doing of something which is expressly forbidden by statute, on the one hand, and contracts which, though not unlawful in themselves, may be unenforceable because they are tainted by an unlawful purpose or because of performance in a manner prohibited on the other hand.
7.44 It is also clear from Yango that the Australian courts regard it as important to consider the adverse express consequences provided for by statute as applicable to the relevant illegality (criminal or administrative penalties or sanctions or express civil consequences). Where those consequences are considered to be sufficiently serious to meet the policy requirement of achieving the purpose of the statute, then it may be less easy to infer that the policy requires that contracts be treated as void or unenforceable in addition. The Australian courts also recognise that, given that the common law doctrine of illegality stems from public policy, it follows that, as was said by Lord Wright in Vita Food, there may be cases where, “public policy understood in a wider sense may at times be better served by a refusing to nullify a bargain save on serious and sufficient grounds”.
7.45 In Master Education Services v. Ketchell [2008] H.C.A. 38, a case concerning the legality and consequent enforceability of a franchise agreement which contravened Franchising Code of Conduct and section 51AD of the Trade Practices Act 1974, the High Court of Australia quoted with approval the comments of Mason J. in Yango in stating (at para. 19) that “[i]n the absence of an express prohibition in the Act, any such prohibition against the making of an agreement, unless there has been compliance with an industry code, must be found by a process of implication”. The Court held that it is not to be assumed that the common law sanction applies to every contravention of a prohibition contained in the statute (at para. 11). The Court found (at para. 30) that the operation of the 1974 Act in respect of contraventions went beyond that of other regimes which were silent as to the consequences for the parties in civil law. The Court held that the detailed provisions of the 1974 Act concerning the consequences of non-compliance with the code did not support the conclusion that the legislature intended that consequences provided by the common law should follow contraventions of section 51AD.
7.46 Fitzgerald v. F.J. Leonhardt Pty Limited [1997] 189 C.L.R. 215 concerned the recovery of a debt by the plaintiff for boring holes for water on behalf of the defendant in circumstances where the defendant landowner failed to obtain the appropriate permits required by statute prior to the relevant holes being drilled. That obligation fell on the landowner, and there was no equivalent obligation on the party drilling holes to obtain the relevant permit. In that context, Kirby J. stated, at p. 242:-
“The first task of a court is to ascertain the meaning and application of the law which is said to give rise to the illegality affecting the contract. The law in question may be a rule of the Common Law but nowadays it is much more likely to be a provision of legislation. The substantial growth of legislative provisions affecting all aspects of the society in which contracts are made presents a legal environment quite different from that in which the doctrine of illegality was originally expressed. Courts, in this area, are faced with a dilemma. They do not wish to deprive a person of property rights, e.g. under a contract, least of all at the behest of another person who is also involved in a breach of the applicable law. On the other hand, they do not wish to ‘condone or assist a breach of statute, nor must they help to frustrate the operation of a statute.’ That is why the first function of the court, where a breach of a legislative provision is alleged, is to examine the legislation so as to derive from it a conclusion as to whether a relevant breach is established and, if so, what consequences flow either from the express provisions of the legislation or from implications that may be imputed to the legislators. Little, if any, assistance will be derived for the ultimate task of a court from examination of the terms of other statutes or judicial classifications of them or by reference to their meaning as found.”
7.47 Kirby J. acknowledged that, in most cases, the relevant legislation “does not expressly deal with the consequences of conduct in breach of its terms upon a contract which has been fulfilled in some way in breach of a provision of the law”. In such circumstances, he found that it is necessary to ask whether the legislation “impliedly prohibits such conduct and renders it illegal”. While he agreed that the courts would be slow to imply a prohibition which interferes with the rights of the parties under contract law in situations in which the legislation does not expressly provide for a remedy, he suggested that “the duty of courts remains, where legislation is involved, to give meaning to the imputed purpose of Parliament as found in the words used” and that “[i]t would be artificial to expel implications from the task of legislative construction where they remain an established feature of the interpretation and application of legislation generally”.
7.48 However, Kirby J. also cautioned, at p. 244:-
“One principle, however, which tends to reinforce the reluctance of courts to imply a prohibition on a contract, the formation and performance of which involves some breach of the law, is the conclusion which will often be derived from the express terms of the legislation itself. Thus, if the legislation provides in a detailed way for sanctions and remedies for breach of its terms, courts will require good reason to add to those express provisions additional civil penalties, such as the deprivation of contractual rights, which Parliament has not chosen to enact. Were it otherwise, the parties would be subject to the penalties (in the present case criminal) expressly provided by the legislation and still more (civil) by the deprivation of their property (contractual) rights. In a given case, such lost rights might be enormous, supplementing in a wholly arbitrary way, the defined penalties for which the legislature has expressly provided.”
7.49 Kirby J. also added the following observation, at p.245:-
“It is important to keep the interpretation and public policy questions separate. Logically, the interpretation question arises first. This is because if, as a matter of interpretation, the contract is illegal as formed, or as performed, it is void as to those parts affected by the illegality. The secondary question of unenforceability for public policy reasons does not then arise. The contract is unenforceable but that is because it is void in law.”
7.50 In Nelson v. Nelson [1995] H.C.A. 25, the High Court of Australia held that there is no general proposition that equity will let the loss lie where it falls in situations where the illegality consists of contraventions of the policy of a statute. As observed by Deane and Gummow JJ. at p.558, this had been the view of the minority of the court (specifically Lord Goff of Chieveley and Lord Keith of Kinkel) in Tinsley v. Milligan. The minority in Tinsley stated, with reference to the judgment of Lord Mansfield in Holman v Johnson, that “the principle is not a principle of justice; it is a principle of policy, whose application is indiscriminate and so can lead to unfair consequences as between the parties to litigation. Moreover the principle allows no room for the exercise of any discretion by the court in favour of one party or the other.”
7.51 In his judgment, McHugh J. sought to explain why the doctrine of illegality expounded in Holman was no longer, in his view, the appropriate formulation to apply. While the underlying policy of that doctrine was still valid, he found that doctrine to be “too extreme and inflexible to represent sound legal policy in the late twentieth century, even when account is taken to the recognised exceptions to this dictum” (at p. 611). These exceptions were succinctly outlined by McHugh J. at p 604:-
“But [the dictum of Lord Mansfield in Holman] is subject to exceptions which allow relief to be granted despite the presence of illegality. First, the courts will not refuse relief where the claimant was ignorant or mistaken as to the factual circumstances which render an agreement or arrangement illegal. Second, the courts will not refuse relief where the statutory scheme rendering a contract or arrangement illegal was enacted for the benefit of a class of which the claimant is a member. Third, the courts will not refuse relief where an illegal agreement was induced by the defendant’s fraud, oppression or undue influence. Fourth, the courts will not refuse relief where the illegal purpose has not been carried into effect.”
7.52 McHugh J. held, at p.611, that a less rigid approach than that taken by the courts in Holman or Tinsley was necessitated by the fact that statutory illegality can arise in different forms:-
“First, the statute may directly prohibit the contract or trust. Second, while the statute may not prohibit making the contract or trust, it may prohibit the doing of some particular act that is essential for carrying it out. Third, the statute may not expressly prohibit the contract or trust but the contract or trust may be associated with or made in furtherance of a purpose of frustrating the operation of the statute. Fourth, the statute may make unlawful the manner in which an otherwise lawful contract or trust is carried out. It would be surprising if sound legal policy required each of these forms of illegality to be treated in the same way. There is, for example, a vast difference between the performance of a contract for carriage of goods by ship that is overloaded in breach of the law and the making of a contract for the carriage of goods where the making of the contract is specifically prohibited.”
7.53 McHugh J. (at p. 612) discussed the circumstances in which the courts could withhold relief because of an illegal transaction. In his view, the imposition of such a sanction on one of the parties to a transaction which would deprive that party of his or her property rights only to vest those in another person, who in many circumstances would be a wilful participant in the illegality, could only be justified if the following two conditions are met:-
“First, the sanction imposed should be proportionate to the seriousness of the illegality involved. It is not in accord with contemporaneous notions of justice that the penalty for breaching a law or frustrating its policy should be disproportionate to the seriousness of the breach. The seriousness of the illegality must be judged by reference to the statute whose terms or policy is contravened. It cannot be assessed in a vacuum. The statute must always be the reference point for determining the seriousness of the illegality; otherwise the courts would embark on an assessment of moral turpitude independently of and potentially in conflict with the assessment made by the legislature.
Second, the imposition of the civil sanction must further the purpose of the statute and must not impose a further sanction for the unlawful conduct if Parliament has indicated that the sanctions imposed by the statute are sufficient to deal with conduct that breaches or evades the operation of the statute and its policies. In most cases, the statute will provide some guidance, express or inferred, as to the policy of the legislature in respect of a transaction that contravenes the statute or its purpose. It is this policy that must guide the courts in determining, consistent with their duty not to condone or encourage breaches of the statute, what the consequences of the illegality will be. Thus, the statute may disclose an intention, explicitly or implicitly, that a transaction contrary to its terms or its policy should be unenforceable. On the other hand, the statute may inferentially disclose an intention that the only sanctions for breach of the statute or its policy are to be those specifically provided for in the legislation.
7.54 Importantly, McHugh J. held that a court should not refuse to enforce legal or equitable rights simply because they were connected to an unlawful purpose unless:-
“(a) the statute discloses an intention that those rights should be unenforceable in all circumstances; or
(b) (i) the sanction of refusing to enforce those rights is not disproportionate to the seriousness of the unlawful conduct;
(ii) the imposition of the sanction is necessary, having regard to the terms of the statute, to protect its objects or policies; and
(iii) the statute does not disclose an intention that the sanctions and remedies contained in the statute are to be the only legal consequences of a breach of the statute or the frustration of its policies.”
7.55 It is then necessary to look at the case law from this jurisdiction. In Gavin Lowe Limited v. Field [1942] I.R. 86, this Court had to consider an action in which a plaintiff sued on a cheque paid to buy a cow which turned out to be suffering from tuberculosis. The defence was that public health legislation made it an offence to “expose for sale” such an animal. The majority (Sullivan C.J., Murnaghan and Geoghegan JJ.) permitted recovery on the basis that the relevant legislation did not make it an offence to sell such a cow but rather only, as a matter of public health, to “expose for sale”. The minority (Meredith and O’Beirne JJ.) disagreed, holding, in the words of O’Beirne J., that “it seems difficult to justify such a construction as would recognise the validity of a contract arising out of exposure for sale, though the exposure itself is made a criminal offence” (see p.107). It does, however, seem clear that all members of the Court accepted in principle that a contract might be unenforceable if tainted by the appropriate illegality.
7.56 Costello J., in Hortensius, was concerned with the enforceability of contracts arising out of loans made to the plaintiffs by the Royal Trust Bank, the benefit of which had been transferred to the defendant Trustee Savings Bank. It was accepted that the purchase of the loans in question by the Trustee Saving Bank was not authorised by s.3 of the Trustee Savings Bank Act, 1965. The transaction thus fell to be considered under an alternative possibility, being s.15 of the Trustee Savings Bank Act, 1863. Costello J. accepted that the Trustee Savings Bank had contravened s.15 of the Trustee Savings Bank Act, 1863 but then considered whether that illegality rendered the loans unenforceable against the plaintiffs. Costello J. stated, at pp. 301 – 302, the following:-
“At common law the enforcement of certain contracts was regarded as being against public policy and such contracts were termed ‘illegal’. Illegal contracts included those which tend to injure the public service, or pervert the course of justice, or abuse the legal process, or are contrary to good morals, or restrain trade. Also included are those whose objects are clearly illegal, so that a contract which cannot be performed without a breach of the criminal law is unenforceable at common law. But in this case we are concerned with a statutory provision which prohibits the trustees from entering into the contracts of 19 December 1983, not a provision which made illegal the objects of the contracts they entered into. It seems to me therefore that the plaintiffs cannot rely on the common law rules relating to the unenforceability of illegal contracts to justify the claims for relief made in this action.
It remains then to consider whether on a true construction of the 1863 Act the contracts in suit are void and therefore unenforceable. Some statutes may expressly declare certain types of contract to be void and unenforceable (without declaring them to be illegal) as does s. 18 of the Gaming Act 1845 which provides that all agreements by way of wagering shall be null and void and which prohibits any action brought to recover a sum alleged to have been won on a wager. Others may prohibit the making of certain contracts and impose penalties for doing so but remain silent as to the civil rights of the parties to them; it is then a question of the construction of the statute as to whether the contract entered into between the parties is to be regarded as an illegal one. But in this case the 1863 Act did not make illegal contracts for the purchase of loans — it prohibited the trustees from entering into such contracts, which is not the same thing. There is, it seems to me, an important distinction between a statutory provision which makes it illegal for a trustee to enter into certain types of contracts and a statutory provision which makes certain types of contract illegal. In the former case (which is what happened on 19 December 1983) what the courts have to consider is what are the legal consequences which flow from a contract entered into by trustees contrary to the statutory provisions by which their trust is governed, in the latter case (which is not this case) what the court would have to consider are the consequences of entering into a contract declared by statute to be an illegal one.”
7.57 It seems fair to say that there has been little modern consideration by the Irish courts of the precise circumstances in which a contract, said to be tainted by illegality by reference to some form of statutory prohibition, may be considered to be enforceable or otherwise. While a decision made by the Employment Appeals Tribunal, the case of Lewis v. Squash Ireland [1983] I.L.R.M. 363, can, I think fairly, be said to represent the orthodox position in this jurisdiction and has also been implicitly recognised by the courts.
7.58 The case concerned the alleged unfair dismissal of a director of the respondent company. The decision focused on a sum of £2,000 which the appellant director received annually in addition to his annual salary. This sum was treated by the company as an expense for the purpose of tax evasion, thereby defrauding the Revenue. The Tribunal, having distinguished the case from St. John Shipping held the illegality did not render the contract of employment void, but that the illegality caused the contract to be unenforceable.
7.59 In the view of the Tribunal, public policy rendered the illegal contract unenforceable. The Tribunal considered, relying on the decision of the Tribunal in Newland v. Simons and Willer Ltd. (1981) I.C.R. 521, that the essential question is “Has the employee knowingly been a party to the deception on the Revenue?”. The Tribunal decided, on a subjective test, that the employee in question had been party to the deception. The chairman of the Tribunal stated, at 369:-
“It is public policy that the courts and this Tribunal, should not lend themselves to the enforcement of contracts either illegal on their face or in which the intended performance of obligations thereunder was illegal to the knowledge of the party seeking to enforce the contract.”
7.60 Since then, of course, the Unfair Dismissals Act has been amended by the Unfair Dismissals (Amendment) Act 1993 so that an employee now is, notwithstanding a contravention of the type which occurred in Lewis, entitled to redress under the Act in respect of his/her dismissal. This was observed by Laffoy J. in Re Red Sail Frozen Foods Ltd. (In Receivership) [2007] 2 IR 361.
7.61 It was held that the amendment to the Unfair Dismissals Act 1977 did not impede an employee from successfully pursuing a claim under that Act. The Minimum Notice and Terms of Employment Act 1973 contained a similar statutory provision. However, as regards holiday pay and arrears of wages, which were governed by the Protection of Employees (Employers’ Insolvency) Act 1984, there was no such statutory provision and the common law rules on illegality were found to apply. However, the Department had adopted a pragmatic approach and made payments to the former employees on the basis of taxed payments to employees. Laffoy J. found that the Department made this decision either without regard to the issue of enforceability of the contracts of employment or, perhaps, was satisfied that no issue of enforceability arose. Laffoy J. held that it was lawful for the receiver to pay the arrears of wages and holiday pay to the Department in the circumstances. It can, I think, be said that Laffoy J. did not demur from the broad approach adopted in Lewis.
8 The Proper Approach
8.1 In the light of that review of the case law, it seems to me that it is appropriate for this Court, at this time, to consider the appropriate modern approach to be applied regarding the question of whether, and if so in what circumstances, a court in this jurisdiction should enforce a contract notwithstanding the fact that the relevant contract may, in some way, have a connection with illegality.
8.2 A starting point has to be to note that the question which was, at least for the time being, resolved in the United Kingdom in Tinsley has not been expressly considered in any detail in this jurisdiction in recent times. In my view, this Court is, therefore, free to consider the proper approach to adopt in the light of principle and precedent. I am also persuaded that there is much to be said for the criticism identified by Lord Sumption in Les Laboratoires Servier of the approach which sought to turn the principle of illegality from a rule of law into a power which could be exercised by the court on a discretionary basis depending on the merits of the case. Whatever may be the disadvantages of the rule of law approach, the uncertainty which would be created by leaving the question of enforceability up to a very broad consideration by a trial judge on the facts of any individual case would arguably be worse.
8.3 However, the approach adopted in cases such as Euro-Diam sought to solve the problem of attempting to balance, on the one hand, the public policy requirement that courts not act in aid of illegal activity with, on the other, the injustice to which a “lie where it falls” approach can give rise by inviting the court to decide each case on its own merits. An alternative approach, which seems to me to give rise to a much greater degree of certainty, seeks to reconcile the competing principles by having regard to what may be seen to be the policy requirements of the relevant statute which creates the illegality in the first place. On that basis, a court is required to assess whether the requirements of public policy, in respect of a particular statutory provision rendering, as a matter of the public law of the State, a particular type of activity illegal, require that contracts sufficiently connected with that particular type of illegality are to be regarded as unenforceable. Such an approach requires each statutory regime (or part of a statutory regime) to be independently assessed to determine whether policy requires particular types of contracts to be treated as unenforceable. However, such an approach does not mandate the court to take a different view as to whether one particular contract or another may be regarded as unenforceable by virtue of being in breach of the same statutory provision by reference to, for example, the severity of the breach concerned or the adverse consequences for the parties. The proper approach, in my judgement, is statute specific but is not case specific.
8.4 It must also be emphasised that the court must, in deciding whether public policy requires relevant contracts to be treated as unenforceable in the context of a particular statutory provision, place appropriate weight on the first principle, being the undesirability of courts being seen to enforce contracts which may be tainted by illegality and thereby failing to discourage such illegality. The weight to be attached to that principle in the context of an assessment of where the balance lies in relation to any particular statutory regime may depend on the nature of the statutory regime concerned and the type of activity which is thereby rendered unlawful. There might well be cases where the nature of the relevant illegality involves very serious criminal activity and where, therefore, the policy requirement that courts refrain from enforcing illegal contracts may be such as would manifestly override any other consideration. A contract to commit murder or to rob a bank would be obvious examples. There will, however, be other cases, not least in the regulatory area, where it may be necessary to assess, in the context of each relevant statutory provision, whether the policy requirements of the statute concerned, when taken in conjunction with the general policy requirement which leans against the enforcement of illegal contracts, may lead to a conclusion which favours enforceability.
8.5 However, once it is determined that policy requires that contracts which are deemed unlawful by reference to a particular statutory provision are to be regarded as unenforceable, no assessment of the merits of the individual case arises. The consequences lie where they fall. While there might be some uncertainty arising prior to the time when a court has the first opportunity to consider whether a particular statutory regime renders contracts unenforceable, such uncertainty stems from the silence of the relevant statute and any uncertainty will be removed once the matter is first determined. The application of the rule, as a rule of law, would then have been decided to apply in all cases under the relevant statutory provision so as to render appropriate contracts unenforceable. Likewise, if a court were to determine that contracts were not to be regarded as unenforceable by reference to a particular form of statutory illegality, then, again irrespective of the merits of any individual case, such contracts would be enforceable. The focus of the approach must, therefore, to be to determine whether public policy requires, in the context of a particular statutory provision, that contracts which may be tainted by illegality by reference to that specific statutory provision, are to be treated as unenforceable. While that approach is not entirely consistent with that adopted by the Supreme Court of the United Kingdom in Tinsley, it seems to me to be broadly supported by the approach adopted in Australia, and to be more appropriate in attempting to balance the public policy requirements involved in a highly regulated age.
8.6 If the statute makes clear what the consequences for relevant contracts are to be, then that is an end of the matter. The real problem arises where, as here, the statute is silent. Neither section 60 nor the MAR say anything directly about relevant contracts being void or valid, enforceable or unenforceable. The question which arises is, therefore, given that silence, as to what public policy requires. In that context it is apposite to note the important policy objectives identified as far back as Holman v. Johnson, but also to have regard to the fact, as noted by Lord Wright in Vita Food Products, that “public policy understood in a wider sense may at times be better served by refusing to nullify a bargain”.
8.7 Finally, as to the broad approach, it is necessary to note that questions may arise as to the extent to which contracts with a greater or lesser connection with the relevant illegality are to be treated as unenforceable. Clearly that issue does not arise if the proper conclusion to reach is that public policy does not require unenforceability at all. But where unenforceability arises, a further question may require to be determined as to just how closely connected to the relevant illegality a transaction may be required to be in order for it to be sufficiently tainted so as also to be treated as unenforceable.
8.8 But it is one thing to specify that the court must attempt to discern what public policy requires, in the light of the undesirability of courts enforcing contracts tainted with illegality coupled with the policy of the relevant statutory regime: deciding how, in more detail, the court should attempt to go about resolving that question in respect of any particular statutory regime is another.
8.9 However, the first two broad principles seem to me to be relatively clear. Those principles are the following:-
“1. The first question to be addressed is as to whether the relevant legislation expressly states that contracts of a particular class or type are to be treated as void or unenforceable. If the legislation so provides, then it is unnecessary to address any further questions other than to determine whether the contract in question in the relevant proceedings comes within the category of contract which is expressly deemed void or unenforceable by the legislation concerned.
2. Where, however, the relevant legislation is silent as to whether any particular type of contract is to be regarded as void or unenforceable, the court must consider whether the requirements of public policy (which suggest that a court refrain from enforcing a contract tainted by illegality) and the policy of the legislation concerned, gleaned from its terms, are such as require that, in addition to whatever express consequences are provided for in the relevant legislation, an additional sanction or consequence in the form of treating relevant contracts as being void or unenforceable must be imposed. For the avoidance of doubt it must be recalled that all appropriate weight should, in carrying out such an assessment, be attributed to the general undesirability of courts becoming involved in the enforcement of contracts tainted by illegality (especially where that illegality stems from serious criminality) unless there are significant countervailing factors to be gleaned from the language or policy of the statute concerned.”
8.10 Where the relevant statutory regime expressly provides that contracts of a particular type or category are considered to be either void or unenforceable (either in all circumstances or in certain specified circumstances), it is clear that the Oireachtas has determined that the balance between the two competing principles, which I have addressed earlier in this judgment, is to be resolved in favour of the “hands off” approach, leaving the consequences to lie where they fall. Doubtless, in such cases, the Oireachtas must be taken to be of the view that there are sound policy reasons for choosing that option. In certain cases it may be that the activity which is rendered illegal by statute is considered to be wrong in itself, and that parties engaging in that activity should not be able to enforce any relevant arrangements entered into.
8.11 If the legislation is clear in that regard, then, in the absence of any question as to the consistency of the relevant legislation with the Constitution, the courts must adopt the policy choice determined by the Oireachtas and treat any contract coming within the terms of the legislation itself as either void or unenforceable. There are also obvious reasons why this question should be the one first answered. If the legislation renders a particular class of contract void or unenforceable then that is the end of the matter. No other issues arise. All of the case law reviewed is consistent on this point. It is only if the legislation is silent in that regard that the further issues identified earlier need to be considered.
8.12 The second question is as to whether, even in the absence of an express provision rendering a contract of a particular type void or unenforceable, the courts should nonetheless treat that contract as being unenforceable as a contract tainted with illegality. It seems to me that the starting point for a consideration of this aspect of the case has to be to acknowledge that, by definition, in order for this second question to arise, the relevant contract must not have been expressly declared by statute to be void or unenforceable by the express terms of the legislation in question. Rather, it is very silence of the legislation on that point that leads to the second question. On the other hand, all due regard must also be paid to the importance of courts not being seen to countenance illegality by enforcing contracts which are tainted. As noted in the review of authorities from common law jurisdictions set out in the preceding section of this judgment, it does, however, need to be acknowledged that the range of matters which can give rise to some element of illegality in a modern, highly regulated age can be very significant indeed. Furthermore, the connection between any particular act of illegality and the contract whose enforceability is under consideration can vary. In addition, the purpose of the statute creating the illegality concerned may or may not tend to be furthered by treating relevant contracts as unenforceable.
8.13 In those circumstances, it seems to me that the Court must have regard to the fact, although it will not, of course, be decisive, that the Oireachtas could have, but chose not to, include an express provision rendering a contract of the type concerned void or unenforceable. The question comes down to one of assessing whether, notwithstanding the absence of such an express provision, nonetheless the Court should, as a matter of policy, treat the contract as unenforceable by reason of it being tainted with illegality.
8.14 It is, after all, the Oireachtas which, by enacting the legislation in question, has rendered certain activity unlawful. The reasons for the Oireachtas adopting that course of action may, of course, be many and varied. Thus, the policy behind the legislation in question may fall into many different categories. But it is precisely because it is the Oireachtas which has decided that a particular activity is to be regarded as unlawful that it is necessary to assess, and place significant weight on whether the policy of the legislation enacted by the Oireachtas requires that a particular of contract be treated as unenforceable.
