Corporate Receivers
Cases
Ruby Property Company Ltd. v. Kilty
[1999] IEHC 50
Mr. Justice McCracken delivered the 1st day of December 1999
CHALLENGE TO THE RECEIVER
8. In the amended statement of claim a declaration is sought that the purported appointment of the Receiver was invalid and of no effect. It is conceded by the Defendants that at the date of the appointment of the Receiver on the 20th day of October 1994, there were substantial monies due to the Bank, but it is alleged that because the loan terms were revised in January 1992, after the date of the debenture, in effect a new debt was created, and the debenture was void and inoperative in relation to it, notwithstanding the fact that it was expressed to be a continuing security for all monies due from the First Plaintiff to the Bank, and in particular it was alleged that it contravened the provisions of section 31(1)(c) of the Companies Act, 1990. This section provides that, subject to certain exceptions:-
“A company shall not enter into a guarantee or provide any security in connection with a loan, quasi-loan or credit transaction made by any other person for such a director or a person so connected”.
9. There is no doubt in the present case that the company did enter into a guarantee and provide security in connection with loans by the Bank to the Second and Third Plaintiffs, who were it’s directors, however, this section only came into force on the 1st day of February 1991, while the guarantee and security were granted on the 3rd day of August 1990. The Defendants argued that this part of the claim cannot succeed because, at the time of the debenture, it was perfectly lawful for the company to give security for it’s directors in this way. The Plaintiffs, on the other hand, argued that the amount and terms of the loan were revised after the 1st day of February 1991, and that in reality that amounted to the giving of a new security. While I think it unlikely the Plaintiffs could succeed on this argument, it is possible that more detailed evidence of the nature of the arrangements could lead to a finding that a new security was given, which would be void. However, any issue of this nature would be an issue between the First Plaintiff and the Bank, and not between the Plaintiffs and the Defendants in these proceedings. Unless and until the transaction has been avoided as against the Bank, the debenture and the appointment of the Receiver remain valid.
10. It is acknowledged by the Plaintiffs that if the debenture is valid, then the Bank was entitled to appoint a Receiver at the time it did so, but they go on to make a further argument on the basis that the Receiver had no power to sell the property unless, at the time of the sale, there were in fact monies due to the Bank, and that the Receiver had a duty to satisfy himself that there were monies so due. The situation was that, in addition to the property at issue in these proceedings, the Bank also had a mortgage over the dwelling house of the Second and Third Plaintiffs, and that on the 11th day of October 1994 the Bank were owed some £287,161.00 on foot of the said mortgage. On the 12th day of October 1994 the Bank took possession of the said dwelling house, but they had not disposed of it on the date they appointed the Receiver. The house was ultimately sold by public auction in November 1994 for the sum of £305,000.00, a sum which the Plaintiffs say was sufficient to discharge the liability of the Second and Third Plaintiffs to the Bank, and they claim that as of that date no monies were due to the Bank on foot of the debenture. It would appear, however, that the Bank claims that further monies were due for costs and expenses, including the costs of their action for possession of the dwelling house against the Second and Third Plaintiffs, and that in fact a sum of some £15,000.00 was due to them over and above the £305,000.00 realised for the dwelling house. It would appear that the Second and Third Plaintiffs never in fact challenged this claim by the Bank, other than by an abortive attempt to have the Bank joined as a co-Defendant in these proceedings, a matter which I will deal with further. That being so, I am quite satisfied that the Receiver was entitled to treat those monies as being due on foot of the debenture, and was entitled to sell the property accordingly. Accordingly, I am quite satisfied that, unless the security in some way offended section 31 of the Companies Act, 1990, which it does not, the Plaintiffs could not succeed in setting aside the transaction or in challenging the Receiver’s right to sell.
11. Finally, in the context of the possibility of the security being in breach of section 31 of the Companies Act, 1990, I am quite satisfied that even if that were the case, the Plaintiffs would not have any remedy against either of the Defendants in the present case. Section 38(1) of the Companies Act, 1990 provides that:-
“Where a company enters into a transaction or arrangement in contravention of section 31 the transaction or arrangement shall be voidable at the instance of the company unless:-
(a) restitution of any money or any other asset which is the subject matter of the arrangement or transaction is not longer possible,…or
(b) any rights acquired bona fide for value and without actual notice of the contravention by any person other than the person for whom the transaction or arrangement was made would be affected by its avoidance.”
12. Firstly, the transaction which could be said to contravene section 31 is the transaction between the company and the Bank. As I have said, the Bank is not a party to these proceedings, and they do not seek to avoid that transaction as against the Bank. Secondly, I have no doubt whatever that the Second Defendant acquired the property bona fide and for value without actual notice of any contravention of section 31, if there has been such a contravention. Therefore, any challenge to the sale on the basis of a possible contravention of section 31 must fail.
SALE AT UNDERVALUE
13. The Plaintiffs allege that the Receiver sold the property at an undervalue, and was in breach of section 316A of the Companies Act, 1963, which provides:-
“A Receiver, in selling property of a company, shall exercise all reasonable care to obtain the best price reasonably obtainable for the property as at the time of sale.”
14. This is simply a statutory acknowledgement of the position at common law, as it has long been decided that a Receiver owes a duty of care to the company when selling it’s property. Holohan -v- Friends Provident and Century Life Office (1966) I.R.1. To consider whether this claim can succeed, it is necessary to detail some of the events leading up to the sale, and the evidence put forward by the Plaintiffs.
15. I propose to consider firstly the correspondence which took place between the Plaintiffs’ Solicitors and the Solicitors for the Receiver in the weeks leading up to the sale. While I only propose to refer to portions of this correspondence which are relevant to the question of value, I think it is necessary to refer to it at some length.
16. On the 6th day of March 1995 the Receiver’s Solicitor wrote to the Plaintiffs’ Solicitor saying:-
“The highest offer made to date is £79,000.00. In the circumstances Jones Lang have recommended to the Receiver that this offer should be accepted in the absence of any increased offer over the coming few days. The offer has the advantage of avoiding advertising expenses which would be considerable. At one point it was thought that the property would be offered for sale through tender but once again the Receiver has been advised by the Auctioneer that any tender was liable not to exceed the offer currently on the table and consequently the opinion of the Auctioneer is that a tender should be avoided with of course, the consequent costs involved therein.
Following upon that professional advise, the Receiver is now prepared to accept the offer in the absence of any increased offer over the coming seven days. The offer is of course subject to contract and good title.
The purpose of this letter is to put you on notice of the Receiver’s proposals in this regard irrespective of the fact that the Receiver has no legal obligation to put your client on notice of his intentions. That said, the Receiver is conscious of the fact that your client may be interested in purchasing the property and to that end would like to afford your client the opportunity of making a bid in respect thereof.”
17. The Plaintiffs’ Solicitor replied by letter of the 9th day of March saying that his clients wished to negotiate with the Bank to discharge the amount due and asked that the sale should be put on hold until they could sort out the actual amount due and discharge it. By letter dated the 13th day of March the Receiver’s Solicitor wrote saying:-
“We note what you say in the final paragraph of your letter. We understand that a slightly increased offer has in fact been made by a third party and that the figure now on offer is of the order of £82,500.00.
We will take instructions with respect to the undertaking requested by you that the Receiver withhold the acceptance of any offer and revert to you as soon as possible.”
18. By letter dated the 15th day of March , although apparently only received by the Receiver’s Solicitors on the 22nd day of March, the Defendants’ Solicitors said:-
“We refer to your letter of the 13th March 1995 and we note that there is now an increased offer on the property of £82,500.00.
We are very concerned that despite not putting the property up for sale through an Auctioneer, that the Receiver is receiving private bids on the property.
The value of the property is worth substantially more than £82,000.00 and we cannot understand why an Auctioneer has not been appointed, why the property has not been sold by Auction and why not even a sign has not been erected describing the property for sale.
We require by return an undertaking from you on behalf of the Receiver that he will not proceed to accept any offers on this property
……in the meantime kindly note that we take great exception to the fact that the Receiver has not complied with his duty, in that he has offered the property up for sale to a limited market, he has not gone to the market, he has not erected the appropriate sign, has not instructed an Auctioneer to sell the property in accordance with normal standard procedures.
The property is valued at substantially more than £82,000.00, please be good enough to confirm that your client will not proceed to accept an offer on this property.
Failing to hear from you, we will be left with no alternative but to apply to the High Court by way of injunction, to restrain the Receiver selling the property on the basis that the Receiver is not proceeding to sell the property in accordance with standard practice of a Receiver in terms of placing the property on the open market for the public.”
19. By letter dated the 20th day of March the Plaintiffs’ Solicitors wrote:-
“Yet again, we have visited the locus and have found no sign standing on the premises advertising the property for sale, in particular we require you to confirm on behalf of the Receiver why the Receiver has not placed the property on the open market and has not completed a full advertising campaign”.
20. These two letters were replied to by the Receiver’s Solicitor by letter dated the 23rd day of March in which he said:-
“Your letter of the 15th March raises certain issues which we specifically wish to deal with as follows:-
(1) Our client has engaged the services of a reputable auctioneering company, Messrs. Jones Lang. Our clients are following the advice of this auctioneering company both as regards the manner of disposing of this premises and as regards it’s value. Our clients are satisfied that the advice they are receiving from this firm is good advice. The Receiver does not have an obligation to market the property for sale by public auction.
(2) Once again, we cannot give you the undertaking which you request in the fifth paragraph of your letter. We have already explained the reason for this in previous correspondence to you.
….Finally, we note the final paragraph of your letter where you make reference to an application to the High Court by way of injunction to restrain the Receiver selling the property on the basis that the Receiver is not proceeding to sell the property in accordance with standard practise of a Receiver by placing the property on the open market for the public. We wish to reiterate that the Receiver is in receipt of advice from a reputable Auctioneer and is following that advice.”
21. On the 4th day of April the Receiver’s Solicitor wrote to the Defendants’ Solicitor saying:-
“On advices received by the Receiver of the company it has been decided to put the sale of the property at Station Road out to tender.
We therefore enclose conditions of sale (one set) incorporating the tender document.
As you will note from the special conditions of the contract the terms of the tender are clearly set out.”
22. By letter dated the 11th day of April, although not received by the Receiver’s Solicitors until the 19th day of April, the Plaintiffs’ Solicitors said:-
“We note the up to date advice that your clients have received, that the property be put up for sale by way of tender.
Can you confirm now, that the new advice, that your client has received also includes a very important factor and that is to say that the property be put up for sale in accordance with normal practice by advertising it in the national newspapers and more especially, placing a sign on the property advertising the property for sale.
Kindly note that our client has instructed us to inform you on behalf of your client the Receiver, that he requires details of all offers made to date and as a shareholder of the company he is entitled to receive the following information.
(1) Name and address of all persons who have made an offer
(2) The price offered in respect of each property, the Receiver has a duty of care to the company and its shareholders and that duty has not been complied with insofar as the property has not been offered for sale to the public.
Can you confirm to whom you are going to submit a tender document, how will the public know that the property is for sale?
Perhaps you might answer these two important questions, so that we can advise our client accordingly.
In the meantime, kindly note that should the property be sold on the basis that it is being sold now, to only those who know about the property and to those people who have tendered a price for the property, our client has instructed us to inform you that he will take proceedings against the Receiver for any loss and damage as a result of his failure to place the property up for sale in order to secure the proper market value of the property.
In the meantime, we require you to furnish us with information confirming who has made an offer to buy the property and the amount of the offers made, we note that the Receiver was prepared to accept an offer of £80,000.00 on the advice of Jones Lang and Wootton.”
23. On the 20th day of April the Receiver’s Solicitors wrote to the Plaintiffs’ Solicitors saying:-
“We confirm that the tender process has now been concluded. Arising therefrom, Superquinn have tendered for the purchase of the premises on the basis of the contract issued to them for a consideration of £102,500.00. This is far in excess of any offer previously received. Furthermore, the contract has been returned unconditional. A copy of this contract was sent to you by courier with our letter of the 4th April 1995 and we presume that your letter of the 11th inst. is the response to that letter. You will note from the contract furnished that there were certain difficulties with this title and all of these difficulties have been taken on board by Superquinn.
Following receipt of the tender document at 11.55 a.m. on the 12th April 1995, the Receiver took advice from Jones Lang Wootton. On the advice of that firm, the Receiver has accepted the unconditional offer from Superquinn in the sum of £102,500.00 and intends now to proceed with the completion of the sale as soon as possible.
No other tender was received.
Your letter of the 11th inst. raises again the issue of the advertising of the premises for sale. We had previously advised you and wish to advise you once again that the Receiver has taken the advice of Jones Lang Wootton in this regard. It was on the basis of the advise from that firm that the Receiver proceeded to dispose of the property by way of tender. You were given adequate notice of this.
We also wish to put it on record yet again that the Receiver took advise from a firm of professional Planning Consultants concerning any possibility of development on this site. In the light of that advise and the advise from Jones Lang Wootton, the Receiver is of the view that he has received an excellent price for this property from Superquinn.”
24. What happened next is a matter which is somewhat in dispute. An affidavit has been filed by Mr. Hugh Miller, the Receiver’s Solicitor, in which he avers to a telephone conversation with Mr. David Turner, the Plaintiffs’ then Solicitor on 20th April, 1995. It is common case that Mr. Turner was in hospital at the time. Mr. Miller’s evidence is that he told Mr. Turner of the tender received from Superquinn and that Mr. Turner said his clients would not be raising any more difficulties regarding the sale and wanted the sale to proceed as quickly as possible. Mr. Miller then wrote to Mr. Turner on 25th April referring to the telephone conversation on 20th April and saying:-
“We note that your client will not now raise any further queries concerning the completion of the sale of this premises.
We anticipate closing the sale on the 28th April”.
25. It should be said that the son of the Second and third Defendants has sworn an affidavit in which he says:-
“I can categorically state that my parents would never have given any such instructions to Mr. Turner. Mr. Turner himself has confirmed to my Solicitor by letter of 19th February 1996 that no such information was imparted by Mr. Turner to Mr. Miller. On the contrary, Mr. Turner advised Mr. Miller that he entertained a concern at the Receiver selling the property to Superquinn when they were the only party on notice that it was for sale”.
26. He then exhibits a copy of a letter from Mr. Turner, which confirms the telephone conversation, but denies that he said that his clients would not taken any further issue with the Receiver. I have to say I find it extremely strange that this has not been put on affidavit by Mr. Turner, who, it ought to be said, no longer acts for the Plaintiffs, but that the only evidence put forward is a copy of a letter written some nine months after the sale.
27. The sale was in fact completed on 28th April 1995, and the conveyance was executed both by the Receiver in his position as Receiver, and also by the Receiver as agent for the Company.