8.15 I now move on to an assessment of the factors which may influence a decision as to whether the second principle requires that a contract of a particular type should be treated as void or unenforceable. This raises, it seems to me, the more difficult question with which this Court is now confronted, which is as to the proper approach which the Court should adopt in attempting to assess whether public policy generally and the policy of the relevant legislative provision requires that particular contracts, or types of contracts, are to be regarded as unenforceable. It is, perhaps, in that context that it may be said that the approach adopted in, respectively, the United Kingdom, on the one hand, and Australia, on the other, differs. That difference can, I think, be exaggerated. However, it can be seen that one aspect of the view of the minority in Tinsley found favour in Australia.
8.16 The original view, stretching back to Holman, was that, as a matter of policy, a court should not concern itself with attempting to give any effect to a contract which was in any way connected with an illegality. In principle, that illegality could derive from policy considerations recognised by the common law itself. As has already been noted, illegality can increasingly be found to derive from statutory prohibitions in one form or another. While it may be said that the original “pure” position adopted in Holman has been nuanced in both the United Kingdom and Australia, it seems that the way in which the common law has evolved on this topic in those two jurisdictions has diverged at least to some extent.
8.17 On one view, the evolution of the jurisprudence in the United Kingdom, as evidenced by Tinsley, and even in St. John Shipping, is more concerned with identifying a proper application of the “pure” position originally identified in Holman or exceptions to that position rather than modifying the underlying position itself. If the principle is that the courts should not be seen to be involved in giving effect to any contractual arrangements tainted by illegality, then that principle has no effect on the retention of property obtained by persons as a result of the completion or partial completion of the contract concerned. Such a party does not have to rely on the contract tainted by illegality to assert their entitlement to property, title to which has already passed as a result of the transaction concerned. The “pure” principle does not require that contracts tainted by illegality be reversed. It does not go that far. It simply suggests that the courts should not get involved in attempting to enforce such contracts. But if they have already been completed, then enforcement is no longer necessary. The principle would need to go much further, and require the active reversal of the consequences of a contract tainted by illegality, if it were to be the case that an action could be brought to recover the benefits which have actually been transferred as a result of a completed or partially completed contract.
8.18 In addition to that aspect of the United Kingdom jurisprudence, there are also the established exceptions to the “pure” rule, which were summarised in the judgment of McHugh J. in the High Court of Australia in Nelson in a passage already cited. But all of those exceptions and refinements do, in a sense, leave the basic rule intact. Contracts tainted by illegality should not be enforced by the courts. That rule may not, strictly speaking, apply where the contract has completed and where, therefore, it may be unnecessary to have recourse to the courts for its enforcement. Likewise, innocent parties, or those for whose benefit the relevant statutory regime was created may not suffer.
8.19 But the proposition which has found favour in Australia is that a more nuanced approach to the question of common law illegality itself is required.
8.20 In a highly regulated age, it seems to me that there may be an argument to the effect that a more nuanced approach is to be preferred. To treat every contract which might be said to be tainted by illegality as unenforceable, with all the potential for injustice to individual parties which such an approach would carry, may well not be consistent with modern policy requirements. As noted earlier, it is important to emphasise that it is open to the Oireachtas to determine whether particular categories of contract are to be regarded as unenforceable by reference to any aspects of a regulatory regime which the Oireachtas determines warrant such an approach. But where the Oireachtas has chosen not to expressly require that such contracts not be enforced, does it necessarily follow that policy always requires that the courts necessarily treat such contracts as unenforceable? There is, of course, nonetheless, the important policy requirement, which stretches back to Holman, and which is to the effect that the courts should not lightly be seen to be giving effect to contracts which are tainted by illegality. But modern experience demonstrates that there are other important policy considerations involved as well. Neither should the courts be readily seen to refuse to enforce otherwise binding commitments (where not expressly provided by statute) which can lead to injustice and consequences which are significantly disproportionate to the illegality concerned. Treating contracts as unenforceable in all circumstances can be as likely to lead to a breach of legitimate public policy requirements as to acting in their aid.
8.21 It seems to me to follow that, at least at the level of general principle, there is a case for a more nuanced approach, which seeks to identify the criteria by reference to which contracts tainted by illegality are to be regarded as unenforceable. Such an approach might be said to be mandated by the modern requirements of policy in a highly regulated age.
8.22 This leads to an important question. Legal certainty requires that there must be a reasonable level of clarity about the principles which are to be applied to determine whether contracts which might be said to be tainted by an illegality are nonetheless to be enforced. While the application of those principles to particular types of contract may require some analysis and may not always be easily determined, nonetheless the overall approach should be clear.
8.23 However, it is important to recall that the appropriate overall approach may have to be applied to a very large range of differing circumstances. In that context, it may well not be appropriate to attempt, in just one case which stems from a particular type of statutory or regulatory regime, to define with any great precision the overall approach which may be appropriate in all cases including very different types of situations involving different types of regimes.
8.24 In this context, it is important not to minimise the seriousness of the allegations which the Quinns make in this case. It is also important to record that those allegations are denied by Anglo, but that, for the purposes of this preliminary issue, the case is being considered on the assumption that the Quinns will be able to prove what they allege. It is worth reiterating that the reason why that approach is adopted is because Anglo argues that, even if those allegations are made out, the Quinns still cannot succeed.
8.25 But even when considering the broad category of underlying transaction which is under consideration in this case, being a lending transaction, it is possible to envisage a very wide range of circumstances, in which such a transaction might be said to be tainted with illegality. There might, for example, be money lent to a drug dealer in circumstances where it was known to the lender that the money was to be used for trafficking in drugs. At the other end of the spectrum, there might be lending which is connected with a transaction where the transaction concerned is in technical breach of a complex regulatory regime and where the lender, although aware of the facts, might not appreciate that there was a technical problem with the transaction for which the lending was being provided. A whole range of intermediate cases can be envisaged.
8.26 In those circumstances, it seems to me that it is appropriate to identify some of the issues or criteria which may need to be considered in the context of determining the enforceability or otherwise of contracts under any particular statutory regime without necessarily reaching a final conclusion as to whether, and if so in what way, each of those criteria should be applied. It will, however, in the context of this case, be necessary to reach a more definitive view on those aspects of the criteria which are of particular relevance to the question of the enforceability or otherwise of contracts which may be associated with alleged breaches of section 60 and/or the MAR. It would be prudent, in my view, to leave over a definitive decision in respect of criteria which are not crucial to this case to proceedings where the potential application of such criteria would be decisive, and where the focus of the Court’s consideration would be on the application of such criteria to the real issues which arose in such cases.
8.27 In any event, it may not always be possible to provide an exhaustive list of the factors which should be taken into account. An inevitable consequence of trying so to do will be that the very next case which arises will throw up circumstances not envisaged. However, a review of the case law, and an analysis of modern conditions, suggests a number of factors which will almost certainly loom large in any court’s consideration. I will address first those criteria which seem to me to be central to the issues in this case, and which, thus, require definitive determination. I will then turn to a brief consideration of criteria which may be relevant in other circumstances.
8.28 First it must be recalled that some statutory regimes render specified activity illegal per se. Other regimes render illegal activity which might ordinarily be lawful, but only in specified circumstances. The most obvious example of the latter is a case where there is a failure to obtain a necessary permission or licence. However, there may be cases where a type of transaction which is ordinarily lawful may be regarded as illegal because of the circumstances in which it was carried out, or due to the motives of one or other or both parties. The activities which are at the centre of the issues in the present case fall into that latter category. There is nothing, per se, wrong with a bank lending money and taking security for that lending, whether from the borrower or other parties connected to the borrower. However, where the lending concerned is designed to permit a party to buy shares in the lender, then section 60 will be breached. Where the lending is connected with activity which amounts to market abuse under the MAR, then the activity generally may be unlawful.
8.29 As pointed out by McHugh J. in Nelson, there is “a vast difference between the performance of a contract for carriage of goods by a ship that is overloaded in breach of the law and the making of a contract for the carriage of goods where the making of the contract is specifically prohibited”. As a further refinement, it is important to note that there may be contracts which, by their nature, and in the circumstances of the case, could only be performed in breach of the relevant law. On the other hand, there will be contracts which could quite easily be carried out in a lawful manner. There was no necessary reason why the goods in Nelson had to be carried in an overloaded ship. They could just as easily have been carried in a ship which was well within its limits.
8.30 Somewhat different considerations might, however, apply in a case where the very terms of the contract itself created a situation where it was, in the circumstances and to the knowledge of both parties, impossible to perform the contract without breaking the law.
8.31 In passing, it is important to recall, as McHugh J. also noted in Nelson, that the courts will not refuse relief where the claimant was ignorant or mistaken as to the factual circumstances which render an agreement or arrangement illegal. It is important to note that the exception thereby created is concerned with ignorance of the facts rather than ignorance of the law. If the claimant knew what he was doing but did not know that it was illegal, then that will not avail him. If he did not know enough about the facts to understand that the contract was unlawful, then a different situation may arise. But it is also important to recall that the exception to which I have referred is one which arises where it is the innocent party who wishes to enforce the contract in question. While a defendant may be able, in an appropriate case, to rely on illegality as a defence to a claim brought by the other party to a contract who was aware of all of the facts necessary to establish the relevant illegality, the same defence will not avail a defendant against a claimant who was not aware of sufficient facts to have knowledge of the illegality imputed to him. A party who knows enough about the facts so that it must be said that they knew, or ought to have known, that a contract could only be carried out in an illegal manner will not, under that analysis, be entitled to enforce same.
8.32 While not necessarily decisive in all cases, it seems to me that significant weight must, therefore, be attached to an analysis of whether the relevant contract is designed to require the parties to carry out the very act which the legislation is designed to prevent. The first matter which, therefore, a court should consider is:-
“Whether the contract in question is designed to carry out the very act which the relevant legislation is designed to prevent.”
8.33 Next, it seems to me that the court must give all appropriate weight to any express terms of the statute concerned, which might be taken to state, or necessarily imply, that the remedies or consequences specified in the statute concerned are to be the only adverse consequences, thus negativing any policy requirement in favour of the imposition of other consequences, such as the rendering of relevant contracts void or unenforceable.
8.34 In addition, therefore, the court should consider:-
“Whether the wording of the statute itself might be taken to strongly imply that the remedies or consequences specified in the statute are sufficient to meet the statutory end”.
8.35 In like vein, a court must also consider whether the act which the legislation seeks to render illegal is regarded as unlawful from the perspective of both parties, or of only one party. Thus, it may be unlawful to carry out a particular activity without a licence. But it may not be unlawful for a person to enter into a contract with an unlicensed service provider. The statutory policy may be clear. It may be designed to require a licence and, perhaps, to thus ensure that a licence holder is, in the public interest, subject to detailed regulation. The whole purpose of that legislation may be to protect consumers of the service concerned. But it may be clear that the policy of the legislation does not place on the consumer any obligation to be satisfied that the service provider holds the necessary authorisation. Indeed, in many cases, to do so would be to place a disproportionate burden on consumers.
8.36 The overloaded shipping cases are a good example. There was nothing, on any view, unlawful in the activities of the consignor. The consignor simply entered into a perfectly normal and valid contract for the consignment of goods. It was the activity of the shipper in overloading the vessel which was illegal. In such circumstances, there would, of course, be no reason in any event why the innocent consignor should not be able to sue on the contract. The questions of policy which I have sought to address are concerned with the issue as to whether the party who acts illegally, in that case the overloading shipper, is entitled to sue. On the other hand, it is also important to note that there will be many cases where both parties act unlawfully by entering into a particular type of contract.
8.37 Therefore, the court should take into account:-
“Whether the policy of the legislation is designed to apply equally or substantially to both parties to a relevant contract, or whether that policy is exclusively or principally directed towards one party. Therefore, legislation which is designed to impose burdens on one category of persons for the purposes of protecting another category may be considered differently from legislation which is designed to place a burden of compliance with an appropriate regulatory regime on both participants”.
8.38 Finally, insofar as matters of particular importance to this case are concerned, it must also be acknowledged that an important part of the policy behind the doctrine of illegality is concerned with achieving the purpose of the statute which creates the illegality in the first place. It is, therefore, necessary to consider whether rendering relevant contracts void or unenforceable might, in some circumstances, be counterproductive in that context. There will be cases where it is necessary to consider whether, and if so to what extent, treating the relevant contracts as unenforceable might tend to defeat the very purpose of the statute itself. A case where it is clear that the policy of the relevant legislation is to protect a particular class of persons will hardly be met by a refusal to enforce contracts to the further detriment of that very class.
8.39 Thus, in addition, the court should consider:-
“Whether the imposition of voidness or unenforceability may be counterproductive to the statutory aim as found in the statute itself”.
8.40 For reasons which I hope will become apparent when I turn to applying these principles to the facts of this case, it seems to me that the criteria which I have so far identified are sufficient to resolve the broad issue in this case. It must be recalled that the broad issue of principle is as to whether a combined consideration of the public policy requirement that the courts should not be seen to come to the aid of illegality, when coupled with the public policy behind the particular statutory provision which renders the relevant activity illegal, requires that sufficiently connected contracts be treated as unenforceable. However, a review of the case law from a number of jurisdictions discloses that there may well be further criteria or factors (beyond those already specified) which can and should be taken into account in appropriate cases. Without in any way attempting to be exhaustive, I now turn to a brief consideration of some further factors which might be relevant in this area of the law generally although, for the reasons already addressed, the views here expressed are necessarily tentative, and will require more detailed consideration in cases in which such questions might be decisive in order that a more definitive approach might be developed.
8.41 The first such matter which needs to be addressed in that context is to consider the adverse consequences which the statute itself provides for those who engage in the relevant illegal activity. It must, of course, be assumed that legislation does not deem certain activity to be illegal without providing for any consequences. What would be the point of rendering activity unlawful if it did not matter in law whether someone engaged in the activity or not? However, most regulatory regimes provide some form of adverse consequence in the case of breach. Criminal penalties may be imposed. Administrative consequences may result. For example, licensed persons or bodies may lose their licence or may have onerous conditions imposed. Individuals may be restricted in their future activities. Administrative penalties may be incurred although, in this jurisdiction, there may be some limits on the extent to which administrative consequences which amount to a penalty may be imposed in circumstances which might be considered to involve the administration of justice.
8.42 That being said, and subject to such constitutional limitations as there may be, persons or bodies found to have acted illegally may be subject to significant administrative financial penalties or the like. The examples which I have given are not sought to be exhaustive. The types of consequences which may be expressly provided by statute as flowing from illegality are many and varied, and are likely to be significantly dependent on the nature of the illegality concerned and the type of activity regulated by the statute in question. All that needs to be said for the purposes of this case is that a court may well be entitled to take into account the range of express potential adverse consequences of the relevant illegality in assessing whether it is to be implied that those consequences are sufficient in themselves to meet the purposes or policy of the statute.
8.43 It may be that an elaborate, significant and proportionate scheme of adverse consequences may be much more likely to lead to the inference that those consequences are sufficient to deal with the relevant illegality. Limited or minor consequences will more readily lead to the opposite inference and, thus, to a conclusion that it is required by policy that relevant contracts should be regarded as unenforceable. In such an assessment, it may well be that a court will be required to be mindful to identify the purpose of the statute (as inferred from its general structure and terms) and to consider whether it should be inferred that the specific consequences, set out in the legislation and to be applied in the case of illegality arising under the statute concerned, are sufficient to meet that statutory purpose.
8.44 It is at least arguable, therefore, that a court may be required to have regard to:-
“Whether, having regard to the purpose of the statute, the range of adverse consequences for which express provision is made might be considered, in the absence of treating relevant contracts as unenforceable, to be adequate to secure those purposes”.
8.45 Likewise, in carrying out such an assessment, it may be necessary to consider whether the further imposition on the parties which might be said to flow from treating a contract as void or unenforceable (with its potential for unjust consequences for the parties or one of them) might be, as McHugh J. suggested in Nelson, “disproportionate to the seriousness of the unlawful conduct”. In other words, the court may have to consider whether rendering all contracts connected with the illegal activity concerned void or unenforceable would impose an excessive and disproportionate burden on interested parties well beyond that necessary to secure that same statutory purpose.
8.46 It is important, however, to treat this aspect of the potential criteria with some care. I have already set out the reasons why it would, on balance, be undesirable to apply a test which required the court to balance the seriousness of the individual wrongdoing in the case in question with the consequences for the parties in that same case. The question of whether treating relevant contracts as unenforceable might be considered to be disproportionate must, therefore, be considered in the context of the general application of the relevant statutory measure and the general sort of circumstances which might be expected to be governed by it. There is no mandate for conducting a proportionality analysis on an individual case by case basis. There may well, however, be some justification in inferring the policy requirements of a statute concerning unenforceability from an analysis of general proportionality.
8.47 It is also, therefore, at least arguable that a court may be required to have regard to:-
“Whether the imposition of voidness or unenforceability may be disproportionate to the seriousness of the unlawful conduct in question in the context of the relevant statutory regime in general.”
8.48 In addition, it should be noted that, even where a relevant contract may be unenforceable as and between the parties thereto, it does not necessarily follow, certainly without further detailed analysis, that every supporting or collateral measure, such as a guarantee or the giving of security by a party other than a party to the original contract, is to be treated in exactly the same way as the underlying contract itself, particularly in circumstances where those involved in the connected transaction are unaware of, and are innocent in relation to, the relevant illegality, and whether those innocent parties may be said not to be beneficiaries of the arrangements concerned. Whether that question truly arises on the facts of this case is an issue to which it will be necessary to return.
8.49 It is important, in that context, to note that, for the purposes of the preliminary issue in this case, it must be assumed that, as they assert, the Quinns were, at the relevant times, unaware of any illegality. Thus, a question potentially arises, in circumstances such as those which underlie this case, as to whether a party to a transaction which is not itself illegal and which is merely collateral to illegal activity is necessarily bound by the consequences of such a collateral contract, even though more central contractual arrangements may be considered to be enforceable notwithstanding illegality under the principles which I have sought to analyse. As noted above, that question may come into greater focus where the parties concerned have not benefited in any way form the overall transaction. In that latter context it may well be important to make a distinction between two types of cases. There may very well be a strong justification for public policy treating such cases differently. On the one hand, it is possible to envisage a case where someone, wholly unconnected with and innocent of an illegal transaction, gives security for the benefit of, for example, a relative.
8.50 An analysis of the appropriate criteria might result in the conclusion that public policy requires that the underlying transaction between two guilty parties should nonetheless be enforced, notwithstanding its connection with illegality. But it would not necessarily follow that an entirely innocent guarantor should suffer to the benefit of a party who was directly engaged in the illegality concerned. On the other hand, different considerations might well apply where the guarantor was, whether innocently or otherwise, designed to benefit from the very transaction itself or from closely connected transactions. In such circumstances it might be difficult to see how public policy required that such a party should potentially gain the benefit of an illegal transaction without having to comply with obligations entered into as part of the very same series of transactions. However, the precise way in which such considerations might work out in practice must await a case in which appropriate facts squarely arise, and where a determination of the proper approach would be decisive to the result. For example, it might well be that “benefit” in this context might properly be seen to be viewed from the time of the relevant transaction and not with hindsight. A series of transactions from which a party might have expected to benefit might not be viewed, for these purposes, differently if the expected benefit did not ultimately materialise.
8.51 In one sense, the question of connected transactions involving innocent parties is the opposite of the one raised by the issues already touched on in this judgment concerning contracts closely connected with illegality. As noted earlier, it may well be necessary, in cases where the application of relevant criteria leads to the conclusion that some degree of unenforceability must follow, to assess just how close a connection there must be between the contract or transaction under review and the relevant illegality so that such a contract might be sufficiently tainted so as to be treated as unenforceable. Such questions are concerned with the reach of illegality. Those issues are concerned with a situation where an underlying or central contract is to be regarded as unenforceable, and concern the question of whether collateral or connected contracts may also be unenforceable. But a similar question arises where the underlying or central contract is enforceable but where there may be circumstances, by reference to the relevant criteria, where it may be arguable that public policy does not extend so far as to require that all collateral contracts involving innocent parties are necessarily also enforceable.
8.52 Put in the context of this case, the question arises as to whether, even if it is the case that the underlying lending transactions entered into between the various Quinn Group companies and other Quinn entities, on the one hand, and Anglo, on the other, are tainted by illegality under either or both of section 60 and the MAR, but are, nonetheless, properly regarded as enforceable in themselves, it necessarily follows that security put in place by an innocent party in support of those transactions is also enforceable. There are, in reality, two questions involved. The first is to consider whether, having applied the appropriate criteria to the issue, the underlying lending contracts should be regarded as enforceable, it may be taken also to be required by that same policy that such collateral contracts are likewise to be regarded as enforceable. The second question is as to whether the fact that the relevant security is already in place, and that Anglo does not, therefore, have to invoke the jurisdiction of the courts to enforce their security, alters the overall legal situation. It should be noted that it is the Quinns who bring these proceedings seeking negative declarations. Anglo does not seek any order of the court which is designed to act in aid of the enforcement of their security. I will analyse, in due course, the nature of the negative declarations sought in this case and the possible effect of that form of action on some of the issues which require to be determined.
8.53 However, whether those questions, including the question as to whether Anglo, having the benefit of completed security arrangements, could, in any event, be deprived of its opportunity to seek to enforce those security arrangements provided that they did not have to invoke a court process, are issues which may not arise depending on the answer to the question of whether the underlying lending contracts are themselves enforceable or not. If the underlying lending contracts are unenforceable then the question of whether collateral contracts with innocent parties might be unenforceable even if the primary contract was enforceable would not arise. Likewise, Anglo would not have to rely on any question concerning the status of concluded security arrangements if the security contracts themselves are enforceable in any event.
8.54 It is appropriate, therefore, to summarise the considerations which may ordinarily need to be taken into account by a court in assessing whether it may be said that public policy requires that contracts tainted by association with illegality under that statute should be regarded as unenforceable.
8.55 In summary, the principal criteria are as follows:-
1. The first question to be addressed is as to whether the relevant legislation expressly states that contracts of a particular class or type are to be treated as void or unenforceable. If the legislation does so provide then it is unnecessary to address any further questions other than to determine whether the contract in question in the relevant proceedings comes within the category of contract which is expressly deemed void or unenforceable by the legislation concerned. (para. 8.9)
2. Where, however, the relevant legislation is silent as to whether any particular type of contract is to be regarded as void or unenforceable, the court must consider whether the requirements of public policy (which suggest that a court refrain from enforcing a contract tainted by illegality) and the policy of the legislation concerned, gleaned from its terms, are such as require that, in addition to whatever express consequences are provided for in the relevant legislation, an additional sanction or consequence in the form of treating relevant contracts as being void or unenforceable must be imposed. For the avoidance of doubt it must be recalled that all appropriate weight should, in carrying out such an assessment, be attributed to the general undesirability of courts becoming involved in the enforcement of contracts tainted by illegality (especially where that illegality stems from serious criminality) unless there are significant countervailing factors to be gleaned from the language or policy of the statute concerned. (para. 8.9)
3. In assessing the criteria or factors to be taken into account in determining whether the balancing exercise identified at 2 requires unenforceability in the context of a particular statutory measure, the court should assess at least the following matters:-
3(a) Whether the contract in question is designed to carry out the very act which the relevant legislation is designed to prevent (para. 8.32)
3(b) Whether the wording of the statute itself might be taken to strongly imply that the remedies or consequences specified in the statute are sufficient to meet the statutory end. (para. 8.34)
3(c) Whether the policy of the legislation is designed to apply equally or substantially to both parties to a relevant contract or whether that policy is exclusively or principally directed towards one party. Therefore, legislation which is designed to impose burdens on one category of persons for the purposes of protecting another category may be considered differently from legislation which is designed to place a burden of compliance with an appropriate regulatory regime on both participants. (para. 8.37)
3d) Whether the imposition of voidness or unenforceability may be counterproductive to the statutory aim as found in the statute itself.(para. 8.39)
4. The aforementioned criteria or factors are, for reasons which will become apparent, sufficient to resolve this case. However, the following further factors may well be properly taken into account in an appropriate case:-
4(a) Whether, having regard to the purpose of the statute, the range of adverse consequences for which express provision is made might be considered, in the absence of treating relevant contracts as unenforceable, to be adequate to secure those purposes. (para. 8.44)
4(b) Whether the imposition of voidness or unenforceability may be disproportionate to the seriousness of the unlawful conduct in question in the context of the relevant statutory regime in general. (para. 8.47)
5. Doubtless other factors will come to be defined as the jurisprudence develops.
8.56 In the light of that general approach, it is necessary to turn to the specific issues of enforceability which arise in this case. I, therefore, turn to the question of whether the underlying lending transactions can be said to be unenforceable as a result of the alleged illegality by reference to section 60 and the MAR. I will approach that question separately in respect of the two legislative measures. However, I should first make a general point applicable to both.
9 Application to the Facts of this Case – A General Point
9.1 On the facts of this case, it is clear that there is no express statutory provision to be found either in the MAR or in section 60 which renders any of the transactions which are the subject of these proceedings void or unenforceable as such. The first question does not, therefore, really arise in either case.
9.2 The core issue of controversy stems from the proper application of the principles which I have sought to identify as being applicable to the second question. Taking the two legislative provisions which are at the heart of these proceedings, can it be said that a proper analysis of the respective statutory regimes leads to the conclusion that, as a matter of policy, a court should regard contracts which are tainted by any illegality arising under those two regimes as being unenforceable? Answering that question requires considering the policy of the relevant legislation, but also the important policy requirement which suggests that courts should be slow to become involved in the enforcement of tainted contracts.
9.3 I have attempted to place the difficult issues which arise in this case in the context of an overall principled framework, for it seems to me to be necessary to attempt to address the questions which arise in the context of such a framework. However, it must be emphasised that the analysis of the proper application of those principles will inevitably require a case by case consideration of any statutory regime in respect of which questions of unenforceability arise. The precise way in which that overall approach will require to be applied will, therefore, necessarily have to await further cases in which the broad principle is sought to be applied to other statutory regimes. This case is, after all, only concerned with section 60 and the MAR.
9.4 As previously noted there are, also, further questions concerning the status of guarantees and/or security which might arise in the event that, in respect of either statutory regime, it is held that lending transactions which may be found to be in breach of either or both of those regimes are nonetheless enforceable. However, the first question which arises in each case is as to whether the underlying lending transactions in themselves can be properly regarded as unenforceable in the light of the principles already identified. I, therefore, turn to that question first in the context of section 60.
10. Section 60
10.1 It seems to me that the section 60 question can be quite easily answered. Section 60 is, in material part, in the following terms:-
“(1) Subject to subsections (2), (12) and (13), it shall not be lawful for a company to give, whether directly or indirectly, and whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of or in connection with a purchase or subscription made or to be made by any person of or for any shares in the company, or, where the company is a subsidiary company, in its holding company.
[…]
(14) Any transaction in breach of this section shall be voidable at the instance of the company against any person (whether a party to the transaction or not) who had notice of the facts which constitute such breach.”
10.2 It is true that subsection (1) of section 60 describes relevant lending as being unlawful. However, subsection (14) enables a company to have a relevant transaction treated as void “against any person (whether a party to the transaction or not) who had notice of the facts which constitute such breach”.
10.3 Section 60 (including subsection (14)) was considered in CH (Ireland) Inc. v. Credit Suisse Canada [1999] 4 IR 542. The issues which arose in that case were quite different to those with which this Court is now faced. However, McCracken J., at p.556, emphasised that subsection (14) only renders an affected transaction voidable. It would seem clearly implicit that McCracken J. did not consider that the section rendered any such transactions void.
10.4 It is true, as counsel for the Quinns pointed out, that subsection (14) does not render any such transaction lawful and does not, therefore, purport to reverse the effect of subsection (1). Nonetheless it seems to me that the section properly recognises the distinction between a transaction being unlawful, on the one hand, and being necessarily unenforceable, on the other. For the reasons already analysed in some detail, it does not necessarily follow that because activity is, under statute, unlawful, all contracts which form part of the illegality are always to be treated as enforceable. The criteria for determining whether such contracts are or are not unenforceable have already been addressed.
10.5 It is true that lending to purchase shares in the lender itself might be said to involve a contract to do the very thing which the statute renders unlawful. However, in the context of the issues which arise under this heading, it is important to make reference to the second criterion already identified. Is there anything in the statute itself which suggests that the legislative intent was that contracts, even though illegal, were nonetheless to be enforceable?
10.6 Subsection (14) would be entirely redundant if every contract caught by section 60 was to be regarded as unenforceable by reason of the fact that it is described as being unlawful in subsection (1). For, if every such contract were unenforceable because it was unlawful, then it would follow that a company would not need to elect to treat it as void but could simply proceed on the basis that it could never be enforced. On the other hand, it is clearly and necessarily implied by subsection (14) that a company can elect not to treat a relevant transaction as void. To take any other view would be to entirely disregard the clear language of the subsection.
10.7 The clear statutory policy must be, therefore, that a company which has been in breach of subsection (1) by giving, for example, a loan to support a purchase of its own shares, can still elect to treat the loan contract as enforceable and get its money back, together with whatever interest might apply. Indeed, there might be other terms in the contract which the company may regard as beneficial and which it may wish to enforce. In those circumstances, it does not seem to me that there is any basis for suggesting that a company who wishes to recover monies lent in breach of section 60 is precluded from so doing on the basis that the transaction was illegal or, in the words of section 60(1) “not … lawful”. To take a contrary view would be in direct contradiction of the clear intent to be found in the legislation which is that the consequences for the company (or more accurately those within the company who are involved in the unlawful transaction) are that they are exposed to a criminal penalty but that the balance between enforcing an unlawful contract, on the one hand, and the potential injustice of allowing the consequences of that unlawful contract to lie where they fell (meaning, in many cases, that the company whose officers had abused its position will be even worse off to the detriment of its shareholders) lies squarely, in the context of this piece of legislation, against treating the contract as void or unenforceable UNLESS the company exercises the election which the statute confers on it under subsection (14).
10.8 In the light of that analysis, it does not seem to me that any of the other possible criteria identified could alter the ultimate determination. Given that analysis of subsection (14), how could it be said that the Oireachtas did not intend that the criminal penalties imposed were not to be sufficient to meet the statutory purpose of discouraging companies providing assistance for the purchase of their own shares. Likewise, the lending of money for the purchase of shares is not, in itself, unlawful. It is only where the money is lent for the purposes of purchasing the shares of the lender that there is a difficulty. It is true, as already noted, that the lending of money for the purchase of its own shares is, in one sense, a contract designed to carry out the very act which the relevant legislation is designed to prevent. However, in the circumstances of section 60, the weight to be attached to that aspect of the criteria is entirely displaced by the statutory language itself. While it may not always be the case that one of the relevant criteria will be determinative, or almost determinative, of the answer as to the true statutory policy, the clear language of section 60(14) makes the task much easier in this case.
10.9 The proper application of the criteria already identified seems to me to clearly lead to the conclusion that the statutory intent is that contracts which breach section 60 are, nonetheless, potentially enforceable (unless subsection (14) is invoked) and that the adverse consequences for those within a company who are found to have acted in breach of section 60 are as specified in the section itself. I am, therefore, satisfied that, so far as section 60 is concerned, it is clear that the lending contracts between Anglo and various Quinn Group entities are enforceable against those Quinn Group entities even if Anglo is established to have acted in breach of section 60 in making the loans concerned. On that basis, it will be necessary to turn, in due course, to the question of whether a different conclusion could be reached in respect of the giving of security by assertedly innocent parties in support of such lending transactions. Indeed, a prior question, as to whether that issue has been properly raised in these proceedings at all, will necessarily have to be addressed first. However, before coming to those questions, it is necessary to consider what the position is in respect of the enforceability of the underlying lending contracts by reference to the alleged breach of the MAR.
11. Market Abuse
11.1 The starting point has to be to consider the relevant provisions of the MAR.
11.2 First, it is important to identify the type of activity which is rendered unlawful by the MAR. The MAR prohibit activities such as insider trading and market manipulation. Under Regulation 2, contravention “includes, in relation to any provision, a failure to comply with that provision” and “contravene” is to be construed accordingly.
11.3 Regulation 6(1) states that “a person shall not engage in market manipulation”. “Market manipulation” is defined in Regulation 2 as:-
“(a) transactions or orders to trade —
(i) which give, or are likely to give, false or misleading signals as to the supply of, demand for or price of financial instruments or
(ii) which secure, by a person, or persons acting in collaboration the price of one or several financial instruments at an abnormal or artificial level,
unless the person who entered into the transactions or issued the orders to trade establishes that the person’s reasons for so doing are legitimate and the transactions or orders to trade, as the case may be, conform to accepted market practices on the regulated market concerned,
(b) transactions or orders to trade which employ fictitious devices or any other form of deception or contrivance, or
(c) dissemination of information through the media, including the Internet or by any other means, which gives, or is likely to give, false or misleading signals as to financial instruments, including the dissemination of rumours and false or misleading news, where the person who made the dissemination knew, or ought to have known that the information was false or misleading”
11.4 As already noted, the MAR themselves are silent as to whether any contracts entered into, which might be said to be in breach of those provisions or connected with prohibited conduct, are to be regarded as void or unenforceable. In that context, it is necessary to look at the consequences which the MAR expressly provide for breaches of their provisions. There are a number of consequences set out.
11.5 First, there are criminal sanctions. These are set out in Regulation 49, which states:-
“(1) A person who contravenes –
(a) any provision of Regulation 5 or 6,
(b) any provision of Regulation 10, 11, 12 (except Regulation 12(7)), 13 (except Regulation 13(3)), 14 (except Regulation 14(2)), 17, 18, 19 20, 21, 22, 23, 24 or 47, or
(c) a requirement under any provision of Regulation 7,
is guilty of an offence and liable on summary conviction to a fine not exceeding €5,000 or imprisonment for a term not exceeding 12 months or both.
(2) Each offence under paragraph (1) consisting of a contravention of any provision of Regulation 5 or 6 is an offence to which section 32 of the Investment Funds Companies and Miscellaneous Provisions Act 2005 applies.
(3) Where the contravention in respect of which a person is convicted of an offence under these Regulations is continued after the conviction, the person shall be guilty of a further offence on every day on which the contravention continues and liable on summary conviction to a fine not exceeding €5,000 or imprisonment for a term not exceeding 12 months or both for each such further offence.”
11.6 Section 32 of the Investment Funds Companies and Miscellaneous Provisions Act, 2005 (“the 2005 Act”), referred to in Regulation 49(2), states:-
“A person who is guilty of an offence created by Irish market abuse law (being an offence expressed by that law to be an offence to which this section applies) shall, without prejudice to any penalties provided by that law in respect of a summary conviction for the offence, be liable, on conviction on indictment, to a fine not exceeding €10,000,000 or imprisonment for a term not exceeding 10 years or both.”
11.7 Then there are potential administrative sanctions. Under Regulation 41, in the case of a breach of the MAR, the Central Bank may impose the following sanctions:-
“(a) a private caution or reprimand,
(b) a public caution or reprimand,
(c) subject to Regulation 46(2), a direction to pay to the Bank a monetary penalty (but not exceeding €2,500,000 in any case),
(d) a direction disqualifying the assessee from being concerned in the management of, or having a qualifying holding in, any regulated financial service provider for such time as is specified in the order,
(e) if the assessee is continuing to commit a prescribed contravention, a direction ordering the assessee to cease committing the prescribed contravention,
(f) a direction to pay to the Bank all or a specified part of the costs incurred by the Bank in investigating the matter to which the assessment relates and in holding the assessment (including any costs incurred by authorised officers).”
11.8 Regulation 6(2) states that, having regard to section 33(2) of the 2005 Act, the purpose of regulation 6 (1) is to implement Article 5 of the Directive. Section 33(2) of the 2005 Act provides for civil liability where there has been a breach of Irish market abuse law which concerns market manipulation. It provides:-
“(2) If a person contravenes a provision of Irish market abuse law (being a provision the purpose of which is expressed by that law to be for the implementation of Article 5 of the 2003 Market Abuse Directive) the person shall be liable—
(a) to compensate any other party who acquired or disposed of financial instruments by reason of the contravention, and
(b) to account to the body corporate or other legal entity which issued the financial instruments concerned for any profit accruing to the first-mentioned person from acquiring or disposing of those instruments.
(3) Subsections (1) and (2) are without prejudice to any other cause of action which may lie against the person for contravening the provision concerned.”
11.9 A number of general observations can be made. First, the range of activity which is, potentially, rendered unlawful by the MAR, is quite extensive. As noted earlier, the sort of transactions which may be said to amount to market manipulation are defined in Regulation 2. They include transactions which mislead the market or which employ deception. They also include the dissemination of information which may mislead. Thus, the sort of transaction or activity which is rendered unlawful by the MAR is focused on the consequences of the transaction or activity concerned rather than its nature. It is the effect, or intended effect, of the relevant transaction or activity on the market for relevant financial instruments which is the primary focus of the legislation. The definition does not concern itself specifically with the type of transaction or activity which is prohibited.
11.10 Next, it is important to attempt to identify the purpose or purposes of the MAR. Clearly, in narrow terms, the purpose of the Irish implementing measures is to comply with Ireland’s obligations under the Directive. However, that begs the question. What is the overall purpose sought to be achieved? In that context, it is appropriate to look at some of the recitals to the Directive.
11.11 Recital 12 to the Directive states that the objective of legislation against insider dealing and market manipulation is “to ensure the integrity of Community financial markets and to enhance investor confidence in those markets”. Furthermore, the recital envisages that a single directive will ensure the same framework for allocation of responsibilities, enforcement and cooperation throughout the Community (now the Union). Recital 13 states that the Directive is necessary to avoid loopholes in Community law which could give rise to wrongful conduct which would undermine public confidence and prejudice the functioning of the markets. The recitals also acknowledge (at 15) that insider dealing and market manipulation “prevent full and proper market transparency, which is a prerequisite for trading for all economic actors in integrated financial markets”.
11.12 Clearly, activity carried out in breach of the MAR has a significant potential to injure the interests of those who have invested in companies whose value or share price may have been affected by the relevant market abuse. In some cases, of course, the company itself may not be a party to the relevant market abuse, but in many cases either the company or its officials or agents will have been involved. To the extent that contracts may be entered into as part of a set of arrangements which are found to constitute market abuse then such contracts will undoubtedly be tainted with illegality. Such contracts may include contracts involving, as one of the parties, the company whose shares are the subject of market abuse. The real question which arises on this appeal is as to whether such contracts should be regarded by the courts as unenforceable by reason of being tainted with illegality.
11.13 In that context, it must be noted that there is a very real risk that the consequences of treating such contracts as unenforceable may be to inflict a second blow on the shareholder value which was sought to be protected by the Directive and by the MAR.
11.14 It seems clear, therefore, that the primary focus of the MAR is to ensure, to the greatest extent possible, that those involved in investing in relevant financial instruments can do so without the risk of there being a false market leading to the relevant investors incurring improper loss. Indeed, the other provisions of the MAR concerning insider trading are directed to the same end. Those who trade with insider knowledge will gain benefit at the expense of those who invest in the market concerned without that benefit.
11.15 Against that background, it is necessary to apply the criteria identified for assessing whether it must be taken that public policy requires that contracts connected with market abuse should be regarded as unenforceable. The first criterion to consider is whether any such contract may be concerned with actually carrying out the very thing which the relevant legislation prohibits. It is possible to envisage such a contract in the context of the MAR. Two persons entering into an arrangement to the effect that they would manipulate the market by entering into transactions which breached the MAR would be entering into a contract to do the very thing which the MAR prohibit. Such a contract would clearly be unenforceable. However, such is not the case here.
11.16 The individual transactions which are said to be unlawful in this case are lending transactions, secured in the manner earlier described, for the purchase of shares or CFDs. Such transactions are not, in themselves, unlawful. Rather, it is only if it can be established that the relevant transactions were for purposes prohibited by the MAR that there would be any illegality. Thus, under the first criterion, transactions in breach of the MAR (as opposed to a contract to engage in activity in breach of the MAR) are not in themselves unlawful but may be rendered unlawful by reason of their purpose.
11.17 I next move to the third criterion to be considered, which is as to whether the relevant illegality can be said to apply, either wholly or substantially, to both parties or to only one. There may, indeed, be contracts which are entered into as part of a plan to manipulate a market in the shares of a particular company where only one party will be culpable. The innocent party who buys or sells shares in the absence of insider information will have done nothing wrong. However, on the assumed facts of this case (for the purposes of the preliminary issue) both parties to the underlying lending transactions are clearly culpable. There is no suggestion that the various Quinn entities which borrowed monies from Anglo for the purposes of the relevant transactions were themselves innocent of market manipulation. What is said is that the Quinns, being the plaintiffs in these proceedings, were unaware of that fact. However, so far as the lending transactions themselves are concerned, this is clearly a case where the relevant illegality applies to both parties.
11.18 However, it is the fourth criterion which is, in my view, of most importance in this case. In that context, it is important to revisit what the statutory purpose is. It is principally directed towards protecting the interests of those who are investors, or potential investors, in the very markets which may be abused. In what way, then, would imposing an additional burden on the investors in a company, whose shares have been subject to market abuse, (which would be the result of rendering unenforceable contracts which that company entered into) serve the purpose of the statute? Undoubtedly, a company whose share price is maintained by market abuse transactions may benefit in the narrow sense of being able to maintain an artificially high value.
11.19 But to deprive those shareholders, who have been induced to enter into transactions to purchase the shares of the company concerned by market abuse, of the benefit of contracts entered into by the company as part of a market abuse scheme, is likely to only increase the damage done to the very persons whom the legislation is intended to protect. In assessing the policy of the legislation, it is necessary to consider whether the imposition of the additional consequence of unenforceability of relevant contracts might be said to enhance or be counterproductive to the achievement of the legislation’s objects.
11.20 For those reasons, I am satisfied that the fourth criterion, while not fully decisive, significantly favours the view that policy does not require that contracts entered into by a company whose shares are the subject of market abuse should be regarded as unenforceable. I now return to the second criterion, which is as to whether the legislation itself, in its terms, provides any guidance on the question of unenforceability.
11.21 In the context of that second criterion, there was much focus on s. 33(3) of the 2005 Act which appears to be designed to preserve causes of action. It will be recalled that s. 33 is principally concerned with creating civil consequences for breach of market abuse law. Compensation may be awarded and a party may be deprived of any profit gained by unlawful activity. Subsection (3), however, states that those provisions are “without prejudice to any other cause of action which may lie against the person for contravening the provision concerned”. It is, of course, the case that the underlying actions which might give rise to a breach of the MAR might also constitute some other form of civil wrong. For example, fraudulent transactions in shares would be actionable under the tort of deceit. The same transactions might also amount to market abuse. Likewise, the same actions might well amount to actionable misrepresentation and market abuse. However, it is difficult to see how subsection (3) is concerned with preserving such causes of action. The subsection is, in its express terms, designed to preserve an action against a person “for contravening the provision concerned”. The phrase “provision concerned” is clearly a reference to a provision of Irish market abuse law, for the earlier parts of the section are expressly concerned with contravention of a “provision of Irish market abuse law”.
11.22 It would be difficult, in any event, to see how the creation of a separate civil claim for loss arising out of market abuse could have any effect on claims for ordinary torts arising out of the same factual circumstances. If the necessary ingredients of a claim in fraud or fraudulent misrepresentation are present then it is hard to see how the creation of a separate civil wrong, which would entitle the relevant party to claim damages for loss arising out of a contravention of the MAR, would affect any parallel claims in tort arising out of the same circumstances.
11.23 What cause of action is, therefore, intended to be preserved by subsection (3)? The reason why that question is important is that the Quinns argue that the subsection suggests a statutory intent that parties be entitled to rely on a breach of the MAR to argue for the unenforceability of a contract tainted by the illegality of market abuse.
11.24 In that context, it is necessary to analyse those aspects of the claim which the Quinns make in these proceedings which are the subject of the preliminary issue currently before the court. While this question also touches on one of the other issues which may arise (being that concerning completed contracts) it is of some importance to attempt to properly characterise those aspects of the Quinns’ claim. The substance of the claim is that the various guarantees and securities put in place by the Quinns are unenforceable. Of course, it must immediately be noted that Anglo has not sought, per se, to enforce the relevant guarantees or securities through the courts. Anglo has, however, appointed the Receiver on foot of those securities.
11.25 Against that background, it is perhaps appropriate to start by considering the way in which a hypothetical claim in the courts for the enforcement of securities such as exist in this case might proceed. In the event of a default, the bank holding the relevant securities might seek to enforce those securities by legal action. In the event that it were said that the transaction, as a result of which the securities were put in place, was tainted with illegality, then the issue of whether the contract was enforceable would squarely arise. However, it is well settled in this jurisdiction that, at least in certain cases, a party can seek a so-called “negative declaration”. While the precise parameters of the circumstances in which such declarations can be obtained have not yet been fully established, the underlying rationale is clear.
11.26 A party may be faced with a claim which it denies. It does not, in itself, make any cross claim. Rather, it simply denies that it has any liability to the claimant. However, the claimant does not commence proceedings and, in the absence of an ability to apply for a negative declaration, the relevant party would be left with the claim hanging over them until such time as either the claimant sues (in which case the matter will be resolved by the court) or withdraws its claim or, indeed, allows the period provided in any relevant statute of limitations to expire. It is clear that such a situation could create a significant injustice for the party against whom the claim is made who may be left with the claim hanging over them for some considerable period of time. It is in that context that the courts have been prepared to allow that party to itself commence proceedings designed to bring clarity to the question of the liability which that party denies.
11.27 While, however, in such circumstances, the party against whom the claim is asserted will be the plaintiff and the claimant will be the defendant, it seems to me that that procedural position does not alter the substance of the issue, which is that it is the claimant who asserts a liability and the plaintiff who denies it. In a case where, whether for reasons of illegality or otherwise, the contract on which the claim was asserted is unenforceable, it does not seem to me that the result of the case could conceivably depend on whether the claimant brings proceedings as plaintiff or the person claimed against brings proceedings seeking a negative declaration. Either the claim is enforceable or it is not. If the person claimed against could resist a claim on the grounds of unenforceability, I can see no reason why that same party cannot, as plaintiff, successfully obtain a negative declaration to the effect that the claim is unenforceable.
11.28 But for like reasons, it seems to me that a negative declaration cannot be interpreted as a cause of action in itself. A plaintiff who seeks a negative declaration does not claim any redress against the defendant. Rather, the plaintiff simply wishes to have it established in advance of any claim being brought by that claimant that the relevant claim would necessarily fail. For the reasons which I have addressed, the courts are prepared to entertain such applications because, at least in some circumstances, it might be considered unfair to require the person claimed against to await, perhaps for some time, a claim being brought, and thus have the claim hanging over them. But that does not alter the fundamental position which is that the substance of the claim, even in proceedings involving only a negative declaration, is one where the cause of action lies in the hands of the defendant and the only relief sought by the plaintiff is to deny that a valid cause of action exists.
11.29 In those circumstances, it does not seem to me that the type of negative declaration sought by the Quinns, in which the validity of the various guarantees or securities are questioned on the grounds of unenforceability, is a cause of action in itself. It is in substance an attempt to get the court to declare in advance that any claim which might be brought on foot of those guarantees and securities would fail on the grounds of unenforceability. I am not, therefore, satisfied that too much can be gleaned from s. 33(3) of the 2005 Act as to the policy of the statute concerning the enforceability or otherwise of contracts which are said to be tainted by reference to the MAR.
11.30 In relation to the criteria thus analysed, it seems to me that the weight, in the context of the MAR, to be attached to the potentially counterproductive nature of treating contracts as unenforceable, is such as outweighs any of the other factors identified. To say that innocent investors in a company are to suffer an additional loss, in the shape of being unable to obtain the indirect benefit of the company in which they hold shares being able to recover lent money, as a result of a market abuse scheme would be to impose an additional penalty on the very persons whom the legislation is designed to protect. On the other side of the equation, the Quinn entities which were involved in that same market abuse scheme are not only far from innocent parties, but are also not the parties for whose benefit the MAR were enacted. The MAR were not designed to protect participants in market abuse from any adverse consequences of their involvement. Rather, they were designed to protect innocent investors from the adverse consequences of actions by parties which, while undoubtedly including Anglo on the facts of this case, also include the relevant Quinn entities. I describe those actions as wrongful, clearly, on the basis of the assumption which underlies this preliminary issue, being that the Quinns will be able to establish a breach of the MAR. But if the Quinns do establish such a breach, then it clearly follows that the Quinn entities which were involved in the relevant lending transactions were every bit as much guilty of knowing breach of the MAR as Anglo.
11.31 In the context of the issues which arise in this case then it seems to me that a consideration of those factors is sufficient to determine that, so far as the underlying lending transactions are concerned, same must be regarded as enforceable as and between Anglo and the relevant Quinn entities. However, insofar as certain other factors have been identified which might be relevant, I also propose to touch on the issue of the level of adverse consequences which are provided for in the MAR themselves.
11.32 Insofar as such considerations may be a factor, the Court would be required to assess the consequences which the statute itself provides for breach. As already noted the rationale behind that approach is that it may be more readily taken that policy requires that further adverse consequences, such as unenforceability, were required if the express measures set out in the legislation might not be considered adequate to achieve the statutory purpose. Section 32 of the 2005 Act creates potential criminal penalties of fines of €10 million or ten years in jail or both in respect of the more serious offences created by that Act relating to market abuse. Administrative sanctions can include a direction to pay up to €2,500,000 together with the costs of investigation, and also can involve disqualification from involvement in the financial services industry.
11.33 There is also provision, under section 33(2) of the 2005 Act, for civil liability, whereby a person who contravenes market abuse law may be required to compensate or account to relevant persons or bodies for losses incurred or unlawful profits made. I will shortly turn to the proper interpretation of section 33(3) which is of relevance under the second criterion.