28. There is no doubt from this correspondence that the Plaintiffs were at all times maintaining that the property should be advertised to the public both in the press and by an advertisement on the premises themselves. The Receiver’s answer to this is that he at all times acted on the advice of Messrs Jones Lang Wootten, who, it is conceded by all parties, are a well known and competent firm of estate agents. He claims that, by acting on such advice, he fully complied with the provisions of Section 361A of the Companies Act, 1963, and indeed any common law duty which he might have to the Plaintiffs.
29. The advice which the Receiver obtained has been put in evidence. He received lengthy and detailed advice from a firm of planning consultants relating to the possible development potential of the property, and it is quite clear that the advices obtained from Jones Lang Wootten were influenced to a considerable degree by this. To ascertain whether there was in fact a breach of Section 361A, it is necessary to consider the advice which was actually obtained by the Receiver. The initial advice was contained in a letter dated 14th December 1994, which included the following:-
“3. Marketing Methods
There are three marketing options open for the property as follows:-
(a) Sale by private treaty – this would involve the preparation of a brochure, the erection of good advertising board on site and limited advertising (estimated budget £2,500/£3,000). The disadvantage of this method is that it fails to deadline or time-scale for the completion of a sale.
(b) Auction – this would involve the preparation of a brochure, a good sign erected on site and considerably more advertising. It does concentrate the mind on a particular date, but a poorly attended auction which produces no bids could influence subsequent negotiations adversely with any interested parties. Likely budget £5,000.
We feel that this would be excessive given the potential value of the site and its negative planning history.
(c) Public tender – again, a brochure, board and advertising would be required. This would involve interested parties submitting their best offer for the site on an unconditional basis prior to a certain date. It would involve the marketing costs of approximately £2,500/£3,000 but we believe may be the best way to progress matters given that there appear to be two identifiable parties who could have a special interest in this site.
Tender can deadline a sale and allow the vendor to keep the results of same confidential for approximately one month during which time conditions may be negotiated away.
If you are to proceed with the sale using one of the above methods, we feel that any campaign should commence in early February with a view to auction date/tender date being first or second week in March. Approaches to the two intended parties could be made now in advance of incurring any marketing expenditure”.
30. On 17th January 1995 the Receiver wrote to the estate agents saying:-
“We confirm our agreement to the proposed tactics outlined in your letter of 14th December being public tender subject to a marketing ceiling of £2,500 and approaches to intended parties in advance of incurring such expenditure”.
31. On 24th January the Receiver wrote to the estate agents setting out five parties who had expressed an interest in the property, and on 1st February the estate agents received an offer of £60,000 from one of those parties subject to certain conditions. On 7th February Jones Lang Wootton wrote to the Receiver setting out approaches which they had made to certain parties quoting a guideline price of £80,000. The ended the letter by saying:-
“I appreciate that these negotiations to date have taken a little while, but obviously if it were possible to agree a sale without incurring expenditure on public marketing, I am conscious that this would be of assistance in the situation.
However, on the assumption that we are unable to agree terms with any of the “special purchasers”, the property must go on the open market. I note from your letter of 17th January 1995, you asked us to deal with the property by way of public tender subject to a market ceiling of £2,500. I am taking this opportunity of enclosing herewith a draft marketing budget for your approval.
If we are instructed to proceed on this basis, I believe that the earliest realistic tender date (allowing time for preparation of boards, brochure and advertising) would be the week commencing 20th March 1995.”
32. There was then enclosed a marketing schedule detailing recommended press advertisements and advertising boards at a cost of £1,700.
33. Following this two offers were received by Jones Lang Wootton, namely, an offer from Superquinn dated 16th February of £70,000 and an offer from another party dated 17th February for £79,000. Neither of these offers were accepted, and on 24th March the estate agents advised, inter alia , as follows:-
“As you will recall, we discussed the indications of interest from parties since we began target marketing of the premises. Since January details of the site have appeared on our summary list of properties. The approaches that we have made have been to parties who would appear to have a special interest in the site. This has resulted in some confirming an interest and others making claims with regard to right of way which I understand from you have not been substantiated.
As you are aware, a number of conditional offers have been made both below and above our previously advised opinion of value.
It appears that parties who have some knowledge with regard to the planning history of the premises, while also having a special interest in the site, appear willing to purchase.
Because of the planning history, the service on the Receiver of a derelict site notice and a claimed right of way, it remains our view that the property has specialist rather than general market appeal. I think it is agreed that the best course of action would be to secure the maximum bid from those parties who have already expressed interest in the property with a view to having to bid competitively and unconditionally for the purchase of the property.
Correctly drafted and with tight deadlines, the potential ‘worth’ this property has may well be taken on board more willingly by bidders.
In relation to any issues affecting title, it is also agreed that the tender documents prepared by the Solicitor should incorporate details of the current title, planning history, alleged right of way and the existence of a derelict site notice. A substantial (non-refundable for the accepted bidder) deposit of not less than 10% should be required by way of draft. Because of the risk of the title putting a number of bidders off or depressing likely proceeds, we would recommend that the Receiver not be obliged to accept the highest bidder. ….
As we have succeeded in generating interest from a number of parties, I think now is an appropriate point to invite competitive bids with a view to achieving an early closing, allowing say, ten days within which to undertake their due diligence on title and other matters.
Completed tender documentation should be returned to the Receiver’s Solicitor and the decision on which, if any, tender be accepted may be taken within a period of say, ten days.
It should be expressly stated that tender bids must be unconditional”.
34. It should be noted that this advice makes no mention of advertising, and indeed by implication appears to recommend that tenders only be sent to persons who have already expressed an interest. While it is not clear exactly how many people were asked to tender, in fact only one tender was received, namely, that from the Second Defendant in the sum of £102,500. When asked by the Receiver for their views as to whether this should be accepted, the estate agents advised on 18th April in the following terms:-
“I refer to the above and to your fax advising that you have received an unconditional signed tender from Superquinn for the sum of £102,500.
Having spoken with Stephen Murray, we are both of the opinion that this figure should be accepted, as it is unconditional. We were always of the opinion that it would be a ‘special purchaser’ who would be in a position to maximise the use of the site, or to frustrate others doing this. Therefore we believe that this figure is most unlikely to be matched by any other party and consider the further advertising of property for sale is in our opinion unnecessary”.
35. On 9th August 1995, over three months after the sale was completed, the Plaintiffs’ Solicitors obtained a valuation of the site, which has been exhibited. This valued the house as a dwelling house at £100,000, but then continued:-
“The situation becomes very different indeed if we take into consideration that the property is actually zoned commercial and is next door to the thriving up-market location of Sutton Cross. There is potential here for a serious commercial refurbishment or redevelopment. In the light of this and even if the commercial development were to be restricted by the planning authorities to the same space as the property now occupies, it is our opinion that the market value would be not less than £160,000 and is very likely to exceed that sum by a further 10% to 20%”.
36. The Plaintiffs’ case is based on this valuation, taken together with the fact that there was no advertising at all, despite the protestations of the Plaintiffs.
THE LEGAL PRINCIPLES
37. It does seem to be clearly established that the Court has an inherent jurisdiction to dismiss a claim where under certain circumstances the Court comes to the view that the action cannot succeed. The general principle was set out by Costello J. in Barry v. Buckley (1981) I.R. 306 at page 308 where he said:-
“But apart from Order 19, the Court has an inherent jurisdiction to stay proceedings and, on applications made to exercise it, the Court is not limited to the pleadings of the parties but is free to hear evidence on affidavit relating to the issues in the case: see Wylie’s Judicature Acts (1906) at pp. 34/37 and the Supreme Court Practice (1979) at para. 18/19/10. The principles on which the Court exercises this jurisdiction are well established. Basically its jurisdiction exists to ensure that an abuse of the process of the Courts does not take place. So, if the proceedings are frivolous or vexatious they will be stayed. They will also be stayed if it is clear that the Plaintiff’s claim must fail; per Buckley L.J. in Goodson v. Greerson at page 765.
This jurisdiction should be exercised sparingly and only in clear cases; but it is one which enables the Court to avoid injustice, particularly in cases whose outcome depends on the interpretation of a contract or agreed correspondence. If, having considered the documents, the Court is satisfied that the Plaintiff’s case must fail, then it would be a proper exercise of its discretion to strike out proceedings whose continued existence cannot be justified and is manifestly causing irrevocable damage to the Defendant”.
38. That case concerned an action for specific performance, and the proceedings were struck out on the basis, as set out at page 310:-
“The agreed facts established beyond any doubt that the Defendant’s Solicitor had made it abundantly clear in his first letter (dated the 5th January 1981), that there would be no binding contract between the parties until the written contract had been signed by both parties and the deposit paid. That remained the situation. No written contract was signed and no deposit paid. Therefore, there was no concluded contract in existence which can now be specifically enforced and this action must plainly fail”.
39. This case was considered by the Supreme Court in Sun Fat Chan v. Osseous Limited (1992) 1 I.R. 425. This again was a specific performance action, and the principles set out in Barry v. Buckley were not disputed before the Supreme Court. McCarthy J. went so far as to say, at page 428:-
“Since the matter has not been debated, I express no view upon the decision in Barry v. Buckley save to comment that applying the underlying logic, a defendant may be denied the right to defend an action in a plenary hearing if the facts are clear and it is shown that the defence is unsustainable”.
40. He went on to say that the High Court should be slow to entertain an application of this kind and grant the relief sought. He then added at the bottom of page 428:-
“I recognise the enforcement of a jurisdiction of this kind as a healthy development in our jurisprudence and one not to be disowned for its novelty though there may be a certain sense of disquiet at its rigour. The procedure is peculiarly appropriate to actions for the enforcement of contracts, since it is likely that the subject matter of the contract would, but for the existence of the action, be the focus of another contract”.
41. It should be noted that in both these cases the decision to strike out was made on agreed facts or on undisputed documents. In a similar application in Ennis v. Butterly (1997) 1 ILRM 28, it was actually conceded by Counsel for the Defendant that the Court must assume that every fact pleaded by the Plaintiff in the Statement of Claim is correct and can be proved at the trial and that every fact asserted by the Plaintiff on affidavit is likewise correct and can be proved. While I think that concession may have been somewhat rash, it is quite clear that the Court can only exercise the inherent jurisdiction to strike out proceedings where there is no possibility of success. If there is a dispute on facts on affidavit which is not resolved by admitted documents, then it will be virtually impossible for a defendant to have proceedings struck out as being unsustainable. The remedy sought by the Defendant is a remedy which has the effect of shutting out a citizen’s right of access to the Courts, which is a right which is very closely guarded and protected by the Courts themselves, and by the Constitution. Therefore, if the Defendants are to succeed in this motion, they must show that on facts which either are not in dispute, or are disputed on grounds which can only be considered as frivolous of vexatious, the Court should allow the action to proceed.
CONCLUSIONS – THE CLAIM AGAINST THE FIRST DEFENDANT
42. There is evidence in the form of a valuation given less than four months after the sale that at that time these premises were worth a sum more than 50% greater than that achieved in the sale to the Second Defendant. I am certainly not going to determine on a motion like this whether the effect of that evidence is that the actual sale that took place was or was not at an under value. It is arguable from the evidence before me that it was in fact an under value. There is a further matter which also concerns me in this regard. I have quoted at length in this judgment from correspondence between the Solicitors for the Plaintiffs and the Solicitor for the Receiver. The Receiver was at all times requested by the Plaintiffs to advertise these premises for sale. He received the same initial advice from his own estate agents, although this does appear to have altered subsequently. It must have been quite clear to the Receiver at all times that there was going to be a very considerable surplus arising on this sale, which of course would belong to the First Plaintiff, and the Receiver was in law the agent of the First Plaintiff. This is a somewhat unusual situation in that the First Plaintiff is not an insolvent company, and therefore monies received by it from the sale of these premises will be an asset of the company, and indeed if the company is wound up, of its shareholders. While I am not making any decision on the matter, as it was not argued before me, I certainly think it is open for consideration by the Court as to whether in those circumstances the Receiver has some form of obligation at least to consider representations made to him by the company as to how to conduct the sale, provided he is satisfied it will, in any event, realise enough to discharge the debenture holder in full.
43. In my view, therefore, it could not be said that this action must fail as against the Receiver insofar as it alleges a sale at an under value, but I do think that it must fail insofar as it seeks to challenge the Receiver’s right to sell the property.
CONCLUSION – THE CLAIM AGAINST THE SECOND DEFENDANT
44. As I have already indicated, any challenge to the validity of the appointment of the Receiver in these proceedings must fail, and the Receiver was entitled under the terms of the debenture to sell the premises. The Second Defendant was invited to make an offer by way of tender for the premises, and did so, and in due course a contract was entered into based on that offer, and the sale was ultimately completed. Even if this was a sale at an under value, or if the Receiver is in breach of Section 316A of the Companies Act, 1963, there is no suggestion that the Second Defendant in any way conspired with any other party to acquire the property at less than its full value. I have no doubt that the Second Defendant is a bona fide purchaser for value of this property, and its title cannot be challenged. The Statement of Claim also includes a claim for damages for trespass against the Second Defendant, but such a claim could only succeed if the Second Defendant has not got good title to the property, and as I have found that the Second Defendant does have title, there could be no claim for damages against it. Accordingly, I would propose to strike out all claims against the Second Defendant.
POSITION OF SECOND AND THIRD PLAINTIFFS
45. Mr. Hogan S.C., on behalf of the Plaintiffs, has acknowledged that the Second and Third Plaintiff were joined purely as a precaution in case the point was taken that the first Plaintiff, being in receivership, could not maintain these proceedings. That point has not in fact been taken, and in any event I am quite satisfied that a company in receivership at all times retains its legal entity, and, subject to the provisions of the debenture, retains the right to maintain proceedings such as these. Accordingly, the Second and Third Plaintiffs are not in fact necessary parties to these proceedings, but as they are not separately represented, I cannot see that their presence as Plaintiffs in any way prejudices the Defendants’ case.
CONSEQUENCE OF DELAY
46. I am aware that there was a motion brought by the Plaintiffs before the death of the Third Plaintiff to join ICC Bank Plc as a co-defendant. That motion never proceeded, but it has been intimated to me that a similar motion is still being contemplated. I would like to make it quite clear that I am refusing to strike out these proceedings on the grounds of delay expressly on the terms that no motion to add ICC Bank Plc as a defendant is brought, and the proceedings are concluded as rapidly as possible between the existing parties. It should be said that this does not in any way preclude the Plaintiffs from suing ICC Bank Plc in separate proceedings should they see fit to do so.
The Merrow Ltd -v- Bank of Scotland Plc & Anor
[2013] IEHC 130
Gilligan J
26. Because the appointment of the receiver was not under seal in accordance with Clause 7 of the 1981 debenture, it is contended on the applicant’s behalf that the appointment of the second named respondent as receiver pursuant to the two debentures is void.
27. In support of this contention the applicant contends as follows:-
(i) The 1981 Debenture was drafted by ICC (which purportedly became the Bank) and signed by it and the Company. Under clause 7 of the 1981 Debenture the Bank could:
“…at any time after the mortgage debt shall have become payable appoint by writing under its Seal a Receiver of the mortgaged property of any part thereof… [emphasis added]”.