11.34 However, for present purposes, it is important to note that the range of possible adverse consequences which are expressly provided for in the relevant legislation in relation to a breach of the MAR are extremely serious, involving very large financial penalties (both criminal and administrative), lengthy jail sentences and the payment of compensation to parties who suffer loss. In addition, the requirement to account for any illegal profits made is also, in my view, of some significance. A person who makes profit by market manipulation can, therefore, be deprived of the entirety of that profit under the civil remedies section and, in addition, may be subject to a whole range of criminal, administrative and civil remedies which would impose a very substantial additional burden.
11.35 In assessing whether it should be inferred that the policy of the MAR required that those potential adverse consequences might be sufficient to achieve the statutory purpose, it is, as pointed out earlier, necessary to look at the legislation from the perspective of the sort of case which it might generally be expected to address rather than necessarily from the specific facts of the case before the Court. The issue is one of general application. Does the legislation generally indicate that the express remedies provided for in the legislation are to be regarded as sufficient? Obviously the sort of activity which might be found to be in breach of the MAR and the scale, whether in terms of the financial extent of the wrongdoing or the degree to which such wrongdoing might be regarded as reprehensible, can vary enormously from case to case. Doubtless, any court considering a criminal penalty would take those matters into proper account. Likewise, the authorities, in considering any administrative consequence, would be required to act proportionately. Clearly any civil consequences, whether in the payment of compensation or the depravation of wrongful profits, would necessarily be directly related to the financial scale of the wrongdoing concerned. It follows that the consequences for less serious wrongdoing, or that involving smaller amounts of money, are likely to be correspondingly reduced and fall below, and doubtless in some cases well below, the maximum which might arise in more serious cases.
11.36 In considering whether it is to be taken that the package of consequences provided for by statute are sufficient to meet the statutory purpose, if such are determined to be the sole potential adverse consequences, it is necessary to consider whether those consequences might be considered sufficiently severe to deal even with serious cases.
11.37 Even in the context of a very severe case involving a large amount of money and particularly egregious wrongdoing, the potential adverse consequences are very significant. The criminal penalties are severe. The administrative sanctions are very significant. The potential civil remedies which might be imposed on wrongdoers are open-ended and limited only by scale of losses which might be suffered or the wrongful profits which might have to be forfeited. It seems to me to follow that the scale of those consequences would tend to support a view that they are sufficient to meet the statutory purpose. They certainly do not displace the analysis already engaged in.
11.38 I turn next to another suggested criterion. Is it possible that treating relevant contracts as unenforceable would be disproportionate to the seriousness of the unlawful conduct concerned? It does not seem to me that this aspect can be readily assessed in the context of the MAR as a whole. The range of wrongdoing, and culpability for that wrongdoing, covered by the MAR is extremely wide. As already noted, the criminal, administrative and civil consequences can be determined in a way which is proportionate to that wrongdoing. But if contracts which are tainted by their association with that wrongdoing are to be treated as unenforceable then the consequences could vary enormously from case to case. In a situation like the instant one, an inability to recover substantial monies lent might have a very serious effect on a company which, at least in some cases, might greatly outweigh or be disproportionate to the scale of the wrongdoing concerned. The problem is that treating a lending contract as unenforceable simply means that none of the money can be recovered. If the effect of market abuse was to, say, apparently alter the price of shares by 5%, then treating the entirety of monies advanced as part of the relevant market abuse scheme as unrecoverable might, or might not, produce a disproportionate result depending on just how much money was expended in supporting the scheme. That aspect of the potential criteria is, frankly, undecisive in the circumstances of the MAR.
11.39 If the imposition of unenforceability imposes a significant additional deterrence in circumstances where the express statutory consequences of wrongdoing may not be particularly severe, and if the imposition of unenforceability does not do any harm to that statutory purpose, then it may well be easy to infer that the legislation contemplates contracts being unenforceable by reason of illegality connected with the statute. But where unenforceability may actually be counterproductive in the context of protecting the very persons whose interests the statute is designed to protect, the overall assessment may require to be different, particularly where, as here, there are very significant sanctions available in any event.
11.40 It must be recalled that, in this part of the judgment, I am dealing with the enforceability of the arrangements between Anglo and various Quinn Group entities and indeed, the various Cypriot companies who purchased shares in the Quinn Group, for the lending of monies connected with the various arrangements put in place to unwind the Quinn Group’s CFD positions in Anglo itself. In those circumstances I am satisfied that Anglo’s entitlement to be repaid those loans from the relevant entities is enforceable. However, this is not a case brought by those entities, but rather a case brought by the Quinns, who seek to suggest that guarantees or securities given by them, as allegedly innocent parties, are unenforceable. For the reasons set out earlier in this judgment, I am satisfied that it does not necessarily follow that, because an underlying and central transaction may be in breach of the MAR or section 60, exactly the same considerations of policy would apply to enforceability of a collateral contract (such as a guarantee or the giving of security for a guarantee) innocently entered into for the purposes of supporting a central transaction which was in breach of those legislative provisions. However, in considering that point, it is necessary to return to the claim made by the Quinns in these proceedings.
12. The Quinns’ Claim
12.1 The statement of claim refers specifically to the alleged illegality of the loan transactions and what is said to be the consequent unenforceability of the security and guarantees. In that context, para. 103 states that “[f]urther…the loan transactions engaged in by Anglo, for and on behalf of the positions being maintained by Bazzely, and/or the Cypriot companies, and/or the subject matter of the said loan transactions were tainted by illegality and/or were for an illegal purpose, of which Anglo was or ought to have been aware”.
12.2 In relation to the MAR, the statement of claim specifies, at para. 106:-
“…the lending was in support of an illegal objective of market manipulation as prohibited by Regulation 6(1) of the Market Abuse Regulations and, accordingly, was tainted with illegality or was intended to support an illegal purpose, such that the said loans are not enforceable.”
12.3 In relation to section 60 of the 1963 Act, the statement of claim specifies at para. 107-110:-
“107. Further and/or in the alternative, the loans were advanced by Anglo in breach of section 60…in that they involved the giving of financial assistance, within the meaning of that section, by Anglo for the purchase or support of its own shares.
108. Such lending, prima facie, constituted the commission of a criminal offence on the part of certain officers of Anglo pursuant to the provisions of section 60(15) of the Companies Act 1963.
109. In the premises, the lending was further tainted by illegality such that the security taken from the plaintiffs by Anglo ought not to be enforceable insofar as it relates to the plaintiffs.
110. By reason of the matters pleaded above, Anglo is estopped from seeking to rely upon the security taken from the Plaintiffs in the form of the personal guarantees and/or the share pledges and the purported appointment of the Share Receiver on foot of the said share pledges is invalid and ought to be set aside.”
12.4 Those seem to me to be the relevant parts of the statement of claim for present purposes. It is against the background of a claim formulated in that fashion that the trial of the preliminary issue was directed and determined. It is, therefore, in the context of a claim as thus formulated that this appeal arises. It is by reference to such a formulation of the claim that it is next necessary to look at aspects of the written submissions made by the parties to this Court.
12.5 In the written submissions on this appeal, Anglo suggests that the Quinns, in the statement of claim, have not alleged that the share charges or guarantees are themselves illegal, but that they are unenforceable and of no legal effect by reason of the allegedly illegal loans which they support. Anglo, by reference to the paragraphs of the statement of claim cited (specifically paragraphs 106 and 109), states (at paras. 14- 17 of that submission):
“14. The Respondents plead that the sole or dominant motivation of IBRC in making the advances in connection with the CFD transactions was to support and maintain its share price. They claim that the funding advanced to the Cypriot companies by IBRC was for the purpose of the Cypriot companies purchasing shares in IBRC. The Respondents plead that by reason of the matters pleaded in their Statement of Claim, the Guarantees and the Share Charges are unenforceable and are of no legal effect.
15. There is no plea that the Share Charges themselves are illegal. It clearly was not illegal for the Respondents and IBRC to enter into the Share Charges and on their face they are entirely lawful documents. The purpose of securing loans, even if those loans are alleged to be illegal, is not in itself an illegal purpose. Neither is it alleged that the Guarantees were themselves illegal.
[…]
19. Accordingly, the Respondents have chosen to source their claims that the various securities are unenforceable in specific alleged breaches of identified statutory/regulatory regimes. The only illegality pleaded lies in the alleged breach of specified statutory provisions. This is of critical significance insofar as the issues the subject of this Appeal are concerned. Central to these issues, and to the viability of that part of the Respondents’ case that depends upon them, is an easily expressed issue of statutory interpretation: do the provisions relied upon by the Respondents – the Market Abuse Regulations and section 60 of the Companies Act 1963 – properly construed, enable or envisage their invocation so as to invalidate security arrangements of the kind in issue in these proceedings?”
12.5 The Quinns, at paras. 22-23 of their written submissions, dealt with this issue as follows:-
“22. Before considering whether the Quinns have standing and are entitled to rely on s.60 and the MAR it is necessary to first consider the purpose to which the Quinns seek to rely on those provisions. Both s.60 and the MAR prescribe unlawful and illegal acts. It is the Quinns’ case that Anglo committed the illegal acts specifically prohibited by s.60 and the MAR. At common law a contract entered into for an unlawful or illegal purpose is unenforceable.
23. The contracts at issue herein are the loan transactions. The loan transactions comprise not only of the letters of facility/sanction but also of the underlying security thereto. The loan transactions impugned in the within proceedings were for the express and intended purpose on the part of Anglo to fund margin calls on CFD positions held in Anglo shares thereby supporting Anglo’s share price, and also to purchase Anglo shares as part of the unwinding of the Bazzely CFD position. Such transactions fall square within s.60 and the MAR and therefore are illegal. The intention to commit an illegal act was one held by Anglo and not the Quinns. Anglo is seeking to benefit from these illegal transactions by taking control of the Quinn Group and its assets through the Share Charges. It is the Quinns’ case that Anglo is not entitled to do so as Anglo’s entitlement is based on an illegal, and therefore unenforceable, contract.”
12.6 In relation to the legality of the contracts concerning the share charges and the guarantees, the Quinns state, at para. 34 of the submissions:
“The case-law also makes it clear that where transactions are themselves valid on their face, but are closely connected with an unlawful purpose or unlawful transactions, the connected transactions will themselves be illegal and unenforceable. The case of Devine v. Scott Johnston is authority for the proposition that a guarantee in respect of an illegal loan is itself tainted with illegality and thus unenforceable.
35. In Equuscorp Pty Ltd v Haxton & Ors, Byrne J held in the Supreme Court of Victoria that the offering of certain investments by a group of companies was a breach of the Companies Code as the group had not prepared and registered a prospectus in respect of the investment. The Plaintiff was an assignee of loans which were granted in order to allow a group of investors purchase an interest in the scheme. Byrne J, at paragraph 102 recognised the principle that the illegality of one transaction could taint and render unenforceable other transactions connected to an illegal agreement.
36. It is submitted that the authorities admit of two separate means by which agreements may be found to be illegal upon which the Quinns rely in these proceedings: first, the Quinns submit that the share charges and guarantees are so closely connected with unlawful loan transactions, the purpose and effect of which was to artificially maintain Anglo’s share price in breach of s.60 and the MAR, that they themselves are tainted with illegality; second the Quinns plead that the share charges and the guarantees are unlawful and unenforceable in and of themselves, as they were entered into for an illegal purpose, and as such, offend the common law rules on illegality.”
There does not seem to be a plea contained in the statement of claim which suggests that the security and guarantees are allegedly void or unenforceable on a separate and stand-alone basis, as opposed to being invalid by being closely connected to the lending transactions which are said to be void or unenforceable due to illegality.
12.7 With regard to the unenforceability of the share charges and guarantees, the Quinns state, at para. 78:-
“The Quinns are parties to transactions that fall foul of s.60(1) and therefore have standing and are entitled to rely on s.60(1) in support of their claim that the Share Charges and Guarantees that formed constituent elements to those transactions are unenforceable in accordance with common law principle. The Quinns are parties to such transactions in two contexts. First, they provided the security as required by Anglo so as to enable the drawdown of the loan facilities connected to the CFD lending. Second, in July 2008 Anglo advanced monies to the Quinns for the purpose of purchasing shares in Anglo in return for which the impugned Share Charges were relied on, i.e. the July 2008 Transactions.”
12.8 Further, at para. 87 the Quinns state:
“87. Further, had it not been for the illegal lending on the part of Anglo for the purpose of funding CFD positions in Anglo shares and for the purpose of purchasing Anglo shares (both of which are accepted matters of fact for the purpose of this application) no liability would ever have arisen in the first place. If a Court finds that the loan transactions, in respect of which the impugned security is a necessary constituent element, were for an illegal purpose then, in accordance with common law principles, the security is unenforceable and was unenforceable on the 14th April, 2011.
88. Anglo seek to contend that because the execution of the impugned security is complete the Quinns are not entitled to set same aside. Regardless as to whether a contract, such as the impugned security, is complete or not it can nonetheless be set aside pursuant to the doctrine of rescission. It has always been the position that completed contracts, including those concerning title to property, can be set aside based on fraudulent misrepresentation.”
12.9 I have analysed the statement of claim and the position adopted by the parties on this appeal in some detail for the purposes of determining with some precision the precise questions which were properly before the High Court on the hearing of the preliminary issue and, therefore, before this Court on appeal. In that context, it is important to make a distinction between two potentially different allegations. The first type of allegation, which was undoubtedly before the High Court and is before this Court, relies on the suggestion that the various underlying lending transactions were void for illegality on the basis already explored. As a consequence, it is said that security put in place to support that lending is so closely connected with the lending concerned that it too is tainted by illegality, and it too is unenforceable, because the underlying loans themselves are unenforceable.
12.10 A second type of allegation might have been to suggest that, even if the underlying loans were themselves enforceable (on the grounds that policy did not require unenforceability), then, nonetheless, security put in place to support illegal activity by persons who are unaware of the illegality concerned might not be capable of being enforced.
12.11 The reason why this distinction is important stems from the analysis already conducted in the course of this judgment which suggests that policy may require that underlying contracts entered into by parties who had knowledge of a relevant illegality might nonetheless remain enforceable, but that it was possible, in similar circumstances, that collateral contracts entered into by innocent parties in connection with such illegal activity might be unenforceable, at least against those parties where the innocent parties concerned might not also have been expected to benefit by the very series of transactions which are argued to be unenforceable.
12.12 However, it does not seem to me that an argument was ever truly advanced on behalf of the Quinns which suggested that a distinction might be made between the effect of any illegality on the underlying lending contracts, on the one hand, and on the security or guarantee arrangements in respect of those lending contracts, on the other. Rather, the case made by the Quinns was that the underlying lending contracts were unenforceable on the basis of being void for illegality and that security put in place in close connection with those unenforceable contracts could not, itself, be enforced.
12.13 While there might, therefore, be a theoretical basis on which it might have been possible to consider whether the guarantee or security arrangements from which the Quinns seek to escape in these proceedings are unenforceable, notwithstanding the fact that the underlying loans are, for the reasons already analysed, enforceable, that case was never truly made, and it would, in my view, be inappropriate to address it any further at this stage.
12.14 In that context, it bears noting that the very issue which I have sought to address raises questions about whether, with the benefit of hindsight, a preliminary issue was really the best way of dealing with the issues addressed in this judgment. Dealing with questions concerning the enforceability of collateral security arrangements without detailed evidence is far from ideal. It is one thing to conduct the trial of a preliminary issue on the basis of the facts as pleaded. But where a nuanced view of those facts may be relevant to the very question of whether a particular legal principle might have application, then the trial of a preliminary issue may prove an inappropriate vehicle for the resolution of such questions. Furthermore, where, as here, the precise legal principles which are applicable may themselves be the subject of some debate and, potentially, refinement, and where the application of the principles ultimately found by the Court to apply may depend, at least on one view, on a very precise consideration of the facts, the trial of a preliminary issue may again prove less than ideal. Be that as it may, however, a trial of the preliminary issue was directed and conducted. This Court must, therefore, deal with the results of that exercise and the issues which thereby arise on this appeal.
12.15 However, by way of illustration only of some of the difficulties arising, it should be recalled that, on the Quinns’ case, they were unaware of their beneficial ownership of the relevant Cypriot companies until well after the underlying lending transactions were put in place. Indeed, it is difficult to see how the Quinns could otherwise claim to have been unaware of the illegality which they allege, for anyone who was familiar with those Cypriot companies at the relevant time would have to have known that the purpose of those companies was to acquire a significant shareholding in Anglo with money provided through loans from Anglo, in circumstances where the overall purpose was to unwind what might have been perceived to be an excessive and difficult position taken in relation to CFDs in Anglo by the Quinn Group.
12.16 But it seems likely that, viewed from the perspective of the time, the Quinns were also to obtain by those same transactions a valuable interest by means of becoming beneficial owners of companies which would, themselves, have a significant shareholding in Anglo. In that context, it may well not matter that, as events have turned out, that shareholding has proved to be worthless. But, viewed from the perspective of the time, it might be necessary to consider whether the relevant borrowing might well be seen to have formed an inherent part of a series of transactions, as a result of which the Quinns were designed to acquire a significant indirect beneficial interest in an apparently valuable financial institution. For the reasons already analysed, such considerations could be relevant in determining whether transactions collateral to enforceable lending might themselves be regarded as unenforceable.
12.17 There was, of course, no reference to any such matters in the context of the preliminary issue either before the High Court or before this Court. The absence of any reference to such matters simply goes to illustrate that the case made on behalf of the Quinns was confined to saying that the underlying lending transactions were unenforceable and that the security and guarantee arrangements put in place, in what was said to be a close connection with the allegedly unenforceable lending transactions, were themselves, therefore, unenforceable. Finally, for completeness, I should record that, in giving the above illustration, I am mindful of the fact that not all of the security or guarantee arrangements entered into were directly associated with the transactions which are at the heart of these proceedings. Some of the guarantee/security arrangements were, as noted earlier, in existence prior to any of the events with which this case is concerned.
12.18 Given that I have concluded that no case was properly made for the independent unenforceability of guarantee or security arrangements, it seems to me that it is unnecessary to consider the further argument put forward on behalf of Anglo concerning the fact that the relevant guarantee and security was already in place. As noted earlier, Anglo suggests that, even in the event that a contract is void or unenforceable for illegality, actions completed under the contract may not be reversed by the Court. Such is said to be the “lies where it falls” nature of the consequences of an illegal contract. At the level of general principle, the position adopted by Anglo on this point is entirely consistent with the jurisprudence.
12.19 If I had, however, concluded that the security arrangements in question were themselves unenforceable by virtue of their close connection with illegal contracts, it would have been necessary to consider whether any such unenforceability would permit the Quinns to undo the security and to prevent Anglo from exploiting the security in a way which did not require Anglo to invoke the jurisdiction of a court.
12.16 However, I have concluded that the underlying lending contracts are enforceable, notwithstanding their illegality. I have further concluded that the Quinns never made a case which suggested that the security arrangements might be unenforceable, even if the underlying lending transactions were enforceable. On that basis, I am forced to conclude that, on the case as it has been pleaded and run to date, it can only be held that the relevant security arrangements are enforceable. This is so because the underlying loans themselves are enforceable and no alternative case has been made. In those circumstances, the question of whether it might be possible to undo executed security just does not arise.
13. Conclusions
13.1 On that basis it seems to me that, in the light of the case made by the Quinns to date, they are not “entitled to rely” (in the words of the preliminary issue directed to be tried) on any of the alleged breaches of either section 60 or the MAR in aid of the claims which they make concerning the invalidity of guarantees given by them and security put in place in respect of underlying lending transactions said to be in breach of those provisions.
13.2 It follows that, in my view, the appeal should be allowed and the result of the preliminary issue should be determined in the manner described in the preceding paragraph.
Anglo Irish Bank Corporation Ltd -v- Collins & Anor
[2011] IEHC 385 (13 July 2011)
JUDGMENT of Ms. Justice Dunne delivered the 13th day of July 2011
This is a claim by the plaintiff (“Anglo”) in respect of a number of sums claimed to be due by the defendants to the plaintiff. The overall sum claimed is a sum of €6,882,970.06. These sums are said to be due on foot of loan facilities provided to the defendants and one Richard Fitzgerald and on foot of guarantees signed by each of the defendants in respect of loan facilities advanced to M.D.Z. Limited. A further sum is claimed on foot of a performance bond but that issue has been postponed for the time being. There is no dispute between the parties that the sums in respect of the partnership are due. Further, there is no dispute as to the amount due on foot of the guarantees. However, it is submitted that the plaintiff is precluded from recovering the sums due in respect of the partnership monies and in respect of the sums due on foot of the guarantees by reference to the principle ex turpi causa non oritur actio” in respect of an issue arising on foot of the guarantees.
The issue raised related to the admitted alteration by the solicitor for Anglo of the guarantees signed by the defendants and as such whether the alterations made to the guarantees amount to a forgery such that Anglo cannot rely on the documents to recover the sum claimed on foot thereof against the defendants. Further, it as claimed that by virtue of the principle of ex turpi causa non oritur actio, the Bank could not rely on previous guarantees signed by the defendants.
The issue raised in respect of the counterclaim was the question as to whether or not the receiver was negligent in his conduct of the receivership and as such it was contended that Anglo was vicariously liable for the negligence of the receiver.
I propose to deal with matters by first considering the arguments made by and on behalf of the defendants in relation to the principle ex turpi causa non oritur actio, which is focused on the circumstances surrounding a guarantee entered into by the defendants on the 20th August, 2008. It would be useful in the first instance to set out certain provisions of the Criminal Justice (Theft and Fraud Offences) Act 2001. Section 2(2)(c) provides:-
“For the purposes of this Act a person deceives if he or she –
. . .
(c) fails to correct a false impression which the deceiver previously created or reinforced or which the deceiver knows to be influencing another to whom he or she stands in a fiduciary or confidential relationship,
and references to deception shall be construed accordingly.”
Section 30 contains the meaning of false and making and I will refer to s. 30.
Section 30 (1) provides:-
“An instrument is false for the purposes of this Part if it purports
(a) to have been made in the form in which it is made by a person who did not in fact make it in that form,
. . .
(e) to have been altered in any respect by a person who did not in fact alter it in that respect,
. . .
(2) A person shall be treated for the purposes of this Part as making a false instrument if he or she alters an instrument so as to make it false in any respect (whether or not it is false in some other respect apart from that alteration).”
Section 25 is also relevant in that it deals with the offence of forgery. It provides as follows:-
“(1) A person is guilty of forgery if he or she makes a false instrument with the intention that it shall be used to induce another person to accept it as genuine and, by reason of so accepting it, to do some act, or to make some omission, to the prejudice of that person or any other person.
(2) A person guilty of forgery is liable on conviction on indictment to a fine or imprisonment for a term not exceeding 10 years or both.”
Section 26 creates the offence of using a false instrument and s. 31 provides a definition of the meaning of the words “prejudice” and “induce”.
It was admitted that certain alterations were made to the guarantees by Mr. O’Leary, the solicitor for Anglo, post execution. Mr. Hussey S.C. on behalf of the defendants contended that under the headings contained in s. 30(1)(a) to (g) inclusive of the 2001 Act, each guarantee was a false document. He also referred to s. 30(2) and relied on same. He submitted that the alterations made the document false by altering the identity of the person who signed the guarantee or the capacity in which the guarantee was signed. In his submissions, the guarantees as altered became false instruments within the meaning of s. 30 and consequently he submitted that the Bank has in these proceedings taken a false instrument and used it with the intention that it would be accepted on its face by anyone who read it to conclude that it was genuine. In other words the acts of Mr. O’Leary, the Bank’s solicitor, come within the definition of forgery within the meaning of s. 25 of the Act. Reliance was also placed by Mr. Hussey on s. 26 of the Act in relation to the use of a false instrument.
It was the conduct described by Mr. Hussey above as the turpitude that lay at the heart of Anglo’s claim in these proceedings and as such, the maxim ex turpi causa non oritur actio applies. A number of authorities were referred by Mr. Hussey in support of his contentions in this regard including, inter alia, Holman v. Johnson, 1 COWP 342, Bowmakers Limited v. Barnet Instruments Limited [1945] 1 K.B. 65 and Stone and Rolls Limited (In Liquidation) v. Moore Stephens [2009] 1 AC 1391. I will refer to these and other decisions subsequently in the course of this judgment.
Mr. Hussey was also critical of the fact that during the course of summary judgment proceedings at an earlier stage in this case, Anglo did not inform the court of Mr. O’Leary’s alterations. It is the case that in June 2010, Mr. O’Leary informed Anglo of the making of the alterations but this fact was not referred to by Anglo in its application to amend the statement of claim herein to include a reference to a 2005 guarantee executed by the defendants. Mr. Hussey submitted that Anglo had a fiduciary relationship with the court by virtue of s. 2(2)(c) of the 2001 Act, which I have set out above. Accordingly, he submitted that there was a lack of uberrima fides on the part of Anglo towards the court. In essence, the defendants relied on three acts of turpitude alleged to have been committed by Anglo, namely, forgery contrary to s. 25, using a false instrument contrary to s. 26 and a lack of uberrima fide on the part of Anglo in failing to disclose to the court in the course of an application to amend the statement of claim that Mr. O’Leary had made alterations in the guarantee. Mr. Hussey’s submissions in relation to these points set out the background to the first issue that had to be determined by the court in these proceedings.
It would be helpful to refer to the background to this matter. Mr. Kiernan and Mr. Collins together with one Richard Fitzgerald agreed to purchase and develop lands at Kenmare in Co Kerry ( hereinafter referred to as the Glanerought development). The lands were purchased in the joint names of Mr. Fitzgerald, Mr. Collins and Mr. Kiernan. A development company was to be incorporated to seek planning permission and to develop the land. That company was incorporated as MDZ Ltd. Mr. Kiernan and Mr. Collins described themselves in evidence as silent partners in the transactions that took place in this case. Mr. Fitzgerald was the main instigator of the scheme. The development was a mixed development of 92 housing units consisting of three bedroomed semi-detached bungalows, three bedroomed detached houses, three bedroomed semi-detached houses, two bedroomed apartments, three bedroomed townhouses and four bedroomed semi-detached townhouses.
The defendants together with Mr. Fitzgerald obtained a mortgage from the plaintiff which was entered into on the 1st April, 2005 for the purchase of the land. Over the years, Mr. Fitzgerald, Mr. Collins and Mr. Kiernan signed a series of facility letters in respect of the liabilities of M.D.Z. Limited and a guarantee in 2005 in respect of the facilities provided to M.D.Z. Ltd.
I now want to refer to the evidence of Mr. Kiernan and Mr. Collins as to the execution of the guarantees, to consider interrogatories furnished by Ms Crowley, of Barry M.O’Meara, Solicitors who acted for the defendants, Mr. Fitzgerald and MDZ Ltd. in the dealings with Anglo and the evidence of Mr. O’Leary. I will also consider relevant correspondence.
I propose to take matters somewhat out of sequence and to start with the evidence of Mr. O’Leary, a solicitor in the firm of Fitzgerald, Solicitors, in Cork. He confirmed that his précis of evidence in these proceedings was true and accurate. He was instructed by Anglo on the 21st August, 2008, to prepare guarantees in accordance with a facility letter of the 20th August, 2008. He sent three guarantee documents to Loraine Crowley, solicitor, of Barry M. O’Meara and Son, solicitors, that evening. One was for Mr. Fitzgerald and the others were for the defendants herein. Mr. O’Leary explained that he had a suite of documents which had been provided by the Bank for such a purpose. One of the suite of documents was a guarantee form which included a non recourse provision at clause 2.4. The facility letter in this case provided for an unlimited joint and several liabilities on foot of the guarantees. Through inadvertence, the guarantees sent by Mr. O’Leary, included the non recourse provision at clause 2.4. Mr. O’Leary described this as an administrative error. He discovered this error on the 26th August, 2008, and that same day he sent unlimited versions of the guarantees to Ms. Crowley by Email.
He noted a curious feature of the guarantee in that it contained a page for completion by the borrower, saying, that there was absolutely no reason for it. As he said, if there was no execution by the borrower in respect of the guarantee, he would have had no concern as to its enforceability.
There was an exchange of correspondence between Ms. Crowley and Mr. O’Leary after he furnished the correct version of the guarantees. She asked, in a letter of the 26th August, 2008, “if you would approach your client to see whether they could have these guarantees re-drafted to exclude our clients’ principal place of residence”. She also asked if her clients had previously signed guarantees and asked for a copy of same, if so. She described her clients in that letter as “Richard Fitzgerald and others”. Mr. O’Leary sought instructions from Anglo and no concession was made by the Bank. He confirmed this to be the case to Ms. Crowley by Email of the 4th September, 2008. An issue was raised in the course of the hearing about a letter of the 5th September, 2008, from Ms. Crowley to Mr. O’Leary, which he apparently did not see at the time but nothing turns on this.
Subsequently, the guarantees were returned, not to Mr. O’Leary as one might have expected, but direct to the Bank. Subsequently, they were sent to Mr. O’Leary by the Bank for what is described as a security report.
I now want to refer to the form of guarantee at issue in this case. The guarantees as returned to the bank are unlimited guarantees. It is stated therein that they are in addition to all other securities held by the Bank. (See clause 13). This is a provision which has some relevance given that there was an earlier guarantee which is relied on by Anglo in these proceedings.
I now want to look in some detail at the final pages of the guarantees. The first page I want to refer to is one headed, “First Schedule”. Under this heading, certain information was recited, namely, the name and address of the guarantor. Below that was a section headed “Second Schedule” and it contained the name of the borrower, M.D.Z. Limited and its address.
The next page was a page intended to be signed by the guarantor. It contained a number of paragraphs including a warning as to the affect of the guarantee to the effect “as a guarantor of this loan, you will have to pay off the loan, the interest and all associated charges if the borrower does not. Before you sign this guarantee you should get independent legal advice.” Unfortunately, it is the case that for whatever reason and there has been no evidence on this point, this page was not signed by either of the defendants in respect of the guarantee prepared for their respective signature.
The next page was headed “For Completion by the Borrower”. It provided a space for execution by the borrower and also for execution by the Bank. For some strange reason and it appears to be an error that emanated from Mr. O’Leary’s office, there was a second page in identical terms headed “For Completion by the Borrower” included in the guarantee. It was this page that was signed by each of the defendants on the respective guarantees in their own name. It is a matter of some curiosity that this should be so, but again one which is not explained, that both defendants separately signed their own guarantees on the page headed “For Completion by the Borrower.” Each signature was witnessed by Ms. Crowley. For completeness, I should mention that the guarantees were dated the 30th September, 2008, but the letter sent by Ms. Crowley to Anglo enclosing the guarantees was dated the 29th September, 2008. Again this is curious, but in the overall context of this case is not of any practical significance.
Returning to the evidence of Mr. O’Leary, he received a letter dated the 2nd October 2008, on the 6th October, from Anglo enclosing the guarantees as executed. Although the letter referred to two guarantees, in fact all three guarantees were enclosed, namely that of Mr. Fitzgerald, Mr. Kiernan and Mr. Collins. Mr. O’Leary examined the guarantees. He wrote on the outside of the guarantees on the cover sheet the date which appeared in the body of the document as the date of execution. He said he did this for identification purposes – in other words, one could tell at a glance what the document was. He then noticed that each of the guarantors had signed on the wrong page. He then did something, which in the light of these proceedings, I am sure has caused him many sleepless nights. He put a line through the word “Borrower” on the page headed “For Completion by the Borrower” and wrote in the word “Guarantor”. He crossed out the reference to “M.D.Z. Limited” on the same page and wrote in the named of the relevant guarantor in its place on each document so that the documents now read “Signed by Declan Collins” and “Signed by Michael Kiernan” respectively. He went on to say that he was embarrassed by what he had done. He had not done it to prejudice anyone and he had no dishonest intention in so doing. He added that he did not inform the Bank of his actions in this regard. He assumed it was “Ok” to this and of no significance.
Subsequently, he sent a draft security report back to the Bank on the 7th October, 2008. He never gave any further thought to the alterations. It was not until May 2010, that he realised that there was a problem in relation to the guarantees.
In the course of cross examination, Mr. O’Leary explained that he received a communication from P.J. O’Driscoll, solicitors for Anglo as to an issue with alterations or in delineations in the guarantees. At this point, he asked to see the guarantees again. He was furnished with copies of the guarantees on the 18th June, 2010 and by letter of the 21st June 2010, he informed P.J. O’Driscoll as to the alterations he had made in the guarantees.
Mr. O’Leary said that the alterations made by him were to reflect the true position between the parties – they did not alter what agreed. He accepted that there was nothing on the guarantees to show that they had been altered by him on the 6th October, 2008.
Mr. O’Leary then dealt with a number of other issues in relation to one of the allegations made by the defendants to the effect that the guarantee they signed contained a clause in the form of clause 2.4, that is, a non recourse clause. Such a clause was included in the original draft guarantees sent by Mr. O’Leary to Ms. Crowley. That is a separate issue which I am not dealing with at this point, but I will return to it later. Suffice it to say that it is accepted on behalf of the defendants that the guarantees received by the Bank were unlimited guarantees. Mr. O’Leary’s evidence overall was to the effect that what he did had been done by him in good faith to reflect the correspondence that had passed between the parties. It had been his understanding that the defendants had signed as guarantors and not in any capacity on behalf of M.D.Z. Limited. He added that if he had any doubt about what he was doing, he would not have done it. He accepted that what he had done was not the optimum practice, but as he understood the position, there was no advantage to him or Anglo in making the alterations.
It was put to him that the document as altered was a “false instrument”, a falsification and a forgery. He resented that characterisation and said that he had simply altered the descriptions of the parties. He accepted that he should have sent the documents back for re-execution. Differences in the page intended for signature by the guarantor and the page for signature by the borrower were acknowledged by Mr. O’Leary and he pointed out that the defendants had obtained ample independent legal advice before signing. Finally he noted that there had never been any communication from anyone to the effect that the guarantors had executed in any capacity other than as guarantors. Accordingly, the documents constituted a sufficient note or memorandum for the purpose of the Statute of Frauds.
I now want to consider the evidence of Mr. Kiernan and Mr. Collins in relation to the execution of the guarantees. Mr. Kiernan described signing various documents from time to time in connection to Glanerought. By and large, this was done in either Mr. Fitzgerald’s office or in the offices of Barry M. O’Meara. He signed facility letters, guarantees and conveyancing documentation. Mr. Kiernan was advised to get independent legal advice on the guarantee and did so. He had an issue as to whether or not he understood it to be a non recourse guarantee but other than that he said that he had brought the document to Barry M. O’Meara’s offices and signed it there. He accepted also that he had signed the facility letter of the 20th August, 2008 prior to this. He was not sure of the date when he signed the guarantee. He could not say that he read the guarantee before signing it. When he signed he did so at the point he was directed to sign it by Ms. Crowley. He had no recollection of the fact that there were two pages for completion by the borrower. He said he signed it on the basis that it was a non recourse guarantee. He told Ms. Crowley he was prepared to sign on that basis. He confirmed that he had not authorised anyone to alter the document.
In cross examination, he confirmed that he was a business man and he described the nature of his business. He fully understood what a guarantee was. He was asked about documents that he signed in the course of his business from time to time. He said that he did not always read everything. He was familiar with the format of the facility letters and knew that there was a requirement in relation to security that there should be an unlimited guarantee. He could not say that he actually read the 20th August, 2008, facility letter. He was aware, however, that the Bank required a further guarantee – he was informed of this by Mr. Fitzgerald or Ms. Crowley. Mr. Kiernan was cross examined in detail about the signing of the guarantee. He had very little recollection of the details as to the date, who was present, and whether he examined the documents or not. He signed the document but could not recollect doing so. On examining the page he signed headed “For Completion by the Borrower” he said he must have known he was signing that page as guarantor. He could not recall signing the previous guarantee in 2005. He was not aware of the fact that he had an unlimited liability as a guarantor.
There was some difference of recollection between the affidavit sworn by Mr. Kiernan in the summary judgment application and his evidence in court. However, it is clear that he knew sometime after the 20th August, and before the 25th August that he was going to have to furnish a guarantee. He was then advised to get independent legal advice by Ms. Crowley on the guarantee and a copy was sent to Mr. Brian O’Shea, his personal solicitor. He met Mr. O’Shea. After getting advices from him, he said he left with the original guarantee. He then brought it to Ms. Crowley’s office within a few days and then he signed it. I should say at this point that it seems to me having regard to the evidence of Mr. Kiernan that he is almost certainly mistaken in his evidence to the effect that he signed the guarantee a few days after meeting Mr. O’Shea. Nevertheless, I do not think that this is an issue of major importance.
Mr. Kiernan then described the guarantee. It was on yellow paper with a border of red lines. He said he vividly remembered this. All of the pages of the guarantee document were lined in this way. Much cross examination explored this issue. In essence the effect of Mr. Kiernan’s evidence is to the effect that the guarantee he signed is not the guarantee before the court. What comes across from the lengthy cross examination of Mr. Kiernan in relation to the signing of the guarantee is that he denies signing an unlimited guarantee; he maintains that he signed a non recourse guarantee; he did not read the guarantee before signing it and if, in fact, the guarantee before the court was unlimited, he said that the Bank must have taken the page he signed and put it into a different document that is an unlimited guarantee. He stated this in evidence, despite the very clear statement at an early stage of the hearing by counsel on his behalf to the effect that the document being sued on by the Bank was in the form in which it had been received by the Bank. One thing from the evidence that is abundantly clear, notwithstanding the general lack of recollection on the part of Mr Kiernan as to the circumstances surrounding the signing of the guarantee, is that he was clearly signing a guarantee qua guarantor and not in any other capacity. He certainly was not signing the guarantee in some capacity on behalf of M.D.Z. Limited.
I now want to turn to the evidence of Mr. Collins on this issue. Mr. Collins described signing the facility letter of the 20th August, 2008, in Mr. Fitzgerald’s office. He was unhappy about doing so as the project was finished. He was told by Mr. Fitzgerald that there was a guarantee to be signed and he went to Ms. Crowley’s office. She told him to get independent legal advice. He took the guarantee away for that purpose. He went to his own solicitor who explained that it was a non recourse guarantee but in any event, his solicitor advised him that he should not sign the guarantee. He had already signed a guarantee in 2005.
Subsequently, Mr. Collins had a meeting with Mr. McCabe from the Bank. He discussed the issue of the guarantee with him. He was advised by Mr. McCabe that the guarantee had to be signed in order to have monies drawn down as provided for in the facility letter. In the meantime, Mr. Kiernan told him he had signed the guarantee. Mr. Collins said that when he signed, Ms. Crowley produced the guarantee for him to sign. He had very little conversation with her and understood he was signing the same guarantee as the one he took to his own solicitors. He also said that he did not authorise anyone to alter the document. He confirmed that the meeting with the bank took place on the 21st September, and he signed a few days later.
In the course of cross examination, Mr. Collins accepted that he was a business man and that he understood the nature of bank facilities, security and guarantees. When he spoke to Mr. McCabe from Anglo and Mr. Whelan, his solicitor, he questioned the need for the additional guarantee given the earlier guarantee. He described signing the facility letter and said that he understood the gist of it. Having spoke to Ms. Crowley, his understanding was that the 2008 guarantee replaced the 2005 guarantee, although he accepted that that was not, in fact, the case. His evidence was similar to Mr. Kiernan in relation to his description of the type of paper on which the guarantee was prepared.
Mr. Collins then described his meeting with Mr. Whelan and ultimately he signed the guarantee some three weeks after having taken advices from his own solicitor. He accepted that the guarantee he signed was unlimited and was consistent with what he had signed up for in the facility letter. He was asked about Ms. Crowley’s responses to interrogatories which were delivered to her in the course of these proceedings. He said that at the time of signing, there was not much discussion. He could not recall exactly what Ms. Crowley had said – she could have advised that he had to execute an unlimited guarantee, but he could not recall that. He was not advised that there was a change to the document, that is, from non recourse to unlimited, but he knew he was meant to sign an unlimited guarantee. He understood that he was signing as guarantor.
In relation to the alterations made by Mr. O’Leary, Mr. Collins said that his concern was not so much the amendments made by Mr. O’Leary, so much as the fact that it was an unlimited as opposed to a non recourse guarantee. This contradicted what he had said earlier on affidavit in the course of these proceedings.
There are a number of observations to be made on the evidence of Mr. O’Leary, Mr. Kiernan and Mr. Collins. I also take note of the interrogatories addressed to Ms. Crowley and her responses to those interrogatories. There is no doubt that the guarantees originally sent out by Mr. O’Leary were non recourse guarantees. Mr. O’Leary on realising his error sent out unlimited guarantees to Ms. Crowley. I am satisfied that both Mr. Collins and Mr. Kiernan got independent legal advice in respect of the guarantees. I am also satisfied that they were at all times aware from the date of signing the facility letter that an unlimited guarantee was required. If not, there would have been little point in the Bank looking for a fresh guarantee and equally little point in Ms. Crowley sending them away to get independent legal advice. I have no doubt that when they each went to Ms. Crowley, they understood they were signing the guarantees as guarantors and not in any other capacity. I will return later to their understanding of the nature of the guarantee. It is interesting in this regard to contrast what was said in evidence by Mr. Collins and what he swore on affidavit as to the capacity in which he signed the guarantee. In his affidavit evidence he said that he signed the guarantee on behalf of the company. Mr. Kiernan said the same on affidavit. I am completely satisfied that Mr. Collins and Mr. Kiernan signed the guarantees in their capacity as guarantors and not in any capacity on behalf of M.D.Z. Limited. I am driven to that conclusion having regard to all of the evidence including the sworn interrogatories of Ms Crowley
I now want to turn to the submissions in relation to the alterations on the guarantees made by Mr. O’Leary. I also think I can conveniently deal with the issue of the evidence of Mr. Kiernan and Mr. Collins to the effect that they signed a non recourse guarantee as opposed to an unlimited guarantee at this point. There is no issue but that Mr. O’Leary sent out non recourse guarantees to Ms. Crowley on the 21st August, 2008. He realised his error within a few days and then sent out the correct versions. In the meantime, Mr. Kiernan and Mr. Collins had both taken independent legal advice on the non recourse guarantees. I think it would be unlikely that such advices given without the solicitors concerned having had regard to the earlier guarantee and the facility letter. Precisely what advice was given by Mr. O’Shea and Mr. Whelan respectively, to their clients is not possible to say as neither of these gentlemen was called to give evidence by the defendants. It seems to me that it is likely and I find as a fact that the guarantees were signed on or about the 29th/30th September, 2008. I have come to this conclusion for a number of reasons:
1. The guarantees were dated the 30th September, 2008.
2. They were sent to the Bank by Ms. Crowley under cover of letter of the 29th September, 2008.
3. Mr. Collins in cross examination put the date of signing after his meeting with Mr. McCabe in Anglo Irish Bank. That meeting took place on the 22nd September, 2008. Clearly the guarantees could not have been signed prior to that meeting.
Following the receipt of the proposed guarantees from Mr. O’Leary, Ms. Crowley sought in correspondence to exclude from the guarantees, the possibility of recourse to the defendants private residences. The position of Ms. Crowley is somewhat ambiguous in that she clearly was the solicitor for Mr. Fitzgerald and she acted for M.D.Z. Limited. There appears to be no doubt that she also acted as the solicitors for Mr. Kiernan and Mr. Collins. The only time that she did not do so was when she sent the defendants to their own solicitors for the purpose of getting independent legal advice in relation to the 2008 guarantee. Other than that, I am satisfied that she was acting for and on behalf of the defendants in relation to matters concerning the Glanerought development. Although it was denied in evidence that Mr. Collins or indeed Mr. Kiernan authorised her to make a request to Mr. O’Leary to exclude the defendants private residence from the scope of the guarantee, I am satisfied that she did so on the basis of her instructions from the defendants. It is clear from the evidence that Mr. Collins in particular was very concerned at the request to give a fresh guarantee. He not only spoke to his own solicitor about this, but went so far as to arrange a meeting with the bank, something he had never done before. The meeting was about his reluctance to enter into an unlimited guarantee.
Those are the background circumstances in relation to the allegation made by the defendants that they executed a non recourse guarantee and this was subsequently changed to an unlimited guarantee in the form in which it was presented to the court. I should mention that the pleadings delivered herein by the defendants could not have been more explicit. They accused the Bank of having taken the signature page of the non recourse guarantee and inserted it into an unlimited guarantee. Mr. Kiernan maintained this approach in his evidence to a significant extent, Mr. Collins less so. Surprisingly, this point was never made in the summary judgment affidavit sworn by Mr. Collins. The same is true of Mr. Kiernan’s affidavit.
How then does one come to a conclusion on this issue? The first point is that Mr. Hussey on behalf of the defendants expressly and unequivocally at an early part of the hearing, long before his clients gave evidence, withdrew any suggestion that the Bank had done any such thing. To that extent it is somewhat surprising that in their evidence, Mr. Collins and Mr. Kiernan made this point. It is clear from the evidence that both defendants signed the guarantees in Ms. Crowley’s presence. She then forwarded them directly to the Bank. If the guarantees were not altered by the Bank in this way, when received by the Bank, one as to ask how could that have occurred? Was it done by Ms. Crowley, someone in her office, the postman or courier who delivered the executed guarantees? These questions have to be considered in the light of the evidence of Mr. Kiernan and Mr. Collins. Mr. Kiernan was a witness who prevaricated, was hesitant and had poor recollection about almost every detail relating the signing of the guarantee, yet he “vividly” recollected the physical appearance of the guarantee. Mr. Collins was not so dogmatic on this issue.
Aside from the evidence of Mr. Kiernan and Mr. Collins, I also had the benefit of the replies to interrogatories sworn by Ms. Crowley. She made it clear that on the day of execution of the guarantees, the defendants knew that they were signing unlimited guarantees and did so sign. It is surprising that given that the defendants have contradicted those sworn replies, they chose not to call Ms. Crowley in these proceedings. Finally, one has to bear in mind the fact that Mr. Collins arranged a meeting with the Bank prior to execution in regard to his concerns about signing the guarantee. He could not have had and would not have had those concerns if the guarantee being signed was a non recourse guarantee. Accordingly, taking all of the circumstances and evidence on this issue into account, I find as a fact that each of the defendants well knew when they signed the guarantees that they were signing unlimited guarantees.
In fairness to Mr. Collins towards the end of his cross examination by Mr. McCann S.C. on behalf of Anglo, he conceded that the allegation that had been made about the substitution or insertion of the signature page from a non-recourse guarantee into an unlimited guarantee, arose because he and Mr. Kiernan believed or assumed that that had happened and ultimately, he accepted that there was no foundation in fact for making that suggestion. Nevertheless, this was an issue that was persisted in doggedly and took up a considerable period of time in the course of the hearing before me when, in truth, there were no grounds to support it.
I want to turn to the submissions which are central to the issue as to the effect of Mr. O’Leary’s admitted alterations on the guarantees. The essential point made in the written submissions on this issue is succinct. There is an argument that the signature of the defendants as “Borrower” is not sufficient to fulfil the requirements of the statute of frauds. That issue need not trouble the court any further given that Mr. Hussey during the course of the oral submissions conceded that there was a series of documents which constituted a sufficient note or memorandum. He submitted that it can be concluded that the alterations and the substitution of altered pages amount to a forgery and the Bank may not rely on the documents to recover against the defendants.
Further by reason of the principle of ex turpi causa non oritur actio “the Bank may not proceed with the claim based on previous letters of offer on foot of earlier guarantees signed by the parties”.
Given the fact that the question of the substitution of pages is now out of the equation, one is left with the argument that the alterations by Mr. O’Leary amount to a forgery and that therefore the Bank cannot rely on the 2008 documents to recover against the defendants either on foot of the 2008 or 2005 guarantees.
The Bank’s contention is that the alterations of Mr. O’Leary did not alter the business effect of the guarantees. They were no more than was intended by the parties. It was submitted that all that was changed was the description of the party signing and that this was not a material alteration. In order to avoid the contract, an alteration had to be material. In making the submission, reliance was placed on the decision in Raiffeinsen Zentralbank v. Crossseas Shipping Limited [20001] W.l.R. 1135, a decision of the Court of Appeal. There was misdescription by a signatory and this was put right by Mr. O’Leary. Reference was also made to Norton on Deeds 2nd Ed. pp. 46 to 47 where it was stated:-
“After a Deed had been executed, one of the parties drew his pen through his own and another party’s signatures; it was admitted that the orator was made wilfully, and under the impression that it might influence claims to be dehors the Deed, but no fraud was intended; the Deed contained no ground or covenant by the parties whose signatures were thus erased, and imposed no liability on them; they were simply covenantees. It was held that the erasure was immaterial, and did not avoid the Deed: Cauldwell v. Parker [1869] I.R. 3 Eq. 519; disapproved in Suffell v. Bank of England, 9 Q.B. D. 555, at pp. 565, 571 and 572; . . .
After execution of a mortgage, the name of a mortgagee was altered from “William” to “Edward Thomas”, those being the real Christian names of the person intended, “William” having been inserted in the Deed by inadvertence. Held, an immaterial alteration: Re. Howgate and Osborn’s Contract, [1902] 1 Ch. 451; 71 L.J. Ch. 279.”
Reliance was placed on Chitty on Contracts to support the argument that there was nothing to suggest that there was anything illegal or immoral behind the alterations. In essence, Mr. O’Leary made an alteration which the defendants in their evidence accepted reflected the true nature of the transactions. Accordingly it was contended on behalf of the Bank that the maxim ex turpi causa non oritur actio did not apply.
Mr. Hussey made the point that the alterations made by Mr. O’Leary were on the page that gave life to the document, that is, the execution page. In the absence of execution there was no document that could be enforced. He pointed out that the page actually competed was entirely superfluous. There was no need for M.D.Z. Limited to complete any part of the guarantee. He submitted that in altering that page Mr. O’Leary was purporting to bring the document to life. When he did that he intended that this was it enable the document to be used to enforce rights under the guarantee. Mr. Hussey also referred to Norton on Deeds and made the point that alterations are presumed to have been made prior to execution. He added that there was no consent to the alterations; there was no request to have the guarantees re-executed and there was no indication that alterations were made post execution.