(ii) The obligation to appoint under seal was expressly included and under clause 10 of the 1981 Debenture, the possibility of the Bank making an appointment “by writing under hand” under s. 24(1) of the Conveyancing and Law of Property Act 1881 was expressly excluded.
(iii) It is common case that the Deed of Appointment was not “under its seal” by the Bank. In appointing the Receiver the Bank did not comply with one of the two formalities in the 1981 Debenture. It is contended on the applicant’s behalf that the Bank’s failure in this regard renders invalid the Receiver’s appointment and causes him to be a trespasser on the Company’s property.
28. Bank’s obligation to appoint in accordance with Debentures.
The Bank purported to appoint the Receiver without reference to the court and pursuant to its contractual rights under the 1981 and 2008 Debentures and it is clear that the Receiver’s authority is derived from those contracts. In R Jaffe Ltd. (in liquidation) v. Jaffe (No.2) (1932) NZLR 195 Smith J. considered the law in this area and held:
“The receiver and manager here to be appointed is to be appointed without the aid of the Court. He is to be appointed according to the terms of the contract between the parties. In my opinion, the position is governed by the terms of the contract. Palmer, in his Company Precedents, speaking of a receiver appointed without the aid of the Court, says: “The receiver derives his appointment and authority from the parties themselves in pursuance of the powers of the contract. This is the point to be attended to.”
In Kerr & Hunter on Receivers and Administrators it is also said with reference to a receiver appointed out of court by the debenture-holders of a company that “the position and powers of such receivers are derived from and depend upon the contract between the parties expressed in the authorising instrument”.
29. Since a receiver’s authority is derived from the instrument under which he is appointed, an appointment is not valid unless it is made in accordance with the terms of that instrument. This principle has been recognised by the leading commentators in this area and accepted and applied by the courts throughout the common law world.
30. Courtney, in The Law of Private Companies (3rd Ed.) has observed that:
“[t]he validity of the appointment of a receiver is dependent upon compliance with the terms contained in the debenture and the capacity of the company and authority of its officers to create the debenture ab initio.”
31. Lynch-Fannon Corporate Insolvency and Rescue (2nd ed.) has noted that “[t]he penalty for non-compliance with the formalities for the appointment of the receiver is that such appointment is void”. She has also observed that non-compliance with formalities of appointment amounts to an abuse of process.
32. In The Law of Company Insolvency (2008), Forde has commented that “[t]here is no prescribed form for appointing an out-of-court receiver. Formalities set out in the security instrument must be scrupulously followed; if they are deviated from to any appreciable extent the appointment will be a nullity and the so-called receiver will be a trespasser on the company’s property”.
33. In The Law of Administrators and Receivers of Companies (2007), Lightman & Moss have noted that “[a] receiver must be appointed in accordance with the terms of the debenture.” Finally, in The Law Relating to Receivers, Managers and Administrators (4th Ed.) Picarda has observed that:-
“There is no set statutory form for the appointment of a receiver and manager out of court. On the other hand any formalities laid down by the relevant debentures or trust deed must be followed. If the debenture requires the appointment to be made in writing or under hand an oral appointment is not sufficient. Again, if the appointment is required to be by deed that formality must be observed”.
34. The importance of strict adherence to the terms of the debenture was recognised by the Supreme Court of Western Australia in Wrights Hardware v. Evans (1988) 13 A.C.L.R. 631. The plaintiff had, by deed of charge, charged its stock and book debts to Euro-Nat to secure repayment of $700,000 lent to it by the latter. Under clause 4.3 of the charge, Euro-Nat could “appoint in writing any person to be a receiver or receiver and manager … of the mortgaged premises” and under clause 4.4, Euro-Nat could “in addition … appoint in writing any person to be an additional receiver or receiver manager” who had “full powers and authority to exercise all or any part of the powers expressed to be conferred on a receiver appointed pursuant to the last preceding sub-clause…”.
35. Euro-Nat appointed the defendants “jointly and severally to be receivers and managers” of the plaintiff. The plaintiff sought interlocutory relief restraining the defendants from acting as receivers and managers on the basis that the appointment was invalid, there being no power in the charge to appoint receivers and managers jointly and severally. The defendant argued that the proper construction of the charge authorised the appointment of joint and several receivers and managers or, in the alternative, the appointment was nevertheless valid insofar as it authorised the defendants to act jointly.
36. The Supreme Court of Western Australia held that the relevant clauses could not have the meaning contended for by the defendants and granted the injunction. Franklyn J. emphasised the importance that the terms of the debenture be complied with by stating:
“I am satisfied that the relevant law applying to the appointment of a receiver or receiver and manager, and receivers or receivers and managers pursuant to the charge is as follows:
1. The manner in which a receiver is to be appointed is prescribed by the debenture deed, in this case the charge, and must be strictly followed: Blanchard P, The Law of Company Receiverships in Australia and New Zealand, Butterworths (Rust), 1982, poro 402: Farwell G, on Powers 3rd edn, (Stevens) 1916, p 147; Donovan, Company Receivers and Managers 1981 edn p 19; Guthrie v Armstrong B & Ald 628 [emphasis added].”
37. The courts in New Zealand have also declared invalid appointments which were not made in accordance with the terms of the debenture. In R Jaffe Ltd. (in liquidation) v. Jaffe (No.2) a debenture provided that:
“The debenture-holder may at any time after the principal moneys hereby secured shall have become payable appoint by writing a receiver and manager of the property hereby charged, and may from time to time remove any receiver and manager so appointed and appoint another in his stead [emphasis added]”.
38. The day before he was entitled to, the debenture holder purported to appoint a receiver in writing. No subsequent appointment in writing was made. It was not argued that the premature appointment was valid but that the “writing” was evidentiary only in character and was a matter of form, not substance. The Supreme Court of Auckland rejected that argument and held the receiver had not been validly appointed.
39. Smith J. reasoned that, since the receiver derived his authority from the contract (the debenture), the appointment had to be in accordance with the terms of the contract. He held that the requirement that the appointment be made “in writing” was a condition of his appointment:-
“The question, then, is, what is the nature of the power of appointment contained in the contract between the company and the debenture-holder? Clause 14, set out above, provides for the appointment of a receiver and manager by writing. Upon construction this means, 1 think, that the only receiver and manager which the debenture-holder can appoint is one which he appoints by writing. It appears to be a condition of his appointment.”
40. In Windsor Refrigerator Co. Ltd. v. Branch Nominees Ltd [1961] 1Ch. 375 the primary issue was whether a document which intended to be a deed but failed in that regard, could nonetheless take effect as an instrument “in writing”. Although the facts are somewhat different to the present case, the House of Lords was concerned that the appointment was made in accordance with the terms of the debenture.
41. Condition 12(1) of the relevant debenture provided:
“At any time after the principal moneys hereby secured shall have become payable the registered holder of this debenture may at any time appoint by writing any person or persons to be a receiver or receivers of the property charged by this debenture and may from time to time by writing remove any receiver so appointed and appoint another in his stead” [emphasis added].
42. In examining the validity of the receiver’s appointment, Lord Evershed M.R. reviewed the above clause and held at pp. 394 to 395:-
“The words are quite simple words: ‘Appoint by writing, and in construing them it is fair to note that the condition also empowers the debenture holders by writing to remove. 1 should have thought that those words would be satisfied if something was done – if the person acting for the debenture holders so conducted himself that one could say that he was appointing someone to be a receiver, and if he accompanied that by handing a writing which was the company’s writing to the receiver.”
43. Donovan L.J. was equally concerned that the appointment was in accordance with the terms of the debenture. He stated:-
“In the way in which this case has come before the court, and has been argued here, it seems to me that two questions arise: First, whether the document purporting to appoint the receiver is such a “writing” as satisfies condition 12 of the debenture ; and secondly, whether, if so, the appointment was invalid as being premature”.
44. Penalty for non-compliance with Debenture.
It is clear from the foregoing that a receiver who is not appointed in accordance with the terms of the debenture is not validly appointed. In addition, an invalidly appointed receiver may be a trespasser on Company property. In Wrights Hardware v Evans [1988] 13 A.C.L.R.631 Franklyn J. held that:
“…2. The existence of a power in the debenture holder to appoint in a particular manner will not relieve a de facto receiver from liability for trespass if the appropriate appointment procedure is not strictly observed: Harold Meggitt Ltd v Discount and Finance Ltd (1938) 56 WN (NSW) 23; Blanchard, supra, para 402; Donovan, supra, pp 19-20…”
45. Rationale for strict compliance with Debenture
The applicant submits that there are good reasons why the Bank ought to be held to the terms of the Debenture. While basic fairness implies that the Bank should be obliged to comply with the terms it chose to impose upon itself, several policy considerations were also identified by Smith J. in R Jaffe Ltd. (in liquidation) v. Joffe (No.2):
“The importance of the strict observance of these requirements is shown, 1 think, by other considerations. A receiver is not an officer of the Court, but, if he is duly appointed, his title is superior to that of a person interfering with the assets under his control, and the Court will then grant an injunction: Polmerl6. If a receiver were unable to prove his title according to the terms of his contract, then I doubt whether he would be entitled to an injunction. Furthermore, while the company is a going concern, a receiver, if the conditions of the debenture so provide, may be the agent of the company, and the company will then be responsible for his contracts. This is particularly important if the debenture-holder has power to appoint not merely a receiver, but a receiver and manager. Under such circumstances the company must be entitled to insist 1 think, upon the fulfilment of the terms of appointment as a condition of its liability”.
46. In Windsor Refrigerator Co. Ltd. v. Branch Nominees Ltd Donovan L.J. noted the far reaching effects of a receiver’s appointment and emphasised that precision was required in this context:
“As to the second question, the argument is that the receiver was appointed the moment the document was signed, and so before the debt became payable. I agree that in a context where precision is not required, one might speak of the document loosely as appointing a receiver. But in this context precision is required. What the debenture holder wants to do is to levy equitable execution, and for that purpose to have some person in being clothed with the necessary authority to take possession of the company’s property, to carry on its business, to act in its name, and pay the debt, and the company has to submit to the exercise of these powers by the person having such authority…”.
47. Even if no policy considerations applied, the Applicant submits that the Company would still be entitled, as a matter of principle, to insist that the Receiver be appointed in accordance with the Debentures. Support for this submission may be found in R (on the application of Mercury Tax Group Ltd) v. Revenue and Customs Commissioners [2008] EWHC 2721 where Underhill J. saw nothing wrong with holding parties to strict formal requirements when it came to the execution of certain agreements.
48. There, the respondents had successfully argued that there was a reasonable suspicion that a serious tax fraud had occurred and had obtained warrants under s. 20C (1) of the Taxes Management Act 1970, to enter a number of premises associated with the claimants and its clients to search for documents. The claimant sought judicial review of the decision to grant the warrants.
49. The claimant operated a tax avoidance scheme under which clients had to sign documents intended to be deeds. Its practice was to ask clients to sign incomplete drafts of the documents and when the final versions came into being, to detach the signature pages from the previous versions and attach them to the final versions. The defendants believed that this practice impugned the validity of the documents giving rise to a suspicion that a tax fraud had occurred. The claimants argued that there was nothing wrong with the practice provided that the alterations to the documents were authorised by the relevant party. Underhill J. noted the reason why the respondents were entitled to rely upon “formal” flaws in the deeds:-
“…I see nothing wrong in applying a strict test of formality to the validity of the agreements with which we are concerned in this case. Their entire raison d’etre is to create–and demonstrably to create–a series of formal legal relationships: if they do not do that, they do nothing.”
50. The Bank’s Memorandum and Articles of Association
Mr. Kevin Whitbread, on behalf of the Respondents, makes the following averment at paragraph 16 of his affidavit:-
“I say that by virtue of the Bank’s Memorandum and Articles of Association it is not required to have a seal and therefore it is not possible for the Bank to have executed the Deed of Appointment of the Receiver under seal, as to do so would be in breach of its Memorandum and Articles of Association. A copy of the Memorandum and Articles of Association is at Tab 7 of the Booklet. For reasons that will be proffered by way of legal submission 1 say that Mr. Foley’s argument on this basis must fail”.
51. None of the documents in “Tab 7” are entitled “Memorandum and Articles of Association” in the manner averred to by Mr. Whitbread. Further, none of the above documents support Mr. Whitbread’s particular argument that since the Bank was “not required” to have a seal “therefore, it is not possible to have executed the Deed of Appointment of the Receiver under seal, as to do so would be in breach of its Memorandum and Articles of Association”.
52. Further, or in the alternative, even if the Bank would have been in breach of its Memorandum and Articles of Association by sealing the Deed of Appointment, that cannot in any way affect its obligations to the applicant Company under the 1981 Debenture.
53. It must be recalled that the Bank’s predecessors were the author of the 1981 Debenture and imposed on itself the obligation to seal the document appointing the receiver. The Bankalso deliberately excluded the provisions of s. 24(1) of the Conveyancing and Law of Property Act 1881, which would have allowed it to make the appointment without using its seal. The Bank made no attempt to alter the contractual terms between the parties when it came to realise that clause 7 of the 1981 Debenture was allegedly contrary to its Memorandum and Articles of Association.
54. It is contended on the applicants behalf that there is no doubt that the Bank was obliged to appoint the receiver in accordance with the terms of the 1981 Debenture and therefore, that it ought to have appointed the receiver “by writing under its Seal”. The Bank’s failure renders invalid the receiver’s appointment over the property covered by the 1981 Debenture. By practical and logical extension, the Receiver’s appointment over the property covered by the 2008 Debenture is also invalid”.
55. It is submitted on behalf of the respondent that the applicant does not either contend that the Bank were not entitled to appoint the second named Respondent (whether under the 1981 or the 2008 debenture) nor that the execution requirements of the 2008 debenture were not fully complied with. Hence, were this Honourable Court to accede to the Applicant’s objection the second named respondent would nevertheless remain validly appointed under the 2008 debenture.
56. Further, pursuant to Section 64 (2) (b) (iv) of the Land & Conveyancing Law Reform Act, 2009 it is specified that an instrument executed after the commencement of the relevant chapter (i.e. after 1 December 2009) is a deed:-
“if made by a foreign body corporate, it is executed in accordance with the legal requirements governing execution of the instrument in question by such a body corporate in the jurisdiction where it is incorporated…”
57. In this instance, the Bank is incorporated under Scottish Law and the applicant has not adduced any legal opinion of a Scottish lawyer that the deed of appointment does not so conform. This is contrary to the approach which was adopted in Jennings & another v. Bank of Scotland Plc & Others (Unreported, High Court, McGovern J., 5th December, 2012). The Bank has exhibited its regulations from 2007 and which at regulation 102 deals with the Bank’s seal and execution of documents and specifically at Regulation 102A dealing with the execution of documents it is provided:
“Subject to the provisions of the legislation [the United Kingdom Companies Act] and to Regulation 102, documents may be signed by a Director or by the Secretary or by some other authorised person or persons. A person may be authorised by the Directors or by a committee authorised by the Directors or by a person so authorised by the Directors or such a committee. Provided that this Regulation is without prejudice to any other manner of execution of documents permitted or prescribed by the legislation.”