Mr. Hussey then proceeded to examine the provisions of the Criminal Justice (Theft and Fraud) Act 2001. I have already set out the relevant provisions above. Mr. Hussey contended that the guarantees as executed were false instruments and that that was the way in which the guarantee was intended to used in these proceedings, namely, to induce any person reading the guarantee to conclude that it is genuine. He referred to s. 26 of the Act to argue that the Bank knowing the guarantee to be a false instrument was inducing the court to accept it as genuine. This was being done to prejudice the defendants. He contended that these acts of turpitude precluded the Bank from succeeding in its claim.
I now want to look at some of the authorities referred to by the parties in the course of their submissions. I have already referred to a passage from Norton on Deeds relied on by Anglo. Mr. Hussey on behalf of the defendants also referred to a number of passages from Norton on Deeds and in particular to the principle set out at p. 32 to the effect that:
“Alterations and interlineations in a Deed are presumed, in the absence of evidence to the contrary, to have been made prior to execution.”
He also relied on a passage at p. 38 which stated:
“If a material alteration by rasure, interlineations or otherwise, be made, after execution, in a Deed by, or with the consent of, any party thereto, he cannot as plaintiff enforce any obligation contained in it against any party who did not consent to such alteration.”
A further passage from Norton on Deeds to which I was referred states:-
“An alteration which, if made before execution, would have effected the position, rights or obligations of any person claiming under the Deed, is material; possibly other alterations may be material.”
It was Mr. McCann’s contention in relation to this paragraph of Norton on Deeds that the alteration did not affect the position, rights or obligations of any person claiming under the Deed. I mentioned earlier the decision in the case of Raiffeisen. In that case part of the guarantee had been left blank at the time of execution, namely the name, address, telex and fax number of the first named defendant who was the agent for service of a Mr. Shah, but was inserted later by an employee of the Bank without the knowledge or consent of Mr. Shah. Creswell J. in the course of his judgment considered the issue of materiality and on appeal Potter L.J. quoted from the judgment of Creswell J. at p. 1139:
“Turning to the question to the question of materiality, he referred also to the passage where Jessell M.R. stated, 9 Q.B.D. 555, 563:
Before one considers the question as to whether the alteration is an alteration affecting the contract, one must know what the instrument is, what the alteration is and what the general effect is . . .”
6. The judge then pointed out and emphasised the fact that the instant contract was a contract of guarantee, the central obligations of which were contained in clause 2 (the Guarantee Clause) and clause 3 (the Indemnity Clause). The remainder, save for clause 37, went to the nature, extent and validity of those central obligations. He then referred to s. 64 of the Bills of Exchange Act 1882, relating to avoidance of a bill by reason of material alteration and in particular:
“any alteration of the date, the sum payable, the time of payment, the place of payment and, where a bill has been accepted generally, the addition of a place of payment without the acceptors consent.”
After observing that the court was here concerned not with a negotiable instrument, but a guarantee, the judge then referred to three particular authorities upon the touchstone of materiality.”
Potter L.J. then referred to those three authorities, namely, Gardiner v. Walsh [1855] 5 E. & B. 83, 89 as adopted by Scrutiny L.J. in Koch v. Dicks [1933] 1 .B. 307 at 320 and thirdly to Suffell v. Bank of England 9 Q.B.D. 555, 568. Potter L.J. went on to say at p. 114 as follows:-
“Thus, the court in Suffell v. Bank of England appears to have had little doubt, that in the ordinary way, the appropriate test of materiality in the case of a contract or ordinary commercial instrument is whether or not the alteration complained of altered the contractual obligations of the parties in some particular.”
I was also referred to a further passage at p. 1146 in which it was stated:
“In the course of argument, we have been cited a large number of cases in which the role in Piggott’s case has been invoked. In general, it seems clear that the touchstone of materiality has been whether or not there has been some alteration in the legal effect of the contract or instrument concerned simply in the sense of some alteration in the rights and obligations of the parties. Those cases in which an alteration or obliteration have been held to be immaterial have been cases of two kinds. First, those where it either was or could have been said that the alterations either rendered express, or had no effect upon, in the sense of adding nothing to, what the law would otherwise provide or imply . . . Second, there is the class of cases, with which we are not here concerned, where the alteration corrects a “mere misdescription” which can be cured by parole evidence that a person or entity referred to has in fact been misdescribed and that the alteration merely corrects the error in description in accordance with the original intention . . .”
I was also referred to Chitty on Contracts, 29th Ed. 16-160 in respect of the maxim ex turpi causa non oritur actio. On the topic of tainting it is stated:
“The maxim ex turpi causa non oritur actio, is also applied to the case of an apparently innocent contract which is nevertheless vitiated by the illegality by another contract to which it is merely collateral – the illegality of the latter tainting the former. Thus, in Spector v. Ageda the plaintiff loaned money to the defendant to repay a loan which had been made by a third party to the defendant and which was an illegal money lending transaction. The plaintiff knew that her loan was to be used to pay of the illegal loan and the issue which squarely faced the court was, Megarry J. stated, “whether a loan knowingly made in order to discharge an existing loan, it was wholly or partially illegal was itself tainted with illegality”. He answered the question in the affirmative; the second transaction was tainted by the illegality of the first and was accordingly unenforceable.”
That passage was referred to by reason of the contention on the part of the defendant that the illegality contended for in relation to the 2008 guarantee tainted the enforceability of the 2005.
There are limits to the maxim as was pointed out in para. 16.162 of Chitty on Contracts where is it stated “it is not sufficient, in order to bring the claimant within the maxim, that he should merely be obliged to give evidence to a an illegal contract as part of his case, as for instance where the illegal purpose has not been carried out; for the rule normally applies only where the action is found upon the illegal contract, and is brought to enforce it”.
It is part of the defendants’ case that the Bank cannot recover on foot of the 2005 guarantee if the 2008 guarantee is found to be void by reason of the alterations and further that the 2005 guarantee is tainted by the illegality, that is, the alleged forgery/use of a false instrument. On the other hand, the Bank argued that it was not necessary to rely on the alterations made as there was in any event a sufficient note of memo of the guarantee. In any event, the Bank maintained that the alterations were minor in nature and the defendants have accepted that they reflect the nature of the transaction.
It was pointed out on behalf of the Bank that the passage from Raiffeinsen at p. 1146 makes clear that the test of materiality is whether or not there has been an alteration in the legal effect of the document in relation to the rights and obligations of the parties. Thus, it is clear that an alteration of a guarantee which had the effect of altering the amount of the guarantors’ obligation, for example, by changing a figure of €50,000 to €90,000 would be a material alteration.
I was also referred to the decision in Holman v. Johnson (1775) 1 COWP 342, which could be described as the fons et origo of the maxim. Lord Mansfield in the case stated at p. 1121,
“The objection, that a contract is immoral or illegal as between plaintiff and defendant, sound at all times very ill in the mouth of the defendant. It is not for his sake, however, that the objection is ever allowed; but is founded in general principles of policy, which the defendant has the advantage of, contrary to the real justice, as between him and the plaintiff, by accident, if I may so say. The principle of public policy is this: ex dolo malo non oritur actio. No court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act. If, from the plaintiff’s own stating or otherwise, the cause of action appears to arise ex turpi causa non oritur actio, or the transgression of a positive law of his country, there the court says he has no right to be assisted. It is upon that ground the court goes; not for the sake of the defendant, but because they will not lend their aid to such a plaintiff. So if the plaintiff and the defendant were to change sides the defendant was to bring his action against the plaintiff, the matter would then have the advantage of it; for where both are equally in fault potior est conditio defendentis.”
I was also referred to Bowmakers Limited v. Barnet Instruments Limited [1945] 1 K.B. 65. That case concerned a contract unlawful by virtue of the Defence (General) Regulations 1939. Du Parcq L.J. having referred to the facts and arguments noted that there was an infringement of the order, that neither party knew of the order and that accordingly, “their error was involuntary”. The issue in the case turned on whether the defendants were entitled to retain goods which they had acquired on foot of the illegal contract. They had contended that the plaintiffs could not recover the goods because they could not sue on the illegal contract. Du Parcq L.J. reiterated the general principle in the course of his judgment in a passage relied on by Mr. Hussey at p. 70 where it was stated:
“Prima facie, a man is entitled to his own property and it is not a general principle of our law (as was suggested) that when one mans goods have got into another’s possession in consequence of some unlawful dealing between them, the true owner can never be allowed to recover those goods by an action. The necessity of such a principle to the interest and advancement of public policy is certainly not obvious. The suggestion that it exists is not in our opinion supported by authority. It would, indeed, be astonishing if (to take one instance) a person in the position of the defendant in Pierse v. Brooks supposing that she had converted the plaintiff’s brougham to her own use, were to be permitted, in the supposed interests of public policy, to keep it or the proceeds of its sale for her own benefit. The principle, which is, in truth, followed by the court is that stated by Lord Mansfield, that no claim founded on an illegal will be enforced, and for this purpose the words “illegal contract” must now be understood in the wide sense which we have already indicated and no technical meaning must be ascribed to the words “founded on an illegal contract”. The form of the pleadings is by no means conclusive . . .”
Accordingly in that case the plaintiff was entitled to recover the goods concerned.
I was then referred to the decision in the case of Stone and Rolls Limited (In Liquidation) v. Moore Stephens [2009] 1 AC 1391.
Mr. Hussey placed particular reliance on para. 16 of the judgment of Rimer L.J. at paras. 12 to 16. Rimer L.J. had quoted from the decision of Lord Browne-Wilkinson in his judgment in Tinsley v. Milligan [1994] 1 AC 340 at p. 376 where it was stated:-
“In my judgment the time has come to decide clearly that the rule is the same whether a plaintiff founds himself on a legal or equitable title: he is entitled to recover if he is not forced to plead or rely on the illegality, even if it emerges that the title on which he relied was acquired in the course of carrying through an illegal transaction.”
Rimer L. J. then continued as follows:-
“That statement of principle was expressed in the context of the facts of Tinsley v. Milligan, a property dispute. But it is one I regard as applying generally and which Langley J. conveniently described as a “reliance” test. The relevant question it identifies is whether, to advance the claim, it is necessary for the claimant to plead or rely on the illegality. If it is, the Tinsley case decided that the axe fall indiscriminately and the claim is barred, however good it might otherwise be. There is no discretion to permit it to succeed. The absence of any such discretion emerges from all their Lordship’s speeches. Lord Goff of Chieveley, who was in the minority with Lord Keith of Kinkel, gave the leading speech for the rejection of the “public conscience” test, with which the majority agreed. The essential difference between the minority and the majority views was whether the touchstone for the application of the ex turpi causa maxim was the reliance test favoured by the majority or the wider test favoured by the minority and regarded as applicable to the particular facts before the court. But once the maxim is engaged, it applies indiscriminately. After referring to Holman v. Johnson 1 COWP 341 and the subsequent application of Lord Mansfield, C.J.’s principle, Lord Goff said [1994] 1 AC 340, 355:-
‘It is important to observe that as Lord Mansfield made clear, the principle is not a principle of justice; it is a principle of policy, whose application is indiscriminate and so can lead to unfair consequences as between the parties to litigation. Moreover the principle allows no room for the exercise of any discretion by the court in favour of one party or the other.’”
Reference was made by contrast by Mr. McCann to a passage from the judgment of Lord Phillips of Worth Matravers, where he stated at p. 1451 as follows:-
“In order to assist in following this lengthy opinion I propose at this stage to summarise my conclusions. (1) Under the principal of ex turpi causa the court will not assist a claimant to recover compensation for the consequences of his own illegal conduct. (2) This appeal raises the question of whether, and if so how, that principle applies to a claim by a company against those whose breach of duty has caused or permitted the company to commit fraud that has resulted in detriment to the company. (3) The answer to this question is not be found by the application of Hampshire Land or any similar principle of attribution. The essential issue is whether, in applying ex turpi causa in such circumstances, one should look behind the company at those whose interests the relevant duty is intended to protect. (4) While in principle it would be attractive to adopt such a course there are difficulties in the way of doing so to which no clear resolution has been demonstrated. (5) On the extreme facts of this case it is not necessary to attempt to resolve those difficulties. Those for whose benefit the claim is brought fall outside the scope of any duty owed by Moore Stephens. The sole person for whose benefit such duty was owed, being the sole person for whose benefit such duty was owed, being Mr Stojevic who owned and ran the company, was responsible for the fraud. (6) In these circumstances ex turpi causa provides a defence to the claim.”
Mr. McCann relying on that passage submitted that the Bank was not suing to recover a benefit arising from Mr. O’Leary’s wrongdoing. There was an underlying obligation to the Bank on foot of the original guarantee and the completion of the facility letter by the defendants. Accordingly he submitted that the “wrongdoing” did not taint the earlier guarantee or the entitlement of the Bank on foot of the defendants’ obligations.
Conclusions on the Arguments
The first question I have to consider in this case is whether the alterations made by the Bank’s solicitor, Mr. O’Leary, amounted to a material alteration. There are several points to note.
(1) The defendants were required by the facility letter of the 20th August, 2008, to enter into fresh guarantees. That facility letter referred expressly to the security held (including the 2005 guarantee) and the security required. Thus, it was always clear that the Bank intended to rely on the 2005 guarantee in addition to the 2008, guarantee. This was subsequently confirmed in writing by Mr. O’Leary.
(2) The defendants signed the facility letters.
(3) Mr. Collins had a meeting with Mr. McCabe who told him that it was a requirement of the Bank that a further unlimited guarantee be furnished for the purpose of obtaining further advances.
(4) The defendants obtained independent legal advice, albeit that was in respect of the non recourse form of the guarantee. The Bank declined a request from Ms. Crowley to exclude the private residences of the defendants from the scope of the guarantees.
(5) The defendants at the time they each executed the guarantees were aware of the fact that the guarantees were unlimited in form.
(6) The executed guarantees were returned to the Bank by Ms. Crowley under cover of letter dated the 29th September, 2008, which stated:-
“Re. Our Clients: Richard Fitzgerald and Others
Guarantee – Anglo Irish Bank to M.D.Z. Limited
Dear Sirs
Please find enclosed herewith guarantees duly signed by Denis Collins and Michael Kiernan for your attention. . . .”
(7) The defendants intended to and did in fact execute the guarantees in their capacity as guarantors and not in any other capacity. There is no evidence at all to suggest that they in fact executed the guarantees in any capacity on behalf of M.D.Z. limited.
(8) That being so, I am satisfied that the alterations made by Mr. O’Leary reflected the intention of the parties, were minor in nature and could not be described as material. The alterations did not affect the nature of the rights and obligations of the defendants. The position would be otherwise if there was evidence to the effect that the alterations changed the nature of the rights and obligations of the defendants.
There has been no explanation at all as to why the defendants signed the page headed “For Completion by the Borrower” and not the page to be completed by the guarantor but as I accept that they intended to and did execute the document as guarantors, I have come to the conclusion that the alterations were not material. The defendants executed what they knew to be guarantees in their capacity as guarantors and in no other capacity. That was their understanding and intention.
I now have to consider the effect of the provisions of the Criminal Justice (Theft and Fraud) Act 2001. Mr. O’Leary has been accused in no uncertain terms of forgery and the Bank has been accused of using false instruments. These are serious offences carrying a maximum sentence of imprisonment for a term not exceeding ten years or a fine, which is unlimited. I am prepared to accept that the alterations made by Mr. O’Leary come within the terms of s. 30 of the Act for the purpose of considering this issue. I would hesitate to say that what occurred comes within all of the headings contended for by Mr. Hussey in respect of s. 30(1) of the Act and my hesitation is coloured by the fact that the alterations were obvious – the word “Borrower” was crossed out and “Guarantor” was written in and the name M.D.Z. Limited was crossed out and the name of each defendant was written in, in the appropriate guarantee. My view is also coloured by the fact, as I have found, that the defendants intended to execute the document in their capacity as guarantors. Nevertheless the guarantees were altered post execution and no consent was obtained by Mr. O’Leary for the alterations and the guarantees were not re-executed.
I am satisfied however that to constitute the offences created by s. 25 and by s. 26 it is necessary that the person making the alteration should do so with the intention specified in those sections, namely inducing “another person to accept it as genuine . . . and by reason of so accepting it, to do some act, or to make some omission to the prejudice of that person or any other person”. Section 26 is in similar terms.
Section 31 of the Act defines the words “prejudice” and “induce”.
I think it would be useful to look at something that was said in relation to the equivalent provisions of the UK statute, the Forgery and Counterfeiting Act 1981, which are in identical terms to the relevant provisions in the 2001 Act. In Archbold, Criminal Pleading Evidence and Practice 2005, the concept and rationale behind the English legislation was described as follows:-
“The concept of forgery and the rationale of the offence were summarised in paras. 41 to 43 of the Law Commission Report:
‘By the middle of the 19th century it was established that for the purpose of the law of forgery that fact that determined whether a document was false was not that it contained lies, but that it told a lie about itself. It was in R. v. Windsor (1865) 10 Cox 118, 123 that Blackburn J. said: ‘forgery is the false making of an instrument purporting to be that which it is not, it is not the making of an instrument which purports to be what it really is, but which contains false statements. Telling a lie does not become a forgery because it is reduced into writing’. This test was applied in the court of appeal in R. v. Dodge and Harris [1972] 1 Q.B 416. . . . as we have said . . . the primary reason for retaining a law of forgery is to penalise the making of documents which because of the spurious air of authenticity given to them likely to lead to their acceptance as true statements of the facts related in them. We do not think that there is any need for the extension of forgery to cover falsehoods that are reduced to writing. . . . the essential feature of a false instrument in relation to forgery is that it is an instrument which ‘tells a lie about itself’ in the sense that it purports to be made by a person who did not make it (or alter it by a person who did not alter it) or otherwise purports to be made or altered in circumstances in which it was not made or altered.”
Having considered the provisions of the 2001 Act, I am satisfied that there is no evidence of the requisite intention on the part of Mr. O’Leary or the Bank. If one considers the meaning of prejudice as provided for in the Act, neither of the defendants could be said to have lost anything by the alterations, equally it could not be said that the Bank gained an advantage as a result of the alterations. The documents already in existence prior to the execution of the guarantee, included the guarantee of 2005, the facility letter signed by the defendants on the 20th August, 2008, and the letter of their solicitor returning the guarantees, all bear testimony to the existing obligation of the defendants and the Bank’s entitlement to enforce that obligation. The defendants had an obligation to pay the sums due in any event. The alterations made in this case are such that it can safely be said that the guarantees are not instruments which tell a lie about themselves. On the contrary, it could be said that the alterations made by Mr. O’Leary were designed to ensure that the guarantees were altered to tell the truth about themselves. The defendants have failed to establish that Mr. O’Leary acted in breach of the criminal law in making the alterations he did.
It cannot be gainsaid that Mr. O’Leary was unwise, to say the least, to have made the alterations to the guarantees. I presume that the Bank would not have advanced further facilities to M.D.Z. Limited until the draft security report was furnished by Mr. O’Leary to the Bank. In those circumstances, it was open to Mr. O’Leary to have the guarantees re-executed. No doubt there were time pressures on all concerned, but it would have been relatively straightforward to do this. Having said that, to characterise the conduct of Mr. O’Leary as amounting to the commission of a serious criminal offence is, to my mind, unfair. His conduct is far removed from constituting the commission of such a serious criminal offence.
It is in those circumstances that I am also satisfied that there was no wrongdoing on the part of Anglo.
Accordingly, given that I am satisfied that there was no wrongdoing by Mr. O’Leary or on the part of the Bank in relying in the guarantees as altered, the maxim does not apply and does not give rise to a defence to these proceedings.
The Bank and the Receiver’s Duty to the Defendants
The final element of this case concerns of role of the receiver, the allegation that he was negligent in the exercise of his functions and the submission that Anglo was vicariously liable for the alleged negligence of the receiver. The receiver, Michael Cotter, was appointed pursuant to the provisions of the mortgage deed of the 1st April, 2005, in respect of the lands at Glanerought. Clause 8.3 of the mortgage deed provided inter alia that:-
“Such receiver shall be agent of the borrower insofar as is allowed by law and the borrower shall be solely responsible for his acts and defaults and/or his remuneration.”
The case made by the defendant’s against the receiver and against Anglo in this respect was, inter alia, that they owed a duty of the defendants not to hastily sell the units at a knockdown price, not to conduct themselves in such a way as to unfairly prejudice or damage the viability of the development or the credibility of the property on the marketplace and not to do anything which would render the property unmarketable and unmortgagable. It was contended that the receiver and by implication Anglo were in breach of this duty in a number of ways.
I think some of these can be disposed of very briefly. Complaint was made in the course of the proceedings as to the removal of the existing selling agent and solicitor having carriage of sale. Criticism was made of the appointment of a selling agent who was “less familiar with the Kenmare market”. Evidence had been given by Mr. Daly, Sherry Fitzgerald Daly, on behalf of the defendants, to the effect that a Kenmare based auctioneer should have been appointed. The evidence of Mr. Tyrell of that firm indicated that the firm deals with property in the Munster region namely covering the Counties of Cork and Kerry. Mr. Tyrell replaced Mr. Daly of Sherry Fitzgerald Daly, a firm of auctioneers based in Kenmare. Mr. Daly had been involved in the sale of the properties on the Glanerought development between January 2006 and 2009.I have to say that there is nothing in the evidence before me to support the contention that the appointment by the receiver of the firm of Cohalan Downing, a Cork city based firm was in any way inappropriate.
It was also pleaded that the replacement of the existing solicitor was unsatisfactory and that the title which was furnished was unmarketable and unmortgageable. In respect of these issues I have to say that there was little or no appropriate evidence to support these contentions. The only witnesses who gave evidence in this regard were the defendants themselves and Mr. Daly. No witness capable of giving appropriate expert witness was called on behalf of the defendants to establish that the receiver furnished a title which was unmarketable and unmortgagable. Mr. Daly purported to give evidence to the effect that the title offered was unmarketable and ummortgageable, but he is clearly not someone capable of giving expert evidence on the issue of title. Mr. Daly did raise a number of practical issues which would be required to be dealt with before the sale could be completed, for example, issues in relation to compliance with planning permission, the necessity for home bond cover or similar insurance to name but two matters. These are all matters that can be dealt with in the run up to the closing of a sale and are not, strictly speaking, title matters. In any event, there is simply no evidence before me to the effect that the receiver furnished a title which was unmarketable and/or unmortgageable. Finally, I know of no basis upon which it could be suggested that the receiver was not entitled to appoint his own solicitor for the sale of the properties comprised in the Glanerought development.
Other Issues Relating to the Role of the Receiver
Following his appointment, the receiver, Michael Cotter, arranged a meeting which took place on the 31st August, 2009, with Mr. Fitzgerald, Mr. Kiernan and Mr. Collins. The receiver outlined his strategy for the receivership. A memorandum of the meeting noted that the receiver did not intend to engage in a fire sale of the assets. The difficulty in valuing the properties involved was also noted. It was pointed out that a long term view would be required in assessing the value of the properties. As set out above, the receiver appointed Mr. Tyrell of Cohalan and Downing as selling agents. They were to provide an opinion on values and to advise on marketing and the sale of the properties concerned. By letter of the 30th September, 2009, Cohalan Downing furnished its advices to the receiver. No issue has been taken with the general strategy set out in that letter from Mr. Tyrell
Mr. Daly was the principal witness on behalf to the defendants in relation to the actions of the receiver and those of Mr. Tyrell. A significant contention on the part of Mr. Daly was that the value placed on the various properties by Mr. Tyrell in his letter of the 30th September, 2009, was too low. Mr. Tyrell had furnished a suggested price range in respect of each of the property types on the estate. Mr. Daly was strongly of the view that those values were simply too low. Mr. Daly accepted that the prices at which the properties were being sold prior to the appointment of the receiver were too high. He said he had tried to obtain instructions to offer the properties at reduced prices when he was still acting as auctioneer in respect of the properties, but he was unable to get such instructions. He recognised the need to reduce prices, but his view was that any reduction should have been less than that proposed by Mr. Tyrell. As an example Mr. Tyrell valued a property, a three bed roomed detached house at €165,000, but Mr. Daly placed a value of €190,000 on the same property.
I heard lengthy evidence from Mr. Daly, Mr. Tyrell and from Ms. Margaret Kelleher, an auctioneer of some twenty years experience, a partner in Lisneys, based in Cork. She gave evidence on behalf of Anglo and the receiver. The tenor of her evidence was that the prices at which the properties were valued by Mr. Tyrell were fair and reasonable. Having regard to the evidence that I have heard on this issue, I have come to the conclusion on the evidence before me that the prices at which Mr. Tyrell proposed to sell the various properties were fair and reasonable.
Another significant issue surrounded the marketing of the properties. As I said, Mr. Tyrell had outlined his strategy in general terms in the letter of the 30th September, 2009. Essentially, there was to be an open day following a marketing strategy. As part of his strategy Mr. Tyrell spoke to a journalist with the Irish Examiner, Tommy Barker. An article appeared in the Irish Examiner on the 7th November, 2009, under the headline “Kenmare Firesale Begins”. This was the day before the first open day planned by Mr. Tyrell. It is an understatement to say that this article was viewed as unhelpful by Mr. Daly and Mr. Tyrell alike. However, Mr. Daly was very critical of the appearance of the article in the newspaper and Mr. Tyrell’s role in relation to its publication. Mr. Daly became aware of the publication of the article in advance and was concerned at the effect of the article on other properties in Kenmare and the general area. He was so concerned that his son Senator Mark Daly contacted Mr. Aynsley, chief executive of Anglo Irish Bank, in advance of the open day. Mr. Daly said that having become aware of the article, if he had been dealing with the matter he would have tried to have the article pulled. He accepted in general terms the value of getting an article written about the forthcoming sale, but his concern was focused on the adverse effects of the headline.
I accept that no one involved in this case wanted to see the property marketed as a “firesale” but in my view this was something which cannot be laid at the door of the receiver, and in fairness, I cannot see on the evidence, how any blame can attach to Mr. Tyrell for the headline which appeared in the Irish Examiner. It must also be observed that the article did not stop potential purchasers from coming to the open day on the 8th November, 2009. The evidence established that a significant number of people turned up for the open day. To that extent it seems to me that there is no evidence to support any contention that the appearance of this article impacted adversely on the sale of the properties.
The next issued raised by Mr. Daly concerns the events that occurred on the open day and thereafter. He had a number of complaints in relation to the conduct of the open day by Mr. Tyrell and in respect of matters leading up to that day. I have already indicated that I am satisfied that there is no issue on the question of whether or not there was a marketable and or mortgageable title to various properties. However, Mr. Daly raised a number of issues that had to be resolved in relation to the properties before any sale could be completed. There was, as mentioned, an issue with Home Bond or similar insurance cover. This was a problem inherited by the receiver and one that had to be resolved by the receiver. Apparently M.D.Z. Limited had not registered a number of properties appropriately with insurers. An issue in relation to compliance with planning permission had to be resolved. The issue of BER certificates had to be dealt with and there was an issue with the management company which had been struck off and had to be reinstated. It was reinstated on the 31st October 2009, well before the open day but nonetheless, people in attendance at the open day had raised queries about the management company. The point made by Mr. Daly was that these issues should have been dealt with prior to the open day. Mr. Tyrell and Mr. Cotter in their evidence explained that the purpose of the open day was to gauge public interest in the properties. They indicated that it was never the intention that any properties would actually be sold on the open day as such. Deposits would not be taken, but details of expression of interest from potential buyers were taken on the day.
The issue in relation to Home Bond or similar insurance cover was finally resolved by March 2010. BER certificates were available for all but four of the properties by mid January and three of the properties could not be sold because they were not built in accordance with planning permission.
In an ideal world I would have thought that the matters referred to above would have been dealt with before a marketing campaign took place. This was not an ideal world. This is not a launch of a new development but an attempt to kick-start a sale of properties in a development that had been on the market since 2006. All of the matters that had to be dealt with should long since have been sorted out by those previously involved in the development. The only outstanding matter that could not have been dealt with in advance of the open day was any issue or query raised about the status, management and role of the management company. It would have been difficult to anticipate the nature of any concerns or queries in advance of the open day.
There was no evidence from the defendants as to why these various matters had not been dealt with previously. In fairness to the defendants, they described themselves as silent partners in the development and it has been clear throughout the evidence that the main moving party in relation to the development was Mr. Fitzgerald.
I accept that it was never the intention or expectation that anyone would enter into contracts to purchase any of the properties on the open day. Indeed, not all of the properties were being actively marketed on the open day. The purpose of the exercise was to gauge the level of interest. The intention originally was to market the apartments in the development first.
At the open day it appears that there were a significant number of people in attendance. Mr. Tyrell explained that if there had been a good level of interest, it might have been possible to get an increase in prices as things moved along. On the open day itself, whilst there were many people interested, there were a lot of enquiries about the status of the management company. Mr. Tyrell made inquiries with the solicitors acting on behalf of the receiver PJ. O’Driscoll, Cork, in relation to this issue. One of the other issues mentioned by Mr Daly in the course of evidence was a problem with planning in respect of the sale of holiday homes. Mr. Tyrell’s evidence was that there was no particular query raised by potential purchasers on this issue on the open day.
Subsequently by the 12th January, 2010, Mr Tyrell was satisfied that he was in a position to commence sales and by the 26th January, 2010, he had sent out a number of contracts in relation to the properties to people who had expressed an interest at the open day. By this time a letter had been received from Brian O’Kennedy and Associates Limited, Consulting Engineers, dated the 18th January, 2010, dealing with a large number of issues including the question of planning permission, BER certificates and so on.
Mr. Tyrell also explained that at the open day, he informed those who were interested in the properties that he would clarify any legal issues and get back to them subsequently. He said that he worked his way through the enquiry list in the aftermath of the open day but was unable to generate any sales by Christmas.
I mentioned earlier that Ms. Kelleher of Lisneys gave evidence on behalf of the receiver. In the course of her cross examination on behalf of the defendants she was asked as to whether outstanding issues should have been resolved before the holding of an open day. She agreed in her evidence that in an ideal world, issues of title would be sorted out before a property goes on the market. She expressed the view that what may happen in an ideal world may not always be practical. There were wider issues involved in this case. She referred to the collapse in the property market and the setting up of NAMA. She noted the legal issues that were queried related to matters raised on the open day. These had to be clarified and it was her evidence that it was reasonable for Mr. Tyrell to clarify any queries. It has to be said that although Mr. Daly was strongly critical of Mr. Tyrell in relation to what he described as “legal issues” that required to be resolved before the opening day, there was no evidence from anyone who came to the open day and had queries about matters such as planning compliance, BER certificates. As Mr. Tyrell indicated in his evidence, the main questions focused on the position of the management company.
I think it is clear from the evidence that following the open day, Mr. Tyrell contacted those who had been present and had expressed an interest in the properties and advised them that he would clarify legal issues. I have to accept his evidence, which has not been contradicted, that the legal issues centred on the status of the management company. It is quite clear that other issues had to be resolved, even if not to the forefront of potential purchasers minds on the open day, but these are the sort of issues that typically have to be resolved in the time between the signing of the contract and the closing of a sale. In other words, a number of matters would have to be dealt with before a sale was completed but it was not essential to have these matters concluded before a marketing exercise took place. As I have said previously and as was stated by Ms. Kelleher, in an ideal world one would expect these matters to be dealt with prior to the marketing of the properties.
It is interesting to note the responses made to Mr. Tyrell by some of those who attended the open day in a document headed Schedule of deposits taken. Two had concerns about the price and whether it was still too high. One had a problem obtaining finance and a few had issues about the fact that there was a management company for the estate and the fact that this could involve costs in the future.
There was one other issue raised in the course of the evidence which I have not previously dealt with and that related to the state and appearance of the Glanerought development at the time of the open day. Mr. Daly had given evidence as to what he considered to be the unsatisfactory nature of the appearance of the development. I have heard the evidence of Mr. Cotter and Mr. Tyrell in regard to this issue. I have to say that I was less than impressed by Mr. Daly’s evidence in this regard. Mr. Daly produced a photograph depicting a Christmas tree left on part of the development. Clearly that had been there for a considerable period of time and indeed must have been present during the time when Mr. Daly was the auctioneer dealing with the sale of the property. I note that Mr. Cotter was obliged, following his appointment as receiver, to let go the existing caretaker on the estate and further, that steps were taken to maintain the appearance of the estate. For these reason I reject the evidence of Mr. Daly on this point.
Submissions
Having outlined the evidence that was given in relation to these matters, I now want to consider the legal submissions made on foot of the evidence herein. I propose to consider in the first instance, the submissions made by Mr. Hussey. He referred to the duties of a receiver and placed reliance on the case of Standard Chartered Bank v. Walker [1982] 1 W.L.R. 1410 and to a passage from the judgment of Denning M.R. at p. 1415 where he stated:-
“We have had much discussion on the law. So far as mortgages are concerned the law is set out in Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949. If a mortgagee enters into possession and realises a mortgaged property, it is his duty to use reasonable care to obtain the best possible price which the circumstances of the case permit. He owes this duty not only to himself to clear off as much of the debt as he can, but also to the mortgagor so as to reduce the balance owing as much as possible, and also to the guarantor so that he is made liable for as little as possible on the guarantee. This duty is only a particular application of the general duty of care to your neighbour which was stated by Lord Atkin in Donoghue v Stevenson [1932] AC 562, and applied in many cases since . . . The mortgagor and the guarantor are clearly in very close ‘proximity’ to those who conduct the sale. The duty of care is owing to them – if not to the general body of creditors of the mortgagor. There are several dicta to the effect that the mortgagee can choose his own time for the sale, but I do not think this means that he can sell at the worst possible time. It is at least arguable that, in choosing the time, he must exercise a reasonable degree of care.
So far as the receiver is concerned, the law is well stated by Rigby L.J. in Gosling v Gaskell [1896] 1 QB 669, a dissenting judgment which was approved by the House of Lords [1897] AC 575. The receiver is the agent of the company, not of the debenture holder, the bank. He owes a duty to use reasonable care to obtain the best possible price which the circumstances of the case permit. He owes this duty not only to the company (of which he is the agent) to clear off as much of its indebtedness to the bank as possible, but he also owes a duty to the guarantor, because the guarantor is liable only to the same extent as the company. The more the overdraft is reduced, the better for the guarantor. It may be that the receiver can choose the time of sale within a considerable margin, but he should, I think, exercise a reasonable degree of care about it. The debenture holder, the bank, is not responsible for what the receiver does except in so far as it gives him directions or interferes with his conduct of the realisation. If it does so, then it too is under a duty to use reasonable care towards the company and the guarantor.
If it should appear that the mortgagee or the receiver have not used reasonable care to realise the assets to the best advantage, then the mortgagor, the company, and the guarantor are entitled in equity to an allowance. They should be given credit for the amount which the sale should have realised if reasonable care had been used. Their indebtedness is to be reduced accordingly.”
I am satisfied that that passage encapsulates the principles of law applicable. Mr. Hussey in his submissions stated that in this case the Bank approved the appointment of the estate agent, that the Bank approved the prices recommended by the estate agent and decided that they were going to sell as mortgagees in possession. The receiver negotiated on behalf of the Bank with the purchasers. On that basis, Mr. Hussey contended that the receiver was the agent of the Bank and that therefore the Bank was responsible for his actions and insofar as he have acted negligently the Bank are responsible for that. He noted the passage in which it was said that if the mortgagee or the receiver has not used reasonable care to realise the assets to the best advantage then the mortgagor is entitled to an allowance and he contended that that is what should happen in this case. He submitted that on the basis of the evidence there were sufficient inquires made at the open day to allow for the entire sale of the estate and that as a result of being told that there were legal issues, the confidence of the public was seriously dented and that there was a lost opportunity.
A second point made by Mr. Hussey was that because the form of sale taking place was a sale by the Bank as mortgagee in possession that the receiver could only be acting as an agent of the Bank. It was further contended that if the open day turned out to be a totally lost opportunity that the loss incurred is what the receiver hoped to sell at, i.e., a total figure of €5.015 million. If one took the prices set by Mr. Daly a further €1.5 million should be added to the figures.
Mr. McCarthy S.C. on behalf of the receiver also referred to the nature of the duty owed by a receiver. He referred to a number of passages from Halsbury’s Laws of England, Vol. 77, 2010 at para. 479. I will just refer to one brief part of what was cited because it is of assistance. It is stated:-
“A receiver and manager owes the same duty in equity to the mortgagor and all subsequent encumbrancers and guarantors as the mortgagee to exercise his powers in good faith and for the purpose of obtaining repayment of the debt owing to the mortgagee. . . . A receiver exercising his power of sale also owes the same specific duties as the mortgagee. The receiver is entitled (like the mortgagee) to sell the property in the condition in which it is without awaiting or effecting any increase in value or improvement of the property. The receiver is not obliged before sale to spend money on repairs to make the property more attractive before marketing it, or to “work” an estate be refurbishing it or to apply for planning permission . . .
The duties owed by a receiver and manager do not compel him to adopt any particular course of action, such as selling the whole or part of the mortgaged property, carrying on the business of the company or exercising any other powers and discretions vested in him. The primary duty of the receiver is to be debenture holders and not to the company. The primary objective of the receivership is to enforce the security by recouping the monies which it secures from the income or assets of the company subject to the security, and when recoupment is complete to hand the remaining property back to the control of the company.”
Reference was also made to the decision in Mooreview Developments Limited and Others v. First Active Plc and Others [2009] IEHC 214 in which Clarke J. stated at para. 12.1:-
“There is no doubt but that a receiver who sells the assets of a company may be liable, both at common law and under statute (s. 316A, Companies Act 1963, as inserted by s. 172 Companies Act 1990) for failing to realise the true value of the asset concerned.”
I was also referred to the decision in Irish Oil and Cake Mills Limited and Another v. Donnelly (Unreported, High Court, Costello J. 27th March, 1983), in which he noted:-
“The receiver derives his appointment and his authority from the contract entered into between the parties. In this case, as is usual the parties agree that he is to be treated as the agent for the mortgagors, the plaintiffs herein. This provision protects the debenture holders from liability as mortgagees in possession and establishes the relationship between the receiver and the company.”
He also referred in the course of his submissions to the decision in the case of Ruby Property Company Limited and Others v. Raymond Kilty and Superquinn, (Unreported, High Court, McKechnie J. 21st January, 2003). In the course of his judgment in that case McKechnie J. helpfully summarised the law in relation to the duty and obligations of a receiver. In the course of that judgment it was also pointed out that the onus of proof is on the party asserting negligence on the part of the receiver.
Having referred to the general principles of law applicable Mr. McCarthy then referred to the facts of this case. It was pointed out that although serious allegations were made against the receiver in the course of these proceedings, not one complaint was made to Mr. Cotter until such time as there was a replying affidavit furnished in the course of the summary judgment proceedings in May 2010. Mr. Kiernan and Mr. Collins never made any contact prior to this with the receiver to say that there was anything wrong with the conduct of the receivership. Nothing was done by the defendant until they were themselves served with these proceedings.
The second point made by Mr. McCarthy was that there was no independent expert testimony furnished to the court as to the conduct of the receivership. The main evidence given on behalf of the defendants was that of Mr. Daly. Mr. Daly was not an independent witness and there was simply no expert evidence as to the alleged negligence of the receiver. The only point of substance that could be raised was that which arose in the course of the cross examination of Ms. Kelleher to the effect that the open day may have been a missed opportunity. Mr. McCarthy went through the amended defence and counterclaim and examined the various allegations made against the receiver. He pointed out that under a significant number of the headings raised in the defence and counterclaim no evidence of any kind was led to demonstrate any negligence on the part of the receiver. The high point of the evidence from the point of view of the defendants was the view expressed by Ms. Kelleher that the fact that Mr. Tyrell contacted a number of people after the open day to say that there were legal issues (in relation to the management company) amounted to a missed opportunity. It was submitted by Mr. McCarthy that it was a reasonable thing to obtain clarification for those parties who had raised issues about the management company, a point accepted by Ms. Kelleher. The fact that this had to be done did not render the entire site toxic. It had always been the expectation that contracts would begin to go out to interested parties subsequent to the open day and in fact they started going out from mid to the end of January. It was submitted that there was nothing negligent in adopting the course of action taken by Mr. Tyrell and Mr. Cotter. Accordingly, he submitted that there was no basis of a claim in negligence against the receiver.
I should refer briefly to the submissions of Mr. McCann on this issue. Mr. McCann emphasised the fact that the receiver was the agent of the borrower in accordance with the terms of the mortgage deed. He pointed out that if there was default by the receiver it did not attach to the Bank. In order for a claim in tort to be maintained, it was not enough to show wrongdoing, there had to be wrongdoing and a loss caused by the wrongdoing. He submitted that there was no evidence of any negligence on part of the Bank in relation to the sales process. Equally, there was no evidence of any higher sales price being achievable because of something the Bank or did not do. Further, there was no evidence of an actual loss. He also reiterated the fact that there was no expert testimony from any expert in insolvency or from an independent auctioneer. Finally, he emphasised that there was no evidence form anyone to indicate why people did not purchase.
Decision
In general terms I should say that there seems to me to be little or no dispute between the parties as to the extent and nature of the duty owed by a receiver to a borrower and indeed to a mortgagee. The question is whether anything occurred in the course of the receivership in this case that amounted to negligence. The issue centres on the role of Mr. Tyrell. In general terms, I have already indicated my view as to the fixing of prices in respect of the various properties at Glanerought. There was no real conflict between the parties as to the approach and strategy adopted by Mr. Tyrell. I have already indicated that I do not accept that Mr. Tyrell was in any way responsible for the unfortunate headline that appeared in the Irish Examiner. It was appropriate for Mr. Tyrell to have attempted to obtain editorial material in the newspapers as part of the marketing strategy. One thing that can be fairly said is that the strategy did in fact work as large numbers turned up at the open day and Mr. Tyrell was in a position to take details from a considerable number of interested people.
This case comes down to a very net issue. Was there any wrongdoing on the part of the receiver through his agent, the auctioneer appointed by him to handle the sale of the properties comprised in the Glanerought development and if so was the alleged negligence such that it caused loss to the defendants. Following the open day, Mr. Tyrell got back to a number of parties who had expressed interest and he did confirm that he would seek clarification on the legal issues. The legal issues described by Mr. Tyrell in his evidence related to the management company. As indicated previously the management company had been struck off and had subsequently been re-instated prior to the open day. Mr. Daly referred to other matters as being “legal issues” which required to be complied with. There were a number of such other issues, but it is clear from the evidence of Mr. Tyrell, and it is the only evidence I have on this point, that these issues were not matters of concern for interested parties.
Other than the evidence that there was an issue on the open day in relation to the management company and that this resulted in Mr. Tyrell contacting parties who had expressed interest to advise them that that issue would be clarified, there is nothing else in the evidence before me that could in any shape or form amount to negligence on the part of the receiver in the conduct of the receivership.
Accordingly, I need to consider the evidence of Ms. Kelleher. As I have pointed out, her evidence is the high point of the case that can be made on behalf of the defendants. In the course of her cross examination, Mr. Hussey had said to Ms. Kelleher that the fact that, having generated interest at the open day Mr. Tyrell then went back to the interested parties and informed them that there were “legal issues” to be clarified and that he would get back to them, was an opportunity wasted and Ms. Kelleher agreed with that comment. In the course of this part of the cross examination, Mr. Hussey accepted that his complaint in this regard did not centre on whether or not there were, in fact, legal issues but rather centred on the marketing approach taken by Mr. Tyrell in this regard.
Ms. Kelleher was then re-examined by counsel on behalf of the receiver and in the course of re-examination, she said that as matters were raised by interested parties on the opening day, that it was absolutely appropriate for the auctioneer, Mr. Tyrell, to clarify those issues. She confirmed that after an open day, she would expect contracts to go out some four to six or eight weeks afterwards.
Therefore it can be seen that although Ms. Kelleher accepted that the open day was something of an opportunity wasted, she accepted in re-examination that it was perfectly reasonable for Mr. Tyrell to clarify the issues raised by interested parties.
Unfortunately, the facts of the matter are that although there were parties who were interested in the properties at Glanerought following the open day it transpired that turning that interest into completed contracts for sale was something that proved to be very difficult. Although there had been some 200 inquiries arising from the open day, very few contracts in fact went out. There were in fact four completed sales and only a couple of other potential sales.
It is in that context that I have to consider whether or not the events immediately following the open day were such as to amount to negligence on the part of Mr. Tyrell the servant or agent of Mr. Cotter the receiver. On the open day there were a number of inquiries from interested parties about the properties on offer. It is also clear that there were a number of queries in relation to the management company. Mr. Tyrell had an obligation to resolve those queries. It is clear from Ms. Kelleher’s evidence that this was a reasonable approach to take. What he did, apparently, was to indicate to those who had raised queries that there were legal issues to be resolved and when they were resolved he would contact the parties concerned again. I think it is clear from the evidence that Mr. Tyrell was in contact with those who had expressed an interest on a number of occasions subsequent to the open day.
The only evidence that supports the contention as to negligence is one sentence in the evidence of Ms. Kelleher. If one examines all of her evidence, particularly her view that it was reasonable for Mr. Tyrell to clarify the issues, together with the rest of the evidence in this case, it is impossible to reach a conclusion to the effect that there was negligence on the part of the receiver. The defendants have failed to establish a breach of the duty undoubtedly owed by the receiver to them.
Even if I was wrong in coming to that conclusion, there is another problem from the point of view of the defendants. There is not a scintilla of evidence to show that any loss has flowed to the defendants as a result of the handing of the open day and its aftermath. On the contrary, the evidence shows that the property market at the end of November 2009, was in a very bad state. To say that it was in freefall may not be an exaggeration. Mr. Daly in the course of his evidence had explained that he had difficulties in the sale of properties in Glanerought and he attributed that to the fact that he could not get a reduction in prices from Mr. Fitzgerald. I have had the benefit of the expert evidence of Ms. Kelleher, including her report. I have also had regard to the evidence of Mr. Tyrell. It is clear from all of these witnesses that there were great difficulties in the market at the time. I simply cannot see how it could be said that the failure to sell more than a handful of the properties by the receiver is for any reason other than the extremely depressed state of the property market. Certainly, there is no evidence before the court to satisfy me that, were it not for the actions of the receiver and/or Mr.Tyrell, the properties would have sold. After all it has to be borne in mind that according to Mr. Daly, these properties were being sold at a considerable undervalue. Mr. Tyrell had a list of interested parties and he worked through that list with a view to trying to get those interested parties to enter into contracts for the purchase of the properties at Glanerought. Despite his best efforts, this simply did not happen save for a small number of sales. Glanerought was a development that had been on the market since 2006. Sales had stagnated to a large extent by the time of the appointment of the receiver. Unfortunately, the problems manifest at Glanerought happened in many other parts of the country and are reflected in the collapse of the property market throughout the country.
To conclude, I can only say that the defendants have fallen far short of providing to this Court the necessary evidence to show that they have suffered any loss by reason of the actions of Mr. Cotter or Mr. Tyrell. In those circumstances I do not have to consider the question as to whether or not Anglo Irish Bank Limited could be liable in respect of any wrongdoing on the part of the receiver.
In conclusion, it seems to me that the plaintiff is entitled to judgment for the sums claimed herein. There is an issue which was postponed in relation to performance bonds and I will hear the parties as to that aspect of the case at a later stage.
Mastertrade (Exports) Ltd. v. Phelan
[2001] IEHC 171 (4th December, 2001)
Judgment of Mr Justice Roderick Murphy delivered the 4th day of December 2001
Background
1.1 The twelve plaintiff companies, referred to as Master Meat Group by the parties though legally separate, traded in meat in the 1980’s.
1.2 The first named defendant was the controlling shareholder. On the 15th of October 1986 he sold 50% of his interest in the group to Mr Zacharia El Taher. Within six months Mr El Taher, unknown to Mr Phelan and in breach of the joint venture agreement of the 10th of October 1986 (as so found by this Court on the 11th of September 2001), sold his interest to Mr Laurence Goodman.
1.3 The group underwent certain difficulties in 1988 when bank borrowings reached £20m. Negotiations between agents (normally acting for Mr El Taher but in reality acting on behalf of Mr Goodman) and Mr Phelan resulted in the latter invoking certain deadlock provisions contained in the joint venture agreement of the 10th of October 1986, following the issue and service, but not the hearing of injunctive proceedings against Mr. Phelan. Mr Phelan nominated a price of £2.5m for the group. As provided for in the agreement, this was countered by a counteroffer of £2.75m which was deemed binding on the parties and was subject to an agreement of September, 1988.
1.4 Mr Phelan commenced proceedings against Mr Goodman and Mr El Taher; following that agreement; later against the companies and the companies, in turn, commenced the present action against Mr Phelan and Master Cut Foods Limited, (the second named defendant herein) which was controlled by Mr Phelan.
1.5 It was agreed between the parties and so ordered by O’Donovan J., on the 27th of July 2000, that these actions be heard together. Furthermore it was agreed that documents, as discovered, would be deemed to prove themselves.
1.6 The hearing of the action commenced in May 2001. It was agreed that certain issues should be tried as preliminary issues before the Court. In order to facilitate this, it was agreed between the parties and by the Court that each of the cases would be opened to the Court and that submissions would be made in relation to the issues which the Court deemed appropriate.
1.7 After thirty-six days hearing over the period from May to July 2001 the first case was opened extensively and a summary of the present case, dealing with fifteen alleged misappropriations (out of a total of thirty-two claimed) where made in relation to the documents and accounts discovered, most of which had already been opened to the Court.
1.8 By judgment dated the 11th of September 2001 the Court determined certain preliminary issues.
1.9 When the hearing recommenced in October 2001 the present action was opened fully to the Court. The remaining allegations of misappropriation, seventeen in all, were dealt with in the context of supporting documentation.