Consequently, it is submitted that the Bank has followed the requirements of this regulation.
58. Further, in Windsor Refrigerator Company Limited v. Branch Nominees Limited and Others [1961] 1 All E.R. 277 Lord Evershed M.R. at page 281 stated:-
“The question is not whether these two gentlemen, when they put their names on this document, were purporting to execute a document under their hands as agents for the company, or had any authority to do so. The question, as I conceive it to be, is: can this document, albeit purporting to operate as a deed, but failing to do so – can it nonetheless be the instrument of the company in writing? I have come to the conclusion that that question ought to be answered in the affirmative.”
This statement was adopted in the case of Byblos Bank SAL v. Al-Khudhairy [1987] 1 BCLC 232. Windsor Refrigerator was cited in the Jennings case where at para. 12 of his judgment the learned judge states:-
“But even if it was not a deed, it is clear that it had all the requisite qualities to be an instrument in writing under Mr. Bruce’s hand and, for the reasons 1 have outlined above, I accept that Mr. Bruce had authority to create such an instrument.”
59. Therefore, it is submitted that the issue comes down to whether or not Mr. Whitbread had the requisite authority to execute the deed of appointment on 10th October, 2012. It is further submitted that the following passage from Lynch Fannon & Murphy “Corporate Insolvency & Rescue” (2nd Ed. 2012) is pertinent and covers the situation which purportedly pertains where at paragraph 6.39 the authors state:-
“A debenture document will normally provide for an appointment under seal but this is not necessary. Where the documents are required to be under seal this may cause delay in appointment as the seal of the debenture – holder (if a corporation) will have to be attested by director’s signatures. The latter may not be readily accessible. Therefore, it is practical and permissible for a debenture- holder to provide for the appointment of a receiver to be made under hand of an authorised officer. The appointment deed may be in the form of a deed poll executed by the debenture-holder only or, more typically, the receiver may be a party to it.”
60. As a matter of fact the respondent does not satisfy the court that it may not have a seal.
61. The difficulty I perceive from the first named respondent’s perspective is that Clause 7 of the 1981 debenture is quite clear in stating that the lender may at any time after the mortgage shall have become payable appoint by writing under its seal a receiver of the mortgage property and the ‘may’ runs with the appointment of a receiver under its seal, and in my view no other construction is open on the face of Clause 7.
62. Further, to compound the situation from the first named respondent’s point of view, the possibility of making the appointment of a receiver under hand is specifically excluded pursuant to subs (1) of s. 24 of the Conveyancing and Law of Property Act 1881. It had to be evident to the first named respondent at all times that in taking over responsibility for the debenture of 1981, the appointment of a receiver had to be under seal and in the particular circumstances as Irish law applies the situation is well summed up in Lynch, Fannon & Murphy Corporate Insolvency and Rescue (2nd Ed.) 2012 at para. 6.39 where it is specifically pointed out that in circumstances where documents are required to be under seal this may cause delay in appointment as the seal of the debenture holder (if a corporation) will have to be attested by directors signatures. The latter may not be readily accessible. Therefore, it is practical and permissible for a debenture holder to provide for the appointment of a receiver to be made under hand of an authorised officer.
63. As previously referred to, the appointment of a receiver to be made under hand is expressly excluded in para. 10 of the debenture of 1981. In this instance the appointment of the receiver pursuant to the debenture of 1981 is made contractually as between the applicant and the first named respondent without recourse to the courts and is not dependent on legislation. In this instance it is dependent on its own contractual arrangement as entered into between the parties and is governed by Irish law.
64. I take the view having regard to the specific contractual arrangements as entered into between the applicant and the first named respondent, the various authorities as relied on by the applicant and as set out in the submissions, that in order for the first named respondent to validly appoint Mr. O’Connor as receiver pursuant to the two debentures and for the appointment to be in compliance with the debenture of 1981, the receiver had to be appointed in writing under the seal of the respondent, and quite simply this proviso is copper fastened by the expressed prohibition as contained in para. 10 of the agreement against the appointment of a receiver in writing under hand, and necessarily has to lead to a conclusion at law that the appointment of the receiver pursuant to the terms of the debenture of 1981 is void, and as I accept the submission that the applicants business is run from both premises as one business and are inextricably intertwined, it follows that the appointment of the receiver pursuant to both debentures in respect of the applicants business is void.
65. It is now necessary to turn to the respondents contention that notwithstanding the possibility of a finding that the appointment of the second named respondent is void for non-compliance with the contractual terms of the 1981 debenture, the applicant is estopped from maintaining that stance by reason of its delay in moving to impugn the appointment from 10th October, 2012, until 18th December, 2012.
66. In this regard the respondents rely on the dicta of Lord Selborne in Lindsay Petroleum Company v. Herd [1874] L.R. 5. p.c. 221 at p. 239 wherein he stated:-
“Now the doctrine of laches in court of equity is not an arbitry or a technical doctrine. Where it would be practically unjust to give a remedy, either because the party has, by his conduct, done that which might fairly be regarded as equivalent to a waiver of it, or whereby his conduct and neglect he has though perhaps not waiving that remedy, yet put the other party in a situation in which it would not be reasonable to place him if the remedy were afterwards to be asserted, in either of these cases lapse of time and delay are most material.”
67. It is further submitted on the respondent’s behalf that this Court in assessing the extent of the applicant’s delay is obligated to work from the time the applicant became aware of the facts giving rise to the relief it seeks. Mr. Foley at paragraph 13 of his first Affidavit unequivocally acknowledges that the validity or otherwise of the appointment of the second named Respondent was in his mind from the outset, averring:-
“We suspected that the appointment of the Receiver was unlawful and, further, that the Company would have been a good candidate for examinership. We obtained legal advice confirming our suspicions regarding the invalidity of the appointment of the Receiver. However, a declaration that the Receiver was not validly appointed would have served no useful purpose unless the Company succeeded in obtaining the protection of the court.”
68. Whether or not the rationale proffered by Mr. Foley for failing to bring an application which he expresses himself as being urgent is a matter for this Honourable Court to consider, it takes absolutely no account of the fact that the second named Respondent since 11 October 2012 has incurred the costs and expense of managing the Company’s business and he has openly advertised for sale the Company’s premises in November 2012.
69. It is contended the case of Archbold v. Scully (1861) 9 H.L.C. 360 is apposite and as Lord Wensleydale at p. 383 stated:-
“if a party, who could object, lies by and knowingly permits another to incur an expense in doing an act under the belief that it would not be objected to, and so a kind of permission may be said to be given to another to alter his condition he may be said to acquiesce.”
70. Allied to this, it is contended on the respondents behalf that the applicant is estopped from disputing the validity of the second named respondent’s appointment more than two months after it was effected, or purportedly effected as the applicant contends. The principle of such an estoppel arising in a receivership situation is exemplified by the case of Bank of Baroda v. Panessar & Others [1987] W.L.R. 208. In that case the lack of objection to the receiver’s appointment and the fact that thereafter the company directors dealt with the receiver was highlighted.
71. In this case the respondent contends that the applicant at no stage after becoming aware of the second named respondent’s appointment made any objection until these proceedings were maintained nor did the applicant or Mr. Foley put the second named respondent on notice that they had legal advice his appointment was invalid and that he should operate under this apprehension until the applicant saw fit to challenge the appointment. The respondent submits that patently the applicant and Mr. Foley stood by while the second named respondent made it known the Company’s two properties were being sold as one unit.
72. The respondents submit the applicant’s action, or inaction as it were, has created an estoppel warranting the applicant being precluded from maintaining the application.
73. The reality of the situation is that there was little interaction between agents of the applicant and the second named respondent subsequent to the appointment of the second named respondent as receiver. The receiver has run the business since the date of his appointment from the two premises and has achieved what in his view he considers to be a reasonable offer for the purchase of the properties and has sought and received a booking deposit in respect thereof subject to the contract.
74. I do not consider that any irrevocable steps have been taken by the receiver in the course of his duties, and the situation does not arise where he has committed himself to any significant legal arrangement.
75. In the particular factual circumstances of this case it is not a situation whereby the applicant actively assisted the appointed receiver with respect to either the running or the disposal of the business and its financial adviser, Paul Carroll, has specifically denied that a purported offer for the properties was made on behalf of the applicant indicating that at all times he had indicated to the respondents that he was acting for an independent third party. I am satisfied to accept that in the particular circumstances of this case, the applicant did not make any offer to purchase either of the properties from the appointed receiver and the reality of the situation appears to have been one of little or no interaction. Further, it appears that in fact what happened was that subsequent to the appointment of the receiver the applicant was taking legal advice and did become aware that there was a possibility that the appointment was invalid and then sought accounting advice as to whether or not there was any reasonable prospect of the companies surviving if placed in examinership.
76. I accept accordingly that there was a degree of delay and there was a degree of acquiescence. However, when I turn to the judgment of Walton J. in Bank of Baroda v. Panesar & Ors W.L.R. 30th January, 1987, it is clear that the basis upon which the defendants would in any event have been estopped both as against the receiver and as against the Bank from maintaining the invalidity of the receiver’s appointment, is factually very different to the circumstances that pertain in this instance. The matter is dealt with extensively at p. 220 of the judgment where in Walton J. states as follows:-
“But it is not, of course, the mere absence of objection which has created an estoppel. Thus, as early as the day he was appointed the first defendant wrote to Mr. Singla giving him notice that “we will obtain you whatever open market offer you get on the lease of” 46, Mortimer Street (Glimtone Ltd.’s premises) and stating that if he ignored the offer, he would be held responsible for the consequences. On 30 November 1983 the first defendant wrote again to the receiver stating that he had requested several people to contact him regarding the sale of the leases of 8-10 Whitechurch Lane, the property of Lowcroft Ltd. The first defendant caused his solicitors to write to the receiver on 14 December 1983, seeking his assistance as such, in relation to a claim against a third party. In December 1983 the receiver caused Lowcroft Ltd. and Glimtone Ltd. to commence proceedings against the three brothers and another of their companies. No objection was ever taken to the effect that this action was incompetent.
Again, on 12 January 1984 the receiver and the first defendant met and entered into a conditional agreement for the purchase by the defendants of the stock and premises of both companies. The first defendant again caused his solicitors to write on 18 January 1984 confirming the broad principles of those proposals; and he himself wrote on 24 January 1984 stating that he was going to reconsider his offer. And so on, right down to the issue of the writ in the present action, by which time, for practical purposes, the receivership had been fully completed. The defendant companies were, by the brother who throughout was the leading member of the family, dealing with the receiver on the footing that he was validly appointed. It seems to me that, under these circumstances, there can be no real doubt but that the companies are themselves estopped from denying that the receiver was validly appointed. The principle of estoppel applicable can be taken from Habib Bank Ltd. v. Habib Bank A.G. Zurich [1981] 1 W.L.R. 1265, 1285 where Oliver L.J. applied the test which he had previously formulated in Taylors Fashions Ltd. v. Liverpool Victoria Trustees Co. Ltd. (Note) [1982] QB 133, 151-152 in these terms:-
“whether … it would be unconscionable for a party to be permitted to deny that which, knowingly, or unknowingly, he has allowed or encouraged another to assume to his detriment …”
77. It is clear from the views as expressed by Walton J. that he does not consider that the mere absence of objection would create an estoppel. In the circumstances before him it was clear that the defendants were immediately offering to match whatever offer the receiver obtained in respect of the lease of the property of the defendants, but the subject matter of the charge in favour of the Bank, and threatening the receiver that if he ignored the defendants offer he would be held responsible for the consequences. Furthermore, the defendants wrote to the receiver stating that they had been out looking for people to purchase the properties and had requested several people to contact him regarding the sale of certain leases. One of the defendants in particular wrote to the receiver seeking his assistance in relation to a claim against a third party and when it was decided to commence proceedings against the defendants and their companies, no objection was ever taken to the effect that the receiver’s action was incompetent. Subsequently, the receiver and the first defendant met and entered into a conditional agreement for the purchase by the defendants of the stock and premises of both companies and the first defendant caused his solicitors to write confirming the broad principles of the proposals but the relevant defendant himself wrote subsequently stating that he was going to reconsider his offer, and as Walton J. states:-
“…And so on right down to the issue of the writ in the present action by which time for practical purposes the receivership had been fully completed. The defendant companies were…dealing with the receiver on the footing that he was validly appointed. It seems to me that, under these circumstances, there can be no real doubt but that the companies are themselves estopped from denying that the receiver was validly appointed”
It was against these background circumstances that Walton J. took the view that there could be no real doubt but that the companies themselves were estopped from denying that the receiver was validly appointed. All of these comments, of course, are against the background where Walton J. had already taken the view that the receiver was validly appointed. In the particular circumstances that pertain here, there could be no comparison between the actions of Mr. Foley and his wife or any other party acting on behalf of the applicant company and the actions of the defendants in Baroda v. Panesar. In my view, there are three significant features in this case which compel the court to decide the issue of estoppel in the applicants favour and these are:-
1. The applicant took no or no significant proactive step confirming its acquiescence in the appointment of the receiver.
2. The receiver, apart from running the business in the applicant’s premises for a period of two months, has taken no or no significant action which commits him to an irrevocable legal situation such as, for example, a completed enforceable contract of sale in respect of the premises.
3. The reality of the situation is that the first named respondent hereto had instant access to the relevant mortgage of debenture and it had to be reasonably clear, in my view, that the appointment of a receiver had to be under seal and the appointment of a receiver under hand was specifically excluded.
78. Having regard to the fact that I have already found that the purported appointment of the first named respondent as receiver over the property and assets of the applicant company is void, the actions of the applicant insofar as I accept that there was a degree of acquiescence could not be considered sufficient to enable the respondents succeed in their claim that the actions or, as is correctly submitted, the inaction of the applicant gives rise to a situation whereby notwithstanding that the second named respondents appointment is void, he can continue to act as receiver over the property and assets of the applicant company and proceed to dispose of them.
79. I am satisfied that the property and assets of the applicants business are inextricably intertwined and run effectively as one business from the two premises. It is not possible to differentiate the subject matters of the two debentures from one another and thus, I am satisfied that in the overall context the provisions of both debentures had to be validly exercised to effect the properties and assets of the applicants business.
80. Accordingly, in accordance with the terms of the notice of motion I accede to the applicants prayer for an order pursuant to O. 316 of the Companies Act 1963, declaring that David O’Connor, the second named respondent, does not stand validly appointed as the receiver manager over the whole of the property and assets referred to comprised in mortgage and are charged by the mortgage debenture dated 7th August, 1981 between the Belohn Limited and the Industrial Credit Company Limited over the premises known as No .1 Merrion Row, Dublin and the mortgage debenture dated 3rd April, 2008, between the Belohn Limited and the Bank of Scotland (Ireland) Limited over the premises known as No. 17 Upper Merrion Street in the Parish of St. Anne and City of Dublin.
81. I am further satisfied to grant a declaration pursuant to s. 316(1) of the Companies Act 1963, that the purported appointment of David O’Connor in the manner set out above is invalid, void and of no effect.
Lascomme Ltd. v. United Dominions Trust (Ireland) Ltd.
[1993] 3 IR 412
Keane J.
While it was conceded on behalf of the bank that the appointment of the receiver did not put an end to all the powers of the directors, it was submitted on their behalf that their power to institute and maintain proceedings in the name of the company did not extend to an action which would have the effect of endangering the security of the debenture holder. In the event of the action being dismissed with costs in favour of the bank, their security would be endangered since it would be the only asset available to satisfy the order as to costs. It was also urged that, in any event, the cause of action and its fruits, should the company prove successful, were also captured by the debenture and available to satisfy pro tanto the debt due to the bank by the company. Hence, it was said, the bank was in effect being asked to pay for an action by themselves against themselves which would be of no practical benefit to anyone.
It is clear that when a receiver is appointed by a debenture holder under the powers in that behalf in the debenture, the powers vested by law in the directors of the company are not thereby terminated. They may not, however, be exercised in such a manner as to inhibit the receiver in dealing with and disposing of the assets charged by the debenture or in a manner which would adversely affect the position of the debenture holder by threatening or imperilling the assets which are subject to the charge. Subject to that important qualification, the powers vested by law in the directors remain exercisable by them and include the power to maintain and institute proceedings in the name of the company where so to do would be in the interests of the company or its creditors.
That proposition is supported by the decision of Murphy J. in Wymes v. Crowley (Unreported, High Court, Murphy J., 27th February, 1987). In the course of his judgment, Murphy J. cited some observations of the Court of Appeal in England in Newhart Developments Ltd. v. Co-operative Commercial Bank Ltd. [1978] Q.B. 814. The passage to which he drew attention (from the judgment of Shaw L.J.) was as follows at p. 821 of the report:
“I see no principle of law or expediency which precludes the directors of a company, as a duly constituted board . . . from seeking to enforce the claim, however ill-founded it may be, provided only, of course, that nothing in the course of the proceedings which they institute is going in any way to threaten the interests of the debenture holders.”
Since Shaw L.J. delivered that judgment, doubts have been expressed in England as to the correctness of the decision in Newhart Developments Ltd. v. Co-operative Commercial Bank Ltd. [1978] Q.B. 814. In Tudor Grange Holdings Ltd. v. Citibank N.A. [1992] Ch. 53, Sir Nicholas Browne-Wilkinson V.C. (as he then was) said at p. 63 of the report:
“I have substantial doubts whether the Newhart case was correctly decided in any event. That may have to be looked at again in the future. The decision seems to ignore the difficulty which arises if two different sets of people, the directors and the receivers, who may have widely differing views and interests, both have power to bring proceedings on the same cause of action. The position is exacerbated where, as here, the persons who have been sued by the directors bring a counter-claim against the company. Who is to have the conduct of that counter-claim which directly attacks the property of the company? Further, the Court of Appeal in the Newhart case does not seem to have had its attention drawn to the fact that the embarrassment of the receiver in deciding whether or not to sue can be met by an application to the court for directions as to what course should be taken, an application now envisaged in s. 35 of the Insolvency Act, 1986.”
The difficulty suggested in that passage that might arise if the defendant was proposing to institute a counter-claim does not arise in the present proceedings, where it is not suggested that any such counter-claim is envisaged. As to the undoubted embarrassment which a receiver would feel in bringing an action against the debenture holder who appointed him, I have to say, with respect, that I cannot see how that embarrassment is relieved by the undoubted power of the receiver to apply to the court for directions (in Ireland under s. 316, sub-s. 1 of the Companies Act, 1963, as substituted by s. 171 of the Companies Act, 1990). A receiver who acts as the receiver has done here, i.e. declining to give his consent to the proceedings and leaving it to the debenture holder to move to stay them, if so advised, cannot be criticised by anyone. If, however, he applies to the court under s. 316, sub-s. 1 for directions as to the proceedings, the court, for all he knows, may direct that the proceedings should indeed proceed, in the interests of all the creditors, against the debenture holder. A receiver who quite unnecessarily brought about that state of affairs would hardly earn the gratitude of the debenture holder to whom his primary duty is owed.
I see no reason to doubt the correctness of the approach adopted by the Court of Appeal in Newhart Developments Ltd. v. Co-operative Commercial Bank Ltd. [1978] Q.B. 814 or by Murphy J. in Wymes v. Crowley (Unreported, High Court, Murphy J., 27th February, 1987). However, in neither of those cases did the question arise which was canvassed in Tudor Grange Holdings Ltd. v. Citibank N.A. [1992] Ch. 53, and the present case, as to the effect of the absence of an indemnity in respect of the costs incurred by the debenture holder against the company in the event of the proceedings being unsuccessful. Notwithstanding the doubts he entertained as to the correctness of the decision in Newhart Developments Ltd. v. Co-operative Commercial Bank Ltd. [1978] Q.B. 814, the learned Vice-Chancellor considered himself bound by the decision, but distinguished it on the ground that there was an indemnity for costs forthcoming in that case. He said:
“Unlike the position in the Newhart case, when the directors of the plaintiff companies decided to start proceedings in the name of the company they were starting proceedings which could directly impinge on the property subject to the receiver’s powers in that they held no indemnity against the liability of the companies’ assets to satisfy a hostile order for costs made against the companies. That brings the case outside both the decision and the reasoning in the Newhart case since, unlike the Newhart case, the receiver’s position was prejudiced by the decision taken. In my judgment, the directors had no power to start the proceedings in those circumstances.”
The facts in that case were more complex than those which I am considering and I am not entirely clear from my reading of the headnote and the statement of facts in the judgments in what manner and to what extent the assets comprised in the relevant debentures would have been affected in the event of a hostile order for costs being made against the companies. I unreservedly concur with the view of Browne-Wilkinson V.C. in that case, which was also the view of the Court of Appeal in Newhart Developments Ltd. v. Co-operative Commercial Bank Ltd. [1978] Q.B. 814 and of Murphy J. in Wymes v. Crowley (Unreported, High Court, Murphy J., 27th February, 1987) that, if the debenture holder’s security would indeed be imperilled by a hostile order for costs, that could well be a ground for staying the proceedings at the instance of the debenture holder.
Unlike Tudor Grange Holdings Ltd. v. Citibank N.A. [1992] Ch. 53, however, the position in the present case is as simple as it is bleak. The only asset the company has is the hotel. The unchallenged evidence is that it is unlikely to achieve a sale price in excess of E£150,000. This will not even discharge the bank’s debt in full. There will be nothing whatever left for the other creditors. If the receivership takes its normal course, and there is no reason why it should not, the hotel will be sold and the proceeds of sale paid over to the bank in part discharge of their debt well before these proceedings have finished their doubtless lengthy journey through the High Court. If the bank successfully defends the proceedings, it will, of course, be unable to recover its costs from the company. If that was a ground for staying proceedings, the directors of an insolvent company would be unable to maintain a claim against the very persons whom they say had brought about the insolvency. It was open to the bank in these proceedings to apply to the court under s. 390 of the Companies Act, 1963, for an order requiring the company, as an insolvent company, to provide security for the costs of the proceedings. That would doubtless have been met by the company with a claim that the court should not exercise its discretion in favour of the bank in granting such an application on the ground that the company had at least an arguable case to present that their insolvency had been brought about by the wrongdoing of the bank. The latter proposition is supported by a number of authorities in this court and the Supreme Court to which it is unnecessary to refer. It is, indeed, unnecessary for me to express any view as to whether such an application by the bank would have been successful, since no such application is before the court.
As to the final argument by the bank that they should not be asked to expose themselves to the costs of a purely academic exercise in litigation, this also seems to me to be fallacious. It rests on the assumption that the cause of action, along with the other assets of the company, vested in the receiver for the benefit of the bank on his appointment. In the result, it is argued, the fruits of the action will vest in the bank in any event if the company is successful. That, however, as Shaw L.J. pointed out in Newhart Developments Ltd. v. Co-operative Commercial Bank Ltd. [1978] Q.B. 814, overlooks the fact that, if the company’s action is successful, the financial situation as between the company and the bank will be entirely transformed. The bank will be able to satisfy the balance of its debt out of the proceeds of the action and the surplus, if any, will be available to the other creditors and the company.
The bank’s application will accordingly be dismissed. There is also before me, as I mentioned already, an application by the company under s. 316 for directions, to which the receiver is a notice party. Counsel for the receiver has, not surprisingly, supported the attitude of the bank. I will make an order on that application that the company is entitled to maintain the proceedings against the bank.
Moorview Developments Ltd & Ors -v- First Active PLC & Ors
[2010] IEHC 35 [2011] 1 IR 117
Clarke J.
4. Analysis
4.1 Neither counsel was able to find any direct authority on the point. In those circumstances it seems to me that the matter must be determined from first principles. A lis pendens is designed to give notice of the fact that proceedings relating to land are pending before the court. Insofar as a lis pendens is registered against a named individual, then it seems to me that its purpose must be to bring to the attention of any interested party, the fact that there are proceedings in being against the person concerned which relate to the ownership of property or an interest in property. It may be that there is contained within the one set of proceedings a number of claims against a number of defendants in circumstances where not all of the claims are pursued against all of the defendants. It seems to me that, as a matter of first principle, it could never be the case that a defendant who happened to be properly joined in a set of proceedings in relation to some relief that did not relate directly to land in which the relevant defendant had an interest, could properly be the subject of a lis pendens. There would, in those circumstances, be no lis pending in relation to the ownership of land or an interest in land in respect of the person concerned. The underlying rationale behind the registration of a lis pendens is as was noted by Geoghegan J. in A.S. v. G.S. [1994] 1 I.R. 407. In the course of his judgment in that case Geoghegan J. noted with approval the explanation by Lord Cranworth in Bellamy v. Sabine [1957] 1 De. G. & J. 566. The relevant passage speaks of “litigation…pending between a plaintiff and a defendant as to the right to a particular estate…”.
4.2 That quote seems to me to express the fundamental proposition. The issue between the parties must relate to the ownership of some interest in land. Where there is more than one defendant in the proceedings, then in order that a lis pendens be validly registered in respect of a particular defendant, then the issues which arise on the pleadings and which are being bona fide pursued by the plaintiff insofar as the relevant defendant is concerned, must relate to the ownership of some interest in land.
4.3 In those circumstances, it does not seem to me that the position of a receiver or agent is captured. A receiver does not own any interest in lands which are properly described as being owned by the company to which the receiver has been appointed. The lands remain owned by the company (in receivership). The fact that the receiver may well be entitled, provided that all necessary formalities are complied with, to execute a deed of transfer of a relevant interest in property in the name of the company does not alter that fact. It is the company which transfers the property. The receiver is simply entitled, by virtue of the debenture in favour of the relevant lender, and his appointment, to cause the company to effect the transfer. There is a real sense in which the receiver’s position in this regard is no different than that of the directors of a solvent company who are, of course, entitled to act on behalf of the company, to sell its property, and, within the articles of association and the law generally, to fix the company seal to any relevant deed of assurance. The fact that, in different circumstances, it may be the receiver rather than the directors who can cause the company to execute a deed of assurance, does not make the receiver any more a person with an interest in the land owned by the company than the directors were persons with an interest in the land owned by the company.
4.4 Therefore, it seems to me that, insofar as a plaintiff may wish to contest the ownership of land held by a company in receivership, then it is that company in receivership who is the proper defendant to that aspect of any relevant proceedings rather than the receiver himself. If a party wishes to obtain injunctive or similar relief against the receiver then that is, of course, possible, but such a claim is not a claim relating to an interest in land but rather is a claim to an injunction.
4.5 In those circumstances, it does not seem to me that a receiver has a sufficient interest in any land purportedly owned by the company to which the receiver has been appointed so as to warrant the registration of a lis pendens against the receiver arising out of proceedings relating to those lands. In an appropriate case there is no reason why a lis pendens cannot be registered against a company in receivership.
5. Conclusions
5.1 In those circumstances, it seems to me that Mr. Jackson is entitled to an order vacating the lis pendens registered as against him on the 10th August, 2007.
5.2 This judgment does not in any way affect any lis pendens registered in relation to First Active who are not a party to this application.
Silven Properties Ltd. & Anor v Royal Bank of Scotland Plc & Ors
[2003] EWCA Civ 1409 [2004] 1 WLR 997, [2004] WLR 997, [2004] 4 All ER 484, [2003] EWCA Civ 1409
Lightman J
JUDGMENT BELOW
The judge set out clearly in his judgment his reasons for dismissing the claim against the Receivers. The first relevant extract reads as follows:
“Underpinning the claims against the Coopers Receivers is the proposition that they owed a duty to the mortgagors to act in their best interests in determining when to sell the mortgaged property and that, as part of their duty to obtain the best or a proper price, they were obliged to take steps to improve the value of the properties by, for example, applying for planning permission, completing the grant of a lease or, in the case of Watney Street, of carrying into effect a land swap with the local authority. If this is correct, there is a fundamental difference between the legal duties owed by a mortgagee and those of any receiver he chooses to appoint. It is common ground that a mortgagee who exercises his power of sale owes a duty to take reasonable precautions to obtain the true market value or a proper price for the property at the time when he comes to sell: see Cuckmere.”
After citing passages from the judgment of Salmon LJ supporting these propositions, the judge went on to say:
“Whilst accepting these propositions, Mr Driscoll contends that they have no application to a receiver who is appointed by a mortgagee and then sells. He relies in particular on a decision of Millett J in Re Charnley Davies Ltd No 2 [1990] BCLC 760, who held that an administrator owed a duty to the company over which he was appointed to take reasonable care to obtain the best price that the circumstances, as he reasonably perceived them to be, permitted, including a duty to take reasonable care in choosing the time at which to sell the property. In reaching this decision, the Judge contrasted the position of the administrator with that of the mortgagee:
‘It was common ground that an administrator owed a duty to a company over which he is appointed to take reasonable steps to obtain a proper price for its assets. That is an obligation which the law imposes on anyone with a power, whether contractual or statutory, to sell property which does not belong to him. A mortgagee is bound to have regard to the interests of the mortgagor, but he is entitled to give priority to his own interests, and may insist on an immediate sale whether or not that is calculated to realise the best price; he must “take reasonable care to obtain the true value of the property at the moment he chooses to sell it”: see Cuckmere Brick Co Ltd v. Mutual Finance Ltd [1971] 2 All ER 633, [1971] Ch 949. An administrator, by contrast, like a liquidator, has no interest of his own to which he may give priority, and must take reasonable care in choosing the time at which to sell the property. His duty is “to take reasonable care to obtain the best price that the circumstances permit”: see Standard Chartered Bank v. Walker [1982] 3 All ER 938, [1982] 1 WLR 1410.’
… I take the view that I am bound on the authorities as they stand to regard the receiver as under the same (but no greater) obligations to the mortgagor as the mortgagee. This does not mean that he is not entitled to exercise some judgment of his own in relation to the timing of any sale. They are his powers to exercise. But inevitably he is likely to give primacy to the interests and wishes of the mortgagee and if he does so, he is under no liability to the mortgagor unless he acts in bad faith or fails to take reasonable steps to obtain a proper price at the relevant time. That is, I think, made clear by the decision of the Privy Council in Downsview Nominees Ltd v. First City Corporation Ltd [1993] AC 295 at page 312, where Lord Templeman, delivering the opinion of the Board, said this:
‘The next question is the nature and extent of the duties owed by a mortgagee and a receiver and manager respectively to subsequent encumbrancers and the mortgagor.
Several centuries ago equity evolved principles for the enforcement of mortgages and the protection of borrowers. The most basic principles were, first, that a mortgage is security for the repayment of a debt and, secondly, that a security for repayment of a debt is only a mortgage. From these principles flowed two rules, first, that powers conferred on a mortgagee must be exercised in good faith for the purpose of obtaining repayment and secondly that, subject to the first rule, powers conferred on a mortgagee may be exercised although the consequences may be disadvantageous to the borrower. These principles and rules apply also to a receiver and manager appointed by the mortgagee.’
Similarly in Medforth v. Blake [2000] Ch 86 Sir Richard Scott V-C, when considering the position of a receiver and manager appointed by a mortgagee to run a business, said this:
‘The proposition that, in managing and carrying on the mortgaged business, the receiver owed the mortgagor no duty other than that of good faith offends, in my opinion commercial sense. The receiver is not obliged to carry on the business. He can decide not to do so. He can decide to close it down. In taking these decisions he is entitled, and perhaps bound, to have regard to the interests of the mortgagee in obtaining repayment of the secured debt. Provided he acts in good faith, he is entitled to sacrifice the interests of the mortgagor in pursuit of that end….’
… The mortgagee or receiver, when exercising the power of sale, must therefore act in good faith with a view to securing repayment of the debt by the conversion of the security into money. The timing of the sale will be a matter for them, unaffected by the wishes of the mortgagor. But the preparation for and the method of sale to be adopted will be matters in respect of which there is no conflict between the interests of the mortgagor and the mortgagee, and where the mortgagee or receiver will be potentially liable to the mortgagor if he fails to act with reasonable care so as to obtain a proper price. In this context it is clear that the property must be fairly and properly exposed to the market, absent perhaps cases of real urgency. Similarly, as part of this duty of care, the receiver may be required to take positive steps to maintain the value of the property. Knight v. Lawrence [1993] BCLC 215 is an example of this. But I am unconvinced that the mortgagee or a receiver appointed by him is required to incur expense in the improvement of the security in order to sell it at a higher price or to embark on making applications for planning permission, granting leases or the like, which, however well-founded, are likely to delay a sale beyond the normal period of marketing.”
CLAIMANTS’ CASE ON APPEAL
The Claimants on this appeal advance three general propositions of law in support of their contention that the judge was wrong and that the Receivers were duty bound to proceed with the steps necessary to increase the market price of the properties charged before proceeding with a sale:
i) a receiver from the date of his appointment owes a duty of care to mortgagors in all he does in the course of his receivership if he is appointed agent of the mortgagor and has exclusive control of property of the mortgagor;
ii) alternatively a receiver (in the like manner to a mortgagee) who has exercised his power to investigate and to pursue an application for planning permission becomes bound not to abandon that course unless to do so would accord with his duty of care i.e. unless a reasonable and prudent person would do so;
iii) the clearly established duty of care of mortgagees and receivers to take reasonable care on sale to obtain the best price reasonably obtainable includes a duty to take the pre-marketing steps required to achieve the best price reasonably obtainable and this includes pursuing applications for development and granting leases of vacant premises.
THE LAW
The Claimants’ submissions require an examination and comparison of the duties of mortgagees and receivers. We shall therefore first consider the relevant duties of mortgagees and then turn to the duties of receivers.
MORTGAGEES
A mortgagee has no duty at any time to exercise his powers as mortgagee to sell, to take possession or to appoint a receiver and preserve the security or its value or to realise his security. He is entitled to remain totally passive. If the mortgagee takes possession, he becomes the manager of the charged property: see Kendle v. Melsom [1998] 139 CLR 46 at 64 (High Court of Australia). He thereby assumes a duty to take reasonable care of the property secured: see Downsview Nominees Ltd v. First City Corp [1993] AC 295 (“Downsview”) at 315A per Lord Templeman; and this requires him to be active in protecting and exploiting the security, maximising the return, but without taking undue risks: see Palk v. Mortgage Services Funding Plc [1993] Ch 330 at 338A per Nicholls V-C (“Palk”).
A mortgagee “is not a trustee of the power of sale for the mortgagor”. This time-honoured expression can be traced back at least as far as Sir George Jessel MR in Nash v. Eads (1880) 25 Sol. J. 95. In default of provision to the contrary in the mortgage, the power is conferred upon the mortgagee by way of bargain by the mortgagor for his own benefit and he has an unfettered discretion to sell when he likes to achieve repayment of the debt which he is owed: see Cuckmere Brick Co v. Mutual Finance Limited [1971] Ch 949 (“Cuckmere”) at 969G. A mortgagee is at all times free to consult his own interests alone whether and when to exercise his power of sale. The most recent authoritative restatement of this principle is to be found in Raja v. Austin Gray [2002] EWCA Civ 1965 paragraph 95 per Peter Gibson LJ (“Raja”). The mortgagee’s decision is not constrained by reason of the fact that the exercise or non-exercise of the power will occasion loss or damage to the mortgagor: see China and South Sea Bank Limited v. Tan Soon Gin [1990] 1 AC 536. It does not matter that the time may be unpropitious and that by waiting a higher price could be obtained: he is not bound to postpone in the hope of obtaining a better price: see Tse Kwong Lam v. Wong Chit Sen [1983] 1 WLR 1349 at 1355B.
The Claimants contend that a mortgagee is not entitled to ignore the fact that a short delay might result in a higher price. For this purpose they rely on certain obiter dicta of Lord Denning MR in Standard Chartered Bank v. Walker [1982] 1 WLR 1410 (“Standard Chartered”) at 1415G-H and 1416A. The mortgagee in that case, having obtained insufficient on the sale at auction of the property charged to recover the sum secured, applied for summary judgment against the mortgagor for that sum. The mortgagor resisted the application alleging that the mortgagee had sold at an undervalue on a variety of grounds one of which was that the sale took place at the wrong time of year. The Court of Appeal gave the mortgagor leave to defend on the ground that there was an arguable case that the sale had been negligently handled. It was common ground in that case that a mortgagee can choose his own time for sale: see Fox LJ at p.1418 F-G. Lord Denning accepted that there were dicta to this effect, but added that he did not think that this meant that the mortgagee could sell at the worst possible moment and that it was at least arguable that in choosing the time he must exercise a reasonable degree of care. The view expressed by Lord Denning cannot stand with the later authorities to which we have referred and which state quite categorically that the mortgagee is under no such duty of care to the mortgagor in respect of the timing of a sale and can act in his own interests in deciding whether and when he should exercise his power of sale.
The mortgagee is entitled to sell the mortgaged property as it is. He is under no obligation to improve it or increase its value. There is no obligation to take any such pre-marketing steps to increase the value of the property as is suggested by the Claimants. The Claimants submitted that this principle could not stand with the decision of the Privy Council in McHugh v. Union Bank of Canada [1913] AC 299. Lord Moulton in that case (at p.312) held that, if a mortgagee does proceed with a sale of property which is unsaleable as it stands, a duty of care may be imposed on him when taking the necessary steps to render the mortgaged property saleable. The mortgage in that case was of horses, which the mortgagee needed to drive to market if he was to sell them. The mortgagee was held to owe to the mortgagor a duty to take proper care of them whilst driving them to market. The duty imposed on the mortgagee was to take care to preserve, not increase, the value of the security. The decision accordingly affords no support for the Claimants’ case
The mortgagee is free (in his own interest as well as that of the mortgagor) to investigate whether and how he can “unlock” the potential for an increase in value of the property mortgaged (e.g. by an application for planning permission or the grant of a lease) and indeed (going further) he can proceed with such an application or grant. But he is likewise free at any time to halt his efforts and proceed instead immediately with a sale. By commencing on this path the mortgagee does not in any way preclude himself from calling a halt at will: he does not assume any such obligation of care to the mortgagor in respect of its continuance as the Claimants contend. If however the mortgagee is to seek to charge to the mortgagor the costs of the exercise which he has undertaken of obtaining planning permission or a lessee, subject to any applicable terms of the mortgage, the mortgagee may only be entitled to do so if he acted reasonably in incurring those costs and fairly balanced the costs of the exercise against the potential benefits taking fully into account the possibility that he might at any moment “pull the plug” on these efforts and the consequences for the mortgagor if he did so.
If the mortgagor requires protection in any of these respects, whether by imposing further duties on the mortgagee or limitations on his rights and powers, he must insist upon them when the bargain is made and upon the inclusion of protective provisions in the mortgage. In the absence of such protective provisions, the mortgagee is entitled to rest on the terms of the mortgage and (save where statute otherwise requires) the court must give effect to them. The one method available to the mortgagor to prevent the mortgagee exercising the rights conferred upon him by the mortgagee is to redeem the mortgage. If he redeems, there can be no need or justification for recourse by the mortgagee to the power of sale to achieve repayment of the debt due to him secured by the mortgage.
When and if the mortgagee does exercise the power of sale, he comes under a duty in equity (and not tort) to the mortgagor (and all others interested in the equity of redemption) to take reasonable precautions to obtain “the fair” or “the true market” value of or the ” proper price” for the mortgaged property at the date of the sale, and not (as the Claimants submitted) the date of the decision to sell. If the period of time between the dates of the decision to sell and of the sale is short, there may be no difference in value between the two dates and indeed in many (if not most cases) this may be readily assumed. But where there is a period of delay, the difference in date could prove significant. The mortgagee is not entitled to act in a way which unfairly prejudices the mortgagor by selling hastily at a knock-down price sufficient to pay off his debt: Palk at 337-8 per Nicholls V-C. He must take proper care whether by fairly and properly exposing the property to the market or otherwise to obtain the best price reasonably obtainable at the date of sale. The remedy for breach of this equitable duty is not common law damages, but an order that the mortgagee account to the mortgagor and all others interested in the equity of redemption, not just for what he actually received, but for what he should have received: see Standard Chartered at 1416B.
In our judgment there can accordingly be no duty on the part of a mortgagee, as suggested by the Claimants, to postpone exercising the power of sale until after the further pursuit (let alone the outcome) of an application for planning permission or the grant of a lease of the mortgaged property, though the outcome of the application and the effect of the grant of the lease may be to increase the market value of the mortgaged property and price obtained on sale. A mortgagee is entitled to sell the property in the condition in which it stands without investing money or time in increasing its likely sale value. He is entitled to discontinue efforts already undertaken to increase their likely sale value in favour of such a sale. A mortgagee is under a duty to take reasonable care to obtain a sale price which reflects the added value available on the grant of planning permission and the grant of a lease of a vacant property and (as a means of achieving this end) to ensure that the potential is brought to the notice of prospective purchasers and accordingly taken into account in their offers: see Cuckmere. But that is the limit of his duty.
RECEIVERS
We turn to the question of the duties regarding mortgaged properties of receivers and in particular of receivers who under the term of the mortgage under which they are appointed are designated as agents of the mortgagor.
There is binding authority for the proposition that (again in default of agreement to the contrary) in the exercise of the power of sale receivers owe the same equitable duty to the mortgagor and others interested in the equity of redemption as is owed by the mortgagee: they are both obliged to take care to obtain the best price reasonably obtainable: see e.g. Cuckmere; Downsview; Yorkshire Bank plc v. Hall [1999] 1 WLR 1713 at 1728E-F; Medforth v. Blake [2000] Ch 86 at 98H-99A (“Medforth”); and Raja at paragraph 55. The critical issue however is whether the receiver (unlike the mortgagee) is under a duty of care in regard to the date of sale and to ensure that steps are taken (in particular in respect of planning and the grant of leases) to realise the full potential of the secured property before sale by obtaining permission or granting the leases.
In a number of respects it is clear that a receiver is in a very different position from a mortgagee. Whilst a mortgagee has no duty at any time to exercise his powers to enforce his security, a receiver has no right to remain passive if that course would be damaging to the interests of the mortgagor or mortgagee. In the absence of a provision to the contrary in the mortgage or his appointment, the receiver must be active in the protection and preservation of the charged property over which he is appointed: see Lightman & Moss, Law of Receivers and Administrators 3rd ed para 7.030. Thus if the mortgaged property is let, the receiver is duty bound to inspect the lease and, if the lease contains an upwards only rent review, to trigger that rent review in due time: see Knight v. Lawrence [1991] BCC 411. His management duties will ordinarily impose on him no general duty to exercise the power of sale: see Routestone Ltd v. Minories Finance Ltd [1997] BCC 180 at 187G. But a duty may arise if e.g. the goods are perishable and a failure to do so would cause loss to the mortgagee and mortgagor.
The critical issue raised is whether (as contended by the Claimants) the wider management duties imposed on a receiver (but not on a mortgagee) may require a receiver (and in particular a receiver appointed the agent of the mortgagor) to postpone a sale until after steps have been taken (in this case proceeding with an application for planning permission and with the grant of a lease) calculated to increase the price obtainable in a sum greater than the cost of taking those steps plus the sum representing accrued interest over the period whilst those steps are being taken.
The existence and scope of the duties of an agent, fiduciary and otherwise, depend on the terms on which they are acting: see Kelly v. Cooper [1993] AC 205 at 214. In the case of an agent appointed to manage his principal’s property on his behalf alone, general agency principles will apply. The agent will be obliged to pursue single-mindedly the interests of his principal and he will owe the duties to his principal for which the Claimants contend. This is reflected in the passage in the judgment of Millett J in the case of Re Charnley v. Davies Ltd (No 2) [1990] BCLC 760 cited by Patten J. The administrator as agent for the company owes a duty of care to the company in the choice of the time to sell and (by parity of reasoning) in the decision whether to take the appropriate available advantageous pre-marketing steps which are calculated to achieve the best price. The issue raised is whether receivers who are appointed by a mortgagee to act as agents of the mortgagor are in a like legal position and owe a like duty to the mortgagor.
The character and incidents of such receivers’ agency has been the subject of judicial and extra-judicial consideration. Mr Peter Millett QC (as he then was) in “The Conveyancing Powers of Receivers After Liquidation” (1977) 41 Conv. (NS) 83 at 88 wrote: “The so called ‘agency of the [receivers]’ is not a true agency, but merely a formula for making the company rather than the [mortgagee] liable for his acts”. But this agency of the receivers is a real one, even though it has some peculiar incidents: see Re Offshore Ventilation (1989) 5 BCC 160 at 166A-B. Its reality is reflected in the continuity after the appointment of receivers of the rateable occupation of the mortgagor through the agency of the receivers (see Ratford v. Northavon RDC [1987] QB 357) and in the absence of personal liability of the receivers for tax in respect of receipts which come to the hands of the receivers as agents: see In re Piacentini [2003] 3 WLR 354.
The peculiar incidents of the agency are significant. In particular: (1) the agency is one where the principal, the mortgagor, has no say in the appointment or identity of the receiver and is not entitled to give any instructions to the receiver or to dismiss the receiver. In the words of Rigby LJ in Gaskell v. Gosling [1896] 1 QB 669 at 692: “For valuable consideration he has committed the management of his property to an attorney whose appointment he cannot interfere with”; (2) there is no contractual relationship or duty owed in tort by the receiver to the mortgagor: the relationship and duties owed by the receiver are equitable only: see Medforth and Raja; (3) the equitable duty is owed to the mortgagee as well as the mortgagor. The relationship created by the mortgage is tripartite involving the mortgagor, the mortgagee and the receiver; (4) the duty owed by the receiver (like the duty owed by a mortgagee) to the mortgagor is not owed to him individually but to him as one of the persons interested in the equity of redemption. The class character of the right is reflected in the class character of the relief to be granted in case of a breach of this duty. That relief is an order that the receiver account to the persons interested in the equity of redemption for what he would have held as receiver but for his default; (5) not merely does the receiver owe a duty of care to the mortgagee as well as the mortgagor, but his primary duty in exercising his powers of management is to try and bring about a situation in which the secured debt is repaid: see Medforth at p86; and (6) the receiver is not managing the mortgagor’s property for the benefit of the mortgagor, but the security, the property of the mortgagee, for the benefit of the mortgagee: see Re B Johnson & Co (Builders) Ltd [1953] Ch 634 per Jenkins LJ at 661 cited with approval by Lord Templeman in Downsview at 331B and at p646 per Evershed MR cited with approval by Scott V-C in Medforth at p95H to 96A. His powers of management are really ancillary to that duty: Gomba Holdings v. Homan [1986] 1 WLR 1301 at 1305 per Hoffmann J.
In the context of a relationship such at the present, which is no ordinary agency and is primarily a device to protect the mortgagee, general agency principles are of limited assistance in identifying the duties owed by the receiver to the mortgagor: see Gomba Holdings v. Homan [1986] 1 WLR 1301 at 1305 B-D (Hoffmann J); [1988] 1 WLR 1231 at 1233 D-H (Fox LJ). The core duty of the receiver to account to the mortgagor subsists, but (for example) the mortgagor has no unrestricted right of access to receivership documents. The mortgage confers upon the mortgagee a direct and indirect means of securing a sale in order to achieve repayment of his secured debt. The mortgagee can sell as mortgagee and the mortgagee can appoint a receiver who likewise can sell in the name of the mortgagor. Having regard to the fact that the receiver’s primary duty is to bring about a situation where the secured debt is repaid, as a matter of principle the receiver must be entitled (like the mortgagee) to sell the property in the condition in which it is in the same way as the mortgagee can and in particular without awaiting or effecting any increase in value or improvement in the property. This accords with the repeated statements in the authorities that the duties in respect of the exercise of the power of sale by mortgagees and receivers are the same and with the holding in a series of decisions at first instance that receivers are not obliged before sale to spend money on repairs (see Meftah v. Lloyds TSB Bank [2001] 2 All ER (Comm) 741 at 744 and 766 per Lawrence Collins J), to make the property more attractive before marketing it (Garland v. Ralph Pay & Ransom [1984] 2 EGLR 147 at 151 per Nicholls J) or to “work” an estate by refurbishing it (Routestone Ltd v. Minories Finance Ltd [1997] 1 EGLR 123 at 130D per Jacob J).
In summary, by accepting office as receivers of the Claimants’ properties the Receivers assumed a fiduciary duty of care to the Bank, the Claimants and all (if any) others interested in the equity of redemption. This accords with the statement of principle to this effect of Lord Browne-Wilkinson in Henderson v. Merrett Syndicates Limited [1995] 2 AC 145 at 205 E-H relied on by the Claimants. The appointment of the Receivers as agents of the Claimants having regard to the special character of the agency does not affect the scope or the content of the fiduciary duty. The scope or content of the duty must depend on and reflect the special nature of the relationship between the Bank, the Claimants and the Receivers arising under the terms of the mortgages and the appointments of the Receivers, and in particular the role of the Receivers in securing repayment of the secured debt and the primacy of their obligations in this regard to the Bank. These circumstances preclude the assumption by, or imposition on, the Receivers of the obligation to take the pre-marketing steps for which the Claimants contend in this action. Further no such obligation could arise in their case (any more than in the case of the Bank) from the steps which they took to investigate and (for a period) to proceed with applications for planning permission. The Receivers were at all times free (as was the Bank) to halt those steps and exercise their right to proceed with an immediate sale of the mortgaged properties as they were.
CONCLUSION
For these reasons this appeal should be dismissed.
OBG Ltd & Anor v Allan & Ors
[2005] EWCA Civ 106 [2005] BLR 245, [2005] PNLR 27, [2005] 1 All ER (Comm) 639, [2005] 2 All ER 602, [2005] BPIR 928, [2005] 2 WLR 1174, [2005] QB 762, [2005] EWCA Civ 106, [2005] 1 BCLC 711 Gibson LJ
Before I deal with the specific issues, I would make certain preliminary observations about this unusual case. The dispute is not about any land of either of the Claimants of which the Receivers took control. It is conceded by the Receivers and Penningtons that the Claimants have a cause of action in trespass in respect of such land. The dispute is not about any chattels of either of the Claimants of which the Receivers took control. It is accepted that the Claimant has a cause of action in conversion in respect of those chattels. It is not suggested that the businesses of the Claimants have been lost in consequence of the trespass and conversion in respect of the land and chattels. The dispute is not about whether the Receivers became liable in equity in some way, for example as trustees for intermeddling with the assets of the Claimants. No claim in equity is maintained. Nor is the dispute about negligence on the part of the Receivers in dealing with the assets of which they took control. That was conceded by the Claimants as noted in the recital to the order of 18 December 2002. Nor is it alleged that here there has been interference with a trade or business, a tort which requires the presence of an intention to cause loss. The dispute in relation to the first two issues is limited to whether any, and if so what, tort was committed in relation to the Claimants’ contractual rights. Moreover the Claimants have limited their case to a tort committed on 9 June 1992 such that the ascertainment of damages resulting therefrom required a valuation of the contractual rights as at that date.
Wrongful interference with contractual relations
Since Lumley v Gye (1853) 2 E & B 216 it has been recognised that an actionable wrong is committed by a person deliberately inducing a party to a contract to breach it. In Millar v Bassey [1994] EMLR 44 at p. 62 I described the tort as “a species of the genus of economic torts whereby the common law protects against the intentional violation of economic interests”. In Greig vInsole [1978] 1 WLR 302 at p. 332 Slade J. identified 5 conditions for the tort:
(1) either (a) direct interference or (b) indirect interference (if coupled with unlawful means);
(2) knowledge of the contract;
(3) intention to interfere with it;
(4) damage which is more than nominal;
(5) so far as necessary, the rebuttal of any defence based on justification for the interference.
The cases in which the conditions for the tort have been fulfilled have all been decided in circumstances where the breach of a contract has been procured or induced or the performance of the contract has been prevented or hindered. However, Mr. Steinfeld submits that the tort should not be confined to cases where the breach of the contract or the prevention or hindrance of its performance is intended. He points to the width of the language used in statements of the ambit of the tort and in particular Lord Macnaghten’s reference to interference with contractual relations, on which the Judge relied, as I have noted in para. 32 above. He submits that there is no reason in principle why the displacement of the board of a company by invalidly appointed receivers who take over the business of the company should not fall within the tort when it can be shown that loss, which would not have been suffered by the company but for the receivership, has resulted. That, he suggests, is direct interference with contractual relations. He supports the Judge’s conclusion that the requisite mental element is satisfied by the Receivers knowing of the contracts and intending to interfere by assuming control of the contractual rights and purporting to act on behalf of the Claimants in relation to the contracts.
Mr. Mitchell accepts that interference is a word of wide meaning which can cover many circumstances, and that the acts of invalidly appointed receivers can be characterised as “interference” as a matter of ordinary language. But he points out that this is not the way the term is used in the authorities where the primary meaning is causing a breach of contract. The most crucial point in any event, he submits, is that the defendant must know and intend his acts to be interference. He relies on the observations of Rix L.J. in Stocznia v Latco [2002] 2 Lloyd’s Rep 436 where Rix L.J. set out the policy considerations of what he called the “wide ranging” tort of inducing breach of contract. He said (para. 130):
“The tort is an economic tort designed to place limits on the self-interested rough and tumble of the business world. Its philosophical basis appears to be that contracts should be kept rather than broken. Where, as here, A (Latco) procures B’s (Latreefers’) breach of his contract with C (the yard), adopting it as his own because he is interested to do so, seeking a benefit for himself or a fortiori a detriment for C, and does so deliberately, knowingly and intending the breach to take place, then A puts himself in the way of incurring a liability, even though not himself a party to the contract, unless (i) he does not directly procure the breach, and (ii) he uses no (relevant) unlawful means, or (iii) he can claim some justification. The significance of (i) is that where A directly procures a breach of contract he makes himself as it were directly privy to the breach. The significance of (ii) is that in the absence of making himself privy to the breach, he cannot be faulted as long as he acts as he is entitled to act, but if (deliberately, knowingly and intending the breach to take place) he commits an unlawful act, by which I have in mind an unlawful act of sufficient causative relevance, then he renders himself liable. It may be that unlawful means ought to be necessary even where there is direct procurement (see the wide-ranging work by Hazel Carty, An Analysis of the Economic Torts, 2001, at 82). The significance of (iii), an area which has not been clearly worked out in the cases, appears to be that there may be moral or perhaps economic factors which may mitigate even to the point of justifying conduct otherwise incurring a prima facie liability.”
Rix L.J. had earlier (at para. 120) considered in some detail the differing views expressed by this court in Millar v Bassey in which the majority (Ralph Gibson and Beldam L.JJ.) held that the action should not be struck out but should go to trial. Rix L.J., however, pointed out that Ralph Gibson L.J. was in agreement, in terms of principle, with the views which I expressed on the intention needed for the tort, viz. that there had to be the deliberate interference with a contract with a view to bringing about its breach rather than interference causing a breach when that interference was merely the incidental consequence of the defendant’s conduct. Those remarks in Millar v Bassey were made in the context of a case where a breach of contract had in fact occurred.
As the Judge noted, there do not appear to have been any previous cases in which the tort of interference with contractual rights has been found in circumstances similar to the present. There is no doubt that the tort has been extended from its Lumley v Gye origins of an intentional procurement of a breach of contract to an intentional procurement of a breach of other obligations. Indeed in Lumley v Gye 2 E & B at p. 233 Erle J. stated the relevant principle as being:
“He who maliciously procures a damage to another by violation of his right ought to be made to indemnify; and that, whether he procures an actionable wrong or a breach of contract.”
Further, in Torquay Hotel Co. Ltd. v Cousins [1969] 2 Ch 106 Lord Denning M.R. extended the tort to include deliberate direct interference in the execution of a contract by preventing or hindering one party from performing the contract even though that would not have been an actionable breach. In that case the contract interfered with contained a clause excluding liability for the relevant breach. That extension has been approved by the House of Lords in Merkur Island Corp. v Laughton [1983] 2 AC 570 at p. 608 per Lord Diplock in a case involving interference by unlawful means with the performance of a contract under which no damages were recoverable for that non-performance. Although these cases have been trenchantly criticised by some academics (see, for example, Weir: Economic Torts (1997) pp. 37, 38), the extension must be accepted as binding on this court.
The question to which the present case gives rise is whether the tort should be further extended to cover the interference by a third party with the right of a party to a contract to perform the contract and manage his contractual rights as he chooses when that interference is not directed at procuring an actionable wrong such as a breach of contract nor at hindering or impeding the performance of the contract. In the present case the Receivers would have liked to perform the NWW contracts and to do so in the name and on behalf of the Claimants. But NWW was not willing to let that happen. It is also a tort for a third party directly to do an act, with knowledge of the contract, which, if done by one of the parties to the contract, would have been a breach of contract (see D C Thomson & Co. Ltd. v Deakin [1952] Ch 646 at p. 694 per Jenkins L.J.). That is not this case.
I am not aware of any case where the tort has been held to apply to an act of a third party who, although aware of a contract between the contracting parties, was not intending to procure a breach of the contract or other actionable wrong or to prevent or hinder the performance of the contract nor would the act have been a breach of contract if performed by a party. The decided cases are concerned with interference with the performance of a contract where such interference was aimed at procuring a failure to comply with some obligation imposed by a term of the contract (see Cane: Tort Law and Economic Interests 2nd ed. (1996) p. 119). As is said in Clerk & Lindsell on Torts 18th ed. (2000) para. 24-05 an interference with contractual performance that causes no breach of contractual obligation on principle cannot be tortious. It is powerfully argued by Hazel Carty in Analysis of Economic Torts (2001) at pp. 63 and 271 that there must be an actionable wrong sought to be procured by the alleged tortfeasor for this tort to arise That, as it seems to me, was the essence of the tort, but cases such as Torquay Hotel and Merkur Island breach that purist principle. However, the present case would extend that breach even further. The fact that the tort has been extended to include prevention of the due performance of a primary obligation even though no secondary obligation to make monetary compensation came into existence does not justify a further extension of the tort to circumstances where the alleged tortfeasor was not intending to prevent the performance of any primary obligation of the contract. That would be to change the nature of the tort which hitherto has had as an essential ingredient the intention to procure a breach, or the non-performance of an obligation, of a contract or a breach of duty. Such intention is lacking in a case such as the present, where the interference is not directed at preventing or hindering the performance of any obligation imposed by a contract. The objection to the interference goes only to who should be managing the contractual rights of one party. No doubt the Receivers did intend to manage the contractual rights of the Claimants, but, whilst that was an intention to interfere with the Claimants’ business (though without intending to cause loss or damage), it does not seem to me to amount to an interference with contractual relations in any relevant sense. Accordingly, I would respectfully disagree with the Judge in his holding that the tort of interference with contractual relations was committed. I would allow the appeal on this point.
If I am wrong on that and the tort does extend to the invalid appointment of receivers who manage the contractual rights of one of the parties to a contract, I have difficulty in seeing how the damages fall to be assessed by reference to a valuation as at the date of the Receivers accepting their appointment. A necessary ingredient of the tort is damage which must be more than nominal. Although the Judge found that Mr. Stevenson attended at OBG’s premises that day and “took control of the business”, it is not apparent that the Receivers did anything that day in relation to the Claimants’ contractual rights which caused loss. It is not apparent when or how the contractual rights became less valuable because there is no pleading or other allegation identifying how the loss was caused. I find it impossible to escape the conclusion that the Claimants, by making the statement recorded in the order of 18 December 2002, committed themselves to a case based on the valuation of their businesses at 9 June 1992 on the footing that the claim was one of conversion of a business which was destroyed by the Receivers’ assumption of control but which would have survived but for the receivership. That is not the claim which the Judge upheld. Again, I respectfully disagree with the Judge on this point.
Is there a tort of conversion of contractual rights?
The Judge dealt very briefly with the Claimants’ primary submission that the Receivers converted the businesses (with the contractual rights) of the Claimants. He referred to two cases on which the Claimants relied, Foulds v Willoughby (1841) 8 M & W 540, relating to the conversion of horses, and Kuwait Airlines Corp. v Iraqi Airways Co. (Nos. 4 & 5) [2002] 2 AC 883, relating to the conversion of aircraft, but said that they could not be applied to the ‘conversion’ of contractual rights.
The Judge referred to three Canadian authorities, McLachlan v Canadian Imperial Bank of Commerce (1987) 12 BCLR (2d) 300, approved on appeal (1989) 57 DLR (4th) 687 (“McLachlan”), Bradshaw Construction v Bank of Nova Scotia (1993) 1 WWR 596 and Royal Bank v Got (1994) 17 Alta LR (3d) 23, confirmed on appeal by the Alberta Court of Appeal (1997) 196 AR 241 and by the Supreme Court of Canada (1999) 3 SCR 408 (“Got”). But they were referred to in the context of the measure of damages for the primary claim of the Claimants that they would have survived but for the receivership.
In this court the Claimants rely on the Canadian authorities, and in particular McLachlan and Got, not as establishing that invalidly appointed receivers of a company commit the tort of conversion of the company’s contractual rights, but as proceeding on the footing that such receivers do incur a tortious liability in respect of such rights as part of the business of which they wrongfully took control. The highest it can be put is that the Canadian decisions assume that trespass and conversion extend to all types of assets in a case where a receiver has wrongfully taken control and the business of the company has in consequence failed.
In McLachlan, a bank as a secured creditor appointed an agent to realise the bank’s security. The agent seized the assets of the plaintiff’s company which in consequence became insolvent. The plaintiff succeeded in claiming that the assets were wrongly seized and that damages should be assessed on the basis of the value of the company as a going concern at the date of seizure. It was found that the company would have survived but for the seizure.
In Got a bank as a secured creditor of a company successfully applied ex parte for the appointment by the court of a receiver. The receiver sold the assets of the company. The bank sued the company for its debt. The company counterclaimed for the loss of its assets. It succeeded in its claim that the bank had misled the court in seeking the appointment of the receiver and was liable in damages for trespass and conversion. This liability extended to amounts receivable by the company.
Mr. Steinfeld referred us to another Canadian case, Kavcar Investments Ltd. v Aetna Financial Services Ltd., an unreported decision of Hollingworth J. in the Ontario Supreme Court on 11 April 1986. In that case a secured creditor put the debtor company into receivership and sold the debtor’s assets. It was held that the receiver was invalidly appointed and the creditor and the receiver were liable for damages for trespass and conversion. In assessing damages the judge assessed the value of the business which the debtor had lost and took account of assets other than land and chattels.
However, none of these cases contains any analysis of the relevant torts in relation to such intangible assets. It may well be that the trespass and conversion had the consequence that the entire business of each relevant company was also lost with the result that the value of intangibles such as receivables was correctly included in the damages awarded. I can obtain no assistance from the Canadian cases in determining whether in English law a tort was committed by the Receivers other than trespass and conversion in relation to the land and chattels.
In my judgment, as a matter of English law there can be no conversion of a chose in action. Historically that is obvious, the tort of conversion being derived from trover, which required averments of goods lost by their possessor and found by the defendant. No English textbook suggests otherwise.
Convenient though it would be for English law to recognise a tort, in the case of invalidly appointed receivers, where the receivers wrongfully took control of a business, I do not think it open to this court to invent such a tort. In my judgment the Judge was right to reject the claim based on conversion.
I confess that I arrive at the conclusion which I do on the first two issues with regret. The wrongful taking of control of intangible assets by an invalidly appointed receiver leading to loss which but for the receivership would have been avoided ought to have consequences in law. It may be that had the Claimants pursued other claims such as in equity or in negligence, they could have achieved the result they desired. But for the reasons which I have given, the Claimants, in my judgment, fail on both the ways they frame their case in tort.
Remuneration
I have had some difficulty in discerning what is the true difference between the parties on this issue. The Judge has determined that in principle the Liquidators’ actual remuneration and expenses, to the extent that they exceed the agreed figure of £300,000 for the notional costs and expenses of the liquidator on a notional liquidation, can be recovered as damages so far as they are shown to have been caused by the receivership.
Mr. Mitchell submitted that the Judge should have held that the Liquidators’ remuneration and expenses were only claimable as against the Receivers to the extent that they (1) were caused by the tortious acts of the Receivers, (2) were not too remote, and (3) were not part of the preparation by the Liquidators for this litigation. However, he accepted that damages in tort which are payable to a company may include the additional costs incurred by the company in the form of the remuneration and expenses of the liquidator arising out of the acts of conversion and trespass. Mr. Mitchell said that his clients feared that much of the costs claimed will have been incurred on claims which have failed.
Mr. Steinfeld pointed out that the Judge was only concerned with whether the claim was recoverable in principle. He accepts that, whether as a matter of causation, remoteness or failure to mitigate, the Claimants cannot recover remuneration and expenses unreasonably incurred. If, for example, it was found on the inquiry that it was unreasonable for the Liquidators to have prosecuted the unsuccessful claim that the Claimants would have survived but for the receivership, then their remuneration and expenses for that claim would, he accepts, not be reasonable.
Mr. Steinfeld also drew attention to the fact that the unusual circumstances of this case meant that the only asset which the Liquidators had was the claim against the Receivers, the Receivers having dealt with the other assets of the Claimants, and that this inevitably meant that the remuneration and expenses of the Liquidators were incurred in preparation for the litigation. I agree that it would be wrong to exclude in advance of the inquiry all remuneration and costs incurred by the Liquidators in preparation for the litigation. Of course, to the extent to which the court in the exercise of its discretion awards costs to the Liquidators, those costs cannot be recovered as damages.
I think it premature to try to give further general guidance on the points which will arise on the inquiry which the Judge has directed. It is sufficient to say that the limited decision taken by the Judge on this issue has not been shown to be wrong in principle. I would therefore dismiss the appeal on this issue.
Bula Ltd. v. Crowley
[2003] IESC 10 [2003] 2 ILRM 401, [2003] IESC 10, [2003] 1 IR 396
THE SUPREME COURT
Denham J.
Murray J.
McGuinness J.
Denham J., [Nem Diss].
17. Decision on First Appeal
(i) Basis for the appointment of the Receiver
The issue for decision is one of law. I am satisfied that the core of the case is to be found in the appointment of the Receiver. An analysis of the legal relationships of the parties, the plaintiffs, the Receiver and the Banks, and the consequences arising from those relationships, is the kernel of the matter.
The factual matrix which is not in dispute, save where expressly indicated, upon which the legal decision falls to be made is as follows. Bula borrowed money from the Banks. The borrowings were secured by a number of mortgages and debentures each of which entitled the relevant bank holding security to appoint a receiver over the property in the event of default being made by Bulain its obligations to the relevant Bank. In default of repayment of the loan the Northern Bank Finance Corporation Limited demanded repayment on the 25th June, 1982, the Ulster Investment Bank Limited demanded repayments on the 28th July, 1982 and Allied Irish Investment Bank Limited demanded repayment on the 5th August, 1982. The latest dates for uncontested repayments of the sums borrowed were the 19th February, 1986 in respect of Northern Bank Finance Corporation Limited, the 31st October, 1984 in respect of Ulster Investment Bank Limited, and the 19th October, 1983 in respect of Allied Irish Investment Bank Limited. In respect of Ulster Investment Bank Limited there is a contested payment of the 23rd May, 1986. On the 8th October, 1985 the banks appointed Laurence Crowley Receiver over the secured property. The Receiver has been an active receiver. On the 4th April, 1997 each of the Banks issued proceedings seeking the recovery of principal and interest due by Bula to the Banks. On the 22nd April 1997 each of the Banks brought well charging order proceedings against Bula. None of these proceedings was served until the 30th day of March, 1998. The secured property has now been sold by the Receiver, who wishes to distribute the money to the Banks.
The first matter which I would stress is the contractual base to the tripartite relationship of Bula, the Receiver and the Banks. Since the core of the case is to be found in the appointment of the Receiver, the key to the situation is to be found in the contractual documents establishing the relationships between the parties on the establishment of the loans. The documents relating to each bank are broadly the same and may be treated as such as regards the relevant issues of law. In this case, thus, facility letters were entered into to govern the arrangement. An example is the letter of the Northern Bank Finance Corporation Limited dated the 16th October, 1974. It states:
“Northern Bank Finance Corporation Limited
16th October, 1974.
The Directors
Bula Limited
Hill Samuel House
25-28 Adelaide Road
Dublin 2.
Dear Sirs,
I have pleasure in advising you that Northern Bank Finance Corporation Limited (hereinafter referred to as the Corporation) will make loan facilities available to BulaLimited (hereinafter referred to as the Borrower) on the following terms and conditions:-
1. Amount of the loan:
£1,750,000 (One million, seven hundred and fifty thousand pounds) subject to further review as set out in Paragraph 6.
2. Purpose of the loan:
a) To complete further land purchases and to meet the company’s requirements for working capital, capital expenditure and interest payments in the period to June, 1976.
b) To take over existing borrowings of approximately £653,000 from Bank of Ireland.
c) Guarantee of an overdraft facility of £100,000 from Northern Bank Limited, it being understood that the amount due on foot of this guarantee is included in the total facility mentioned at 1, above.
3. Security
a) A floating debenture over all the assets of the Borrower.
b) A fixed charge over 117 acres of unregistered freehold land at Nevinstown, Co. Meath, underlain by mineral deposits.
c) A fixed charge over a further 143 acres surrounding the land mentioned in b.
4. Rate of Interest:
The rate of interest will be 2% per annum over the average cost to the Corporation of raising funds on the Dublin Inter-bank Market in the week prior to the date of drawdown, and will be reset every three months thereafter on the same basis. Interest will be calculated on the outstanding balance on a day-to-day basis and will be payable without deduction of tax in arrears on the 30th April and 31st October during the term of the loan and on final repayment of the loan, but without prejudice to the provisions of the other terms and conditions of this facility, if interest is not paid on the due date the amount thereof will bear interest at the same rate as if it were a capital sum.
5. Reserve Requirements:
If there shall be any increase in the cost to the Corporation of making or maintaining the loan by an amount which the Corporation deems material resulting from any changes in the reserve or liquidity requirements of the Central Bank of Ireland, then the Borrower shall pay as additional in interest such amount as the Corporation shall certify as will compensate for such increased cost as from the date of notification.
The Borrower shall be at liberty at any time after such notification and without payment of any premium or penalty to repay the full amount of the loan outstanding.
6. Period:
The loan and interest thereon will be repayable on demand, but it is the Corporation’s general understanding that repayment will be effected from re-financing to be arranged not later than the 30th June, 1976, subject to a general review of requirements not later than the 31st December, 1975.
7. Arrangement Fee:
An arrangement fee of £10,000 is payable by the Borrower on acceptance of the facility.
8. Commitment Fee:
A commitment fee is payable at the rate of ½% per annum, payable half-yearly in arrears, on any undrawn portion of the loan with effect from the date of acceptance of this facility until such date as the loan is fully drawn.
9. Drawdown of the loan:
The loan may be drawn down in tranches of a multiple of £100,000 subject to a minimum drawing of £100,000. On completion of the security arrangements drawings up to a maximum amount of £400,000 may be made in respect of Purpose a in Clause 2 above, together with the amount set out in respect of Purpose b in the same Clause. The balance of the total facilities may not be drawn until:
1. the completed formal contract regarding the acquisition by the State of 49% of the issued share capital of the Borrower has been produced to the Corporation. The Corporation is to be satisfied that the terms of this contract are in line with the Agreement in Principle dated the 26th July, 1974 already executed.
10. Insurance:
The property described in Clause 3 is to be insured in an office approved by the Corporation against all normal risks at amounts as may be considered necessary, and the Borrower is to provide the Corporation with a copy of the relevant policy together with premium receipts. The Corporation will require its interest as mortgagee to be noted by the insurer.
11. It is a condition of this loan that in any transaction involving the appointment of Merchant Bankers or Banking Advisors, the Corporation will be so appointed. The Corporation is also to be firstly offered the opportunity of providing or arranging the necessary long term finance for the development and operation of the mine.
12. Subject to there being no developments in the meantime that would be likely, in our opinion, to have adverse effects upon the business of the Borrower or its future prospects, the loan will be available upon completion of the security arrangements.
13. A certified copy of the Board resolution accepting the facility and authorising the loan is required to be supplied.
14. Any costs, including solicitors’ fees, stamp duty, etc., to be discharged by the Borrower.
15. The offer will remain open until the 31st October, 1974 and will be subject to re-negotiation if acceptance is not received by that date.
16. Audited balance sheets and accounts are to be provided annually and the Borrower is to make available to the Corporation from time to time such information regarding its future plans, trading and financial position as may be requested.
17. A copy of the Memorandum and Articles of Association of the Borrower is to be provided.
18. The Borrower represents and warrants to the corporation as follows:
a) the making and performance of this agreement are within the Borrower’s corporate powers and have been duly authorised by all necessary corporate action and do not contravene any law or contractual restrictions binding on the borrower;
b) there are no pending or threatened actions or proceedings before any court or tribunal which might materially adversely affect the financial condition or operations of the Borrower;
c) that the loan herein referred to is used for the purpose stated in Clause 2.
This letter supercedes and cancels all previous facility letters to the Borrower from the Corporation.
Subject to the Borrower’s acceptance of the foregoing we shall arrange for our solicitors to proceed with the necessary legal formalities.
If there is any further information required, please do not hesitate to contact us.
Yours faithfully,
FOR AND ON BEHALF OF NORTHERN
BANK FINANCE CORPORATION LTD.
—————–
M.K. Condell
Director
We, the Directors of Bula Limited, hereby confirm agreement with the terms and conditions of the foregoing and undertake to carry out all the obligations set out therein.
—————————
Michael J. Wymes
—————————
Thomas J. Roche”
Security was provided by deeds which had relevant express terms. Thus, for example, there was the floating charge made by deed dated the 25th day of November, 1974 between Bula and the Northern Bank Finance Corporation Limited. Clause 8 made provision