1.10 A motion to strike out the companies’ claim, was formally moved on the 1st of November 2001, the forty-fifth day of the hearing.
2. Motion to Strike Out
2.1 That motion, heard over four days from 1st November to 7th November sought the following orders:-
(1) An order for the trial of an issue as to the entitlement of the plaintiff to maintain the above entitled proceedings having regard to the wrongdoing alleged and/or found against Laurence Goodman.
(2) An order staying and/or striking out these proceedings for abuse of process.
(3) Further and other reliefs.
(4) Costs.
The application was grounded upon the affidavit of Paschal Phelan of 16th October 2001. A replying affidavit of Anita Kerrigan, solicitor for the respondents, was sworn on the 26th October, 2001. A further affidavit of Mr. Phelan was sworn on the same date.
3. Grounding Affidavit
3.1 Mr Phelan referred to the following which are detailed in paragraph 3 of his affidavit as follows:-
(a) that Laurence Goodman procured Zacharia El Taher to enter into a sale in April 1987 which sale was in breach of the contract between Mr Paschal Phelan and Mr El Taher. It follows, in the light of the admissions made by Mr Goodman, that he wrongfully induced such sale;
(b) the fact of such sale having occurred was actually concealed by Mr Goodman who procured a situation where Mr Phelan was tricked and deceived into exercising the deadlock provisions in the October 1986 agreement with Mr El Taher;
(c) Mr Goodman misled organs of the State in a calculated and deliberate fashion in order to maintain his otherwise unlawful ownership of the Master Meat Group of companies;
(d) Mr Goodman abused the process of the Court in relation to the 1988 injunction proceedings issued to prevent Mr Phelan from relying on his agreement with Mr El Taher, by not disclosing to, and concealing from the Court, the fact of the beneficial ownership of the shares which he had acquired beneficially from Mr El Taher;
(e) Mr Goodman throughout the entirety of the proceedings, until the amended defence incorporating a letter of September 2000, knowingly and deliberately concealed from the Court, and sought to conceal from the plaintiff, the fact that he was the beneficial owner of and/or in control of the companies in the Master Meat Group of companies;
(f) The actions of Laurence Goodman was premeditated and deliberate as he had the opportunity to, and did consult, a variety of persons who were expert in their field, in deciding to pursue this course;
(g) Mr Goodman remains the beneficial owner of the Master Meat companies whose existence is entirely notional at this stage as they do not purport to hold any assets of substance and have been dissolved for failure to make returns in accordance with the Companies Acts.
Paragraph 4 and 5 of Mr Phelan’s affidavit deals with the effect of the actions above mentioned. In those circumstances he believes and is advised that it is inappropriate that this action proceeds. He deposes as follows:-
“4. The effect of these actions was to ensure that an entirely unlawful and improper benefit would be obtained by Mr Goodman, and the purpose and effect of these proceedings was to seek to procure, by indirect means, a benefit (for) Mr Goodman so that his position as wrongdoer will be rewarded. The bulk of the matters which are complained of predate any involvement by Mr Goodman who has no complaint, good bad or indifferent in respect of same but who, nonetheless, will be permitted to have the entire benefit of any award made in favour of the companies whose continued existence is clearly intended solely for the purpose of pursuing Mr Phelan.
5. In these circumstances, I say and believe and am so advised that it is inappropriate that the actions proceed without a determination made in respect of the entitlement to pursue this relief from the outset. The evidence which is being mustered is clearly copious and likely to absorb a very considerable amount of court time. I do not believe that this is entirely accidental and believe that it is part of the war of attrition against your deponent and that the Court should not be used in this fashion.”
3.2 The replying affidavit of Anita Kerrigan, Solicitor for the company plaintiffs, and respondents in this motion, believes the application to be wholly misconceived and to further delay the progress of the proceedings. Ms. Kerrigan says that almost all of the matters upon which Mr Phelan purports to rely must await further evidence and adjudication. She says she is advised that the defence of ex turpi causa non oritur actio has no application to the situation where the alleged wrong is not attributable in any way to the plaintiff companies. There is no basis for the contention that the fact and legal personality of the plaintiff companies, the respondents to this motion, can be ignored. The claim made by the companies are of deliberate, widespread and systematic fraud and unlawful dissipation of assets, affected by the applicant in relation to the assets of the companies.
The affidavit then continues to deal with each of the allegations. She avers that it does not follow from the admissions of Mr Goodman that he wrongfully induced the sale of April 1987. It has not been established that Mr. Goodman’s intention was to procure or induce a breach of contract nor that Mr Phelan was tricked and deceived into exercising the deadlock provisions. Mr Phelan cannot complain where he invoked the deadlock mechanism and where he, as effective controller of the companies, put a value on the companies. There was no abuse of the Court by the inter parties injunction proceedings in September 1988 in circumstances were the ownership of Master Meat Anstalt was not a relevant consideration. Denial is not concealment. The companies are legal entities separate from their members and their rights are unaffected by the change in ownership of their shares. The company claims are central not only to these proceedings but also to Mr Goodman’s defence in the first named action Phelan v. Goodman and El Taher ([1989] No. 6960 p).
3.3 Mr Phelan’s supplementary affidavit of the 26th of October 2001 refers to the present position of the companies as having no active trading and having been struck off the register and reinstated shortly before the onset of the trial. Their continued existence is to maintain proceedings which can only be intended to benefit Mr Goodman personally.
3.4 Proceedings were referred to between the defendants on the first day of the hearing of this action before O’Higgins J. which were not opened to this Court. It is not appropriate that, given the circumstances of those proceedings, this Court should be referred to them in this way. They are not within the deponent’s own knowledge. Hearsay can only be considered by the Court in certain circumstances where the source of knowledge is given. Moreover, they were specifically heard by another court so as not to influence this Court.
4. APPLICANTS SUBMISSIONS
4.1 Mr Phelan and Mastercut Foods Ltd. say that Mr Goodman is not entitled to maintain these proceedings which should be struck out as an abuse of process is because of the inducement by Mr. Goodman of the agreement of the 15th of April 1987 the admissions made by Mr Goodman on the 29th of September 2000 and the decision of this Court of the 11th of September 2001.
This led to a breach of the contract of the 10th of October 1986 (see 1.2 above) which was induced by Mr. Goodman. Machinery was put into place of a wrongful nature for the concealment of the transaction which led inexorably to the destruction of the Master Meat Group. A series of frequent tortuous deceits interfered with the economic interests of Mr. Phelan and the Master Meat Group of Companies. Wrongful disclosure of confidential information was made to a competitor. Messrs. Taher, as Directors of the Master Meat Group companies, were prevented from carrying out their duties and responsibilities towards those companies when Mr. Goodman became a shadow Director and controller.
4.2 The applicants also submit that in any event the books and records of the Company were available to Mr. Goodman.
4.3 The submission expressed doubts as to whether title to the shares in the companies passed to Mr. Goodman or to his nominees. There was deliberate deceit and misleading of a Government Minister, from whom a conditional consent was obtained in relation to the purchase of Mr. Phelan’s remaining 50% on or about the 16th of September, 1988. Moreover, Mr. Phelan was prevented after the 16th of September, 1988 from remaining with the companies for the purpose of the orderly transfer of the business and affairs for the Company.
The true nature of the 15th of April, 1987 transaction and the beneficial interest acquired by Mr. Goodman was concealed from the Court in the application for an injunction on or about the 5th of September, 1988. This constituted not only an abusive process but a contempt of Court.
4.4 The reality of the proceedings by the Company against Mr. Phelan and Master Cut Foods Limited is that Mr. Goodman personally would become entitled to the claim made by the companies.
Mr. Phelan’s amended defence of the 30th January, 2001 raised an objection to the maintenance of the present proceedings against him on grounds that the plaintiff Companies were acquired by Mr. Goodman by means of unlawful and improper activities and in breach of certain statutory and regulatory provisions. Those who were giving instructions on behalf of the plaintiff Companies, the objection continues, are persons who have achieved their position in those companies by reason of breach of contract, inducing breach of contract, conspiracy and/or other wrongful or unlawful acts.
The applicants, as defendants in these proceedings, say that the plaintiffs are estopped from maintaining such proceedings in that they are not brought in good faith but are brought at the instigation of Mr. Goodman who unlawfully acquired ownership of the plaintiff Companies and who would be permitted to obtain the benefit of his own wrongdoing in the event of the relief sought being afforded.
4.5 The applicant refers to the admissions made by Mr. Goodman on the 29th of September, 2000 and the Judgment of this Court on the 11th of September, 2001 with regard to the reality of the agreement of the 15th of April, 1987 and concludes that the admission and findings of the Court tarnish Mr. Goodman with such wrongdoing and illegal activity on the basis of his behaviour to date amounting to an abuse of process and that Mr. Goodman necessarily is relying on his procurement and inducement of the breach of the agreement between Mr. Phelan and Mr. Taher in order to maintain the plaintiff’s action. The Court was urged that no action could be based on a disreputable cause and the Court should not lend its aid to one who founds his cause of action upon an immoral or illegal act.
4.6 It was submitted that it followed from Mr Goodman’s affidavit of the 31st of October 2001 (sworn not in this motion but in the discovery motion) where he stated at paragraph 5 that he gave instructions with regard to all proceedings that discovery be made, that these proceedings are for his benefit and not for the benefit of the companies. Persons acting on the respondent’s behalf got an indemnity from Mr Goodman. This demonstrated a continuum in the implementation of the agreement of the 15th of April 1987.
4.7 It was further submitted that Mr Goodman was asking for a recasting of the agreement of the 15th of September 1988 and that the Court should not be moved to improve his bargain. There was no complaint made from the 15th of April 1987 when Mr Goodman, in the applicant’s submission, was a shadow director and that Mr. Goodman is the real plaintiff in this action. The applicants say that Mr Goodman had abused the legal process by swearing an affidavit in injunction proceedings in September 1988 (which was not opened) which deliberately misled the Court with regard to those injunction proceedings. Moreover, the suppression of facts and the false facts given to the Fair Trade Commission were further evidence of abuse of process.
4.8 The applicants submit that the judgment of the Court on the 11th of September 2001 established wrongdoing and illegality. This was a case where the Court should lift the corporate veil. Moreover the admissions, the finding of the Court, the operation of the deadlock agreement and the letter from Rory O’Donnell, Solicitor, to Mr El Taher of the 19th of May 1989 referred to in that judgment, disentitle Mr Goodman from proceeding with this claim. There was wrongdoing in concealment and in the indemnity given to Mr Zacharia El Taher which amounted to a bribe, a promise of payment for award.
4.9 The Court was urged that this wrongdoing constituted fraud and was a factor the Court must consider in lifting the corporate veil. Reference was made to Cummings v. Stewart [1911] 1 I.R. 236 at 240 where Meredith MR referred to the Companies Act, 1908, as imbodying a code framed ( inter alia ) for the purpose of preserving and enforcing commercial morality. He continued:-
“… and it would be strange, indeed, if that code could be turned into an engine for the destruction of legal obligations, and the overthrow of legitimate and enforceable claims. The most casual reader of the speeches of the law lords in the case of Salomon v. Salomon and Company cannot fail to observe that there is nothing in any of those speeches contrary to the view I have just expressed.”
4.10 It is submitted that further authorities establish that the court should disallow the respondents claim.
In Cavern Systems v. Clontarf Residents [1984] ILRM 24 the defendants had instituted but not served High Court Proceedings challenging the validity of the planning authority’s decision. Costello J., dismissed their claim with the following admonition (at 29, 30):-
“But if an objector issues a High Court Summons and then deliberately takes no steps to serve it or to disclose its existence then he will be not merely taking advantage of the Rules of Court for his own purposes; he will have consciously rendered the section useless and have flouted parliament’s will.”
In Euro Diam Ltd. v. Bathurst [1990] QB 1 at 36 the court decided that it would not aid illegality. The court was also referred to Chitty on Contract 28th edition, Volume 1 Para 17-005.
Where parties were in pari delicto, as occurred in Sherry v. Haddock [1980] Q.B. 647 (h) the Court will not assist.
The applicants submit that the first question to be asked is should the plaintiff be heard at all given that their position springs from the unlawful contract of the 15th of April 1987. Reference was made to Brown Jackson v. Versey [1957] 2 Q.B. 621 and to Bigos v. Bigousted [1950] and to Byrd v. Saddler and Moore 166 -167.
4.11 The applicants also referred to Scott v. Browne, Douring McNab and Company (1892) 2 Q.B. 724 – in that case Lindley J. stated:
“The plaintiffs purchase was an actual purchase (of shares) not a sham purchase; this is true, but it is also true that the sole object of the purchase was to cheat and mislead the public … the plaintiff must look elsewhere than to a Court of Justice for assistance as may require against a person he employed to assist him in his fraud, if the claim to such assistance is based on his illegal contract … any rights that he may have irrespective of his illegal contract will be recognised and enforced.”
The maxim ex turpi causa and the maxim ex dolo malo non oritur actio are founded upon general principles of policy. The Court refuses to go to the aid of such a person.
The applicant submits that the ownership of the companies was acquired through fraud, a concealment being a badge of deceit.
5. RESPONDENTS’ SUBMISSIONS
5.1 Mr Gleeson S.C. in reply submitted that the maxim ex turpi causa was not a one way street. The Court must look at all the circumstances: the evidence of the documents and the acknowledgements of some of the alleged misappropriations. The impact of the misappropriation on valuation is central to a claim for damages in adjusting the purchase price of £3.75m to £5.5m. If some misappropriations were found or sustained then the accounts are shot through with deceit, fraud and dissimulation. The fatality in the plaintiff’s claim is the acknowledgement of some misappropriations.
5.2 Moreover a motion to strike out close to the 50th day of the hearing is unprecedented.
The veil to be removed from the companies and designed to expose Mr Goodman cannot be used to wrap Mr Phelan from the effects of the courts determination. That would be an abuse of process and contempt of court. At no times does Mr Phelan say that there was no grounds for the claims. On the 26th of October 2001 in his second affidavit (after Mr Gallagher, SC for Mr Goodman, had opened all thirty-two misappropriations to the court) there is a conspicuous absence of denial.
The authorities relied on related to artificial companies. The Court must assume the validity of the plaintiff’s assertions and the evidence put in with regard to the misappropriations. The companies are real, have assets and funds in Court and have claims amounting to some £15m. These companies also feature in the second action in the claim by Mr Phelan against all the companies and Master Meat Anstalt, Zachariah and Nasser El Taher.
Murphy J., in Allied Irish Coal Supplies Ltd. v. Powell Duffryn International Fuels Ltd. [1998] 2 IR 521 at 535 upheld the principle in Salomon v. Salomon.
5.4 In their submission the respondents say that the Application misapprehends and misrepresents the law underlying the arguments advanced in an unprecedented way under the heading of “the abuse of the process” and “ ex turpi causa ”.
Mr. Phelan lists what are alleged to be abuses by Mr. Goodman of the process of the Court: these allegations are denied.
Mr. Phelan relies on the Court’s jurisdiction to dismiss proceedings for abuse of process, to punish for contempt of Court, to strike out proceedings which disclose no cause of action and to strike out proceedings where there has been no proper discovery (which is the subject of a separate application). Underlying this is the proposition that a party who is perceived as having misbehaved is liable to have his proceedings dismissed on that account and to justify a demand that the Court now conduct an inquiry into his conduct, so far as to decide whether that jurisdiction should be exercised.
5.5 The jurisdiction of the Court to dismiss proceedings as an abuse of process arises only when the proceedings themselves constitute an abuse. See McCabe v. Harding Investments [1984] ILRM 105. This case involved a claim that the defendants’ planning permission was invalid because they had failed to comply with planning regulations. The claim was struck out because any failure was regarded as minor.
In O’Neill v. Ryan, [1993] ILRM 557 the claim of a shareholder was struck out because the shareholder was not entitled to pursue the same as a matter of law. In Barry v. Buckley [1981] IR 306, a claim for a specific performance of contract for sale of land the claim was stuck out because there was clearly no agreement. In Tassan Din v. Banco Ambrosano [1991] 1 IR 570 a claim was struck out because the matters were already decided by the Court.
5.6 The respondents submit that the most striking feature of the submission of Mr. Phelan is that nowhere in the course of a lengthy thirty-six page submission is there any substantive defence as to the various claims made in the present proceedings advanced. This was an opportunity which was strikingly missed by Mr. Phelan in his most recent affidavit of the 26th of October, 2001. Mr. Phelan, it was submitted, is not claiming that the facts as alleged did not occur, nor that they did not disclose a cause of action in law. He is simply asserting that, because of the alleged wrongdoing by a shareholder in the plaintiff Companies, the claims should be halted.
Reliance is placed by the applicants on Cavern Systems v. Clontarf Residents [1984] ILRM 24. This was a case in which the plaintiff had complied with the letter of the Local Government (Planning and Development) Act, 1976 in instituting proceedings to challenge the validity of permission. The Court held that their actions, in not advising the defendants of those proceedings within a period of six months, was inconsistent with the legislative intention that such proceedings be advised to developers and the planning authorities and be disposed of expeditiously. It was for that reason the respondents submit that the Court held that the proceedings should be dismissed.
6. Decision of The Court
6.1 The jurisdiction of this Court to strike out only arises in extreme circumstances: Murphy v. J. Donoghue Ltd and Others ([1996] 1 IR 123 Supreme Court, per Barrington J.) at 142 in the context of failure to discover. That plaintiffs are entitled to have their actions heard by the Court unless there are compelling circumstances which justify a strikeout in limine on the basis of undisputed and incontrovertible facts. ( LAC Minerals v. Chevron Mineral Corporation [1995] 1 ILRM 161)
6.2 Generally the Court should be slow to entertain an application to dismiss an action on the basis, or admitted facts, it cannot succeed! see McCarthy J. in Sun Fat Chan v. Osseous Ltd . [1992] 1 IR 425 at 428:
“Generally the High Court should be slow to entertain an application of this kind and grant the relief sought.
Experience has shown that the trial of an action will identify a variety of circumstances perhaps not entirely contemplated at earlier stages in the proceedings; of the times it may appear that the facts are clear and established but the trial itself will disclose a different picture.”
The critical relied on by the applicant are not admitted at this stage of the proceedings. Paragraph 3 of Mr. Phelan’s grounding affidavit categorise Mr. Goodman’s admissions as wrongful; the sale of shares as trickery and deceit; the organs of State being misled in a calculated and deliberate fashion the Court process being abused by concealment and the actions of Mr. Goodman being premeditated and deliberate. No question of intention has been admitted or determined.
6.3 It would appear, that the jurisdiction of the Court to dismiss proceedings as an abuse of process arises only where the proceedings themselves constitute such an abuse: McCabe v. Harding Investments [1984] ILRM 105 per O’Higgins J. at 108-109. In relation to Order 19 and 28, the relief claimed in that case, the abuse complained of was frivolous or vexatious pleadings. In the present case the abuse alleged refers, inter alia , to injunction proceedings issued and served but not heard in September 1988 which the applicants say was based on an illegal fraudulent or tainted contract on the 15th of April 1987.
The present proceedings concern an action by twelve plaintiff companies against a former Director and a company controlled by him. That claim has been opened but not proved to this Court and consists of thirty-two allegations of misappropriation in which the companies seek relief against the applicants in this case.
6.4 The respondent companies have not been in breach of any agreement, have not induced a breach of an agreement nor are in any way tainted with illegality, deceit or fraud. They are the proper plaintiffs in relation to the allegations that they make in these proceedings.
6.5 To visit the alleged illegality, conspiracy and/or fraud of Mr Goodman on the companies is not, in my view, supported by the authorities. The companies were not, at least for some period in which the misappropriations are claimed, in any way linked to Mr Goodman. Whatever about the inducement whereby Mr El Taher sold his shares on the 15th of April 1987 and used Mr El Taher as an agent until he acquired the entire shareholding of the companies on the 16th of September, it is the company and not its members who are entitled to prosecute this claim.
6.6 After the 16th of September 1988 the assets of the companies appear to have been disposed of and the companies where, apparently, struck off the Register of Companies. I am informed that the companies have lodged certain monies in Court in relation to this action. These are assets of the companies and, even if struck off, are available to the companies once they are restored to the Register.
The effect of restoration of the companies to the Register is provided for in Section 311 A of the Companies Act, 1963. Once restored the Company shall be deemed to have continued in existence as if its name had not been struck off. Subsection (3) of that Section further provides that, subject to any order made by the Court in the matter, the restoration shall not effect the rights or liabilities of the company in respect of any debt or obligation incurred, between the date of its dissolution and the date of such restoration.
There is no evidence that the formation or restoration to the register of the respondent companies was used as an engine for the destruction of legal obligations or the overthrow of legitimate or enforceable claims (see Meredith MR in Cummings v Stewart (1911) I IR 236 at 240 where a company was formed, not for the purpose of carrying on a patent licensee’s business of reinforced concrete but merely with a view to ridding himself of the liability to pay royalties (see 4.9 above).
It may be that the concealment alleged with regard to the agreement of 15th April 1987 did mislead the public but there is no evidence before the Court that the sole object of the concealment was to “cheat and mislead the public” as was the case in Scott v Browne, Douring McNab and Company (1892) 2 Q B 724 referred to by the applicant at 4.11 above.
The legislative intention in the Local Government (Planning and Development) Act, 1976 which led Costello J. to dismiss the plaintiffs case in Caverns Systems v Clontarf Residents Association [1984] ILRM 24 (see 5.6 above) does not seem to be applicable.
6.7 It is significant that in both the grounding affidavit of Mr Phelan dated the 16th of October 2001 and the supplemental affidavit of the 26th of October 2001 that there is no denial of any of the extensive detail of the thirty-two allegations of misappropriation which have then opened in detail to this Court. The Court is, of course, aware of the general denial in the defence. The Court has been informed, and as such has not denied, that Mr Phelan accepts some of the allegations of misappropriation in his reply to the first fifteen allegations which were opened to the Court in July of this year.
Clearly the intention of the parties as to the purpose of transferring funds from one company to another or distributing such funds to members requires further evidence so does the allegation of illegality and fraud with reference to an acknowledged inducement. It does seem to me that it would be imprudent for the Court not to await that evidence.
6.8 The plaintiff’s claim in the first proceedings relates to the valuation of shares sold on the 16th of September 1988. That plaintiff is the moving party in this motion seeking to disallow the companies’ claim against him which affect the underlying assets of the companies whose shares he seeks to have revalued by this Court. It would seem improper for this Court to attempt such a valuation without dealing with the claims in these proceedings. This is especially so, it seems to me, where in the opening of the present applicant’s claim in the first action (Phelan v. Goodman and El Taher [1989/6960P]) Mr Phelan complains that he depletion of the companies’ assets was due to the conspiracy of Mr Goodman and Mr El Taher. Moreover the claim to interest on the resulting losses magnifies the claims made by Mr Phelan. To ignore the claims of the companies especially in respect of an earlier period would be improper.
6.9 The applicants seek an order for the trial of an issue as to the entitlement of the plaintiffs to maintain these proceedings. That application is based on the wrongdoing alleged and/or found against Laurence Goodman who is not a party to these proceedings. The applicant must overcome two hurdles to establish that the wrongdoing of Mr Goodman affects the entitlement of the plaintiff companies to maintain their proceedings. Firstly they must show that there are wrongdoings already found against Mr Goodman. Alleged wrongdoings require evidence as to intention. Neither the admissions nor the documentary evidence opened in this lengthy trial can lead to a finding, at this stage, of wrongdoing either of Mr Goodman nor, indeed, of Mr Phelan.
6.10 Even if such wrongdoing were to be found at this stage against Mr Goodman the second hurdle is to establish that this wrongdoing entitles the companies to maintain their action. Part of the allegations relate to a period before Mr Goodman indirectly acquired the first half interest in the companies. There has been no allegation with regard to wrongdoing of Mr Goodman before the 15th of April 1987.
6.11 The first order sought is an order staying and/or striking out these proceedings for abuse of process. It seems to me that an abuse of process can only relate to these proceedings themselves. The basis for the argument for abuse of process relates to an action for injunctive relief in 1988 which was not proceeded with. In relation to that action the issue of the ownership of the shares in Master Meat Anstalt and Tarsus Anstalt may very well have been an issue. Even if that were so it does not seem to me to affect the right of the plaintiffs in this case to pursue an action whoever their shareholders were.
6.12 The Court is also asked to order the trial of an issue as to the entitlement of the plaintiffs, the respondents to this motion to maintain these proceedings having regard to the wrongdoing alleged and /or found against Mr. Goodman.
Mr. Goodman is not a party to these proceedings. It is inappropriate to lift the corporate veil having regard to the documentary evidence presently before the Court.
The seven matters relied on in the grounding affidavit are not all established facts. To categorise some of them as wrongful, unlawful, premeditated, deliberate and procured by trickery and deceit require proof of intention which would require oral evidence. No oral evidence has yet been led let alone been subject to cross- and re-examination. Even if such evidence were to establish the necessary intention this would not disentitle the companies from maintaining their claim.
6.13 In the circumstances I must refuse the application to strike out the proceedings for abuse of process or to order the trial of an issue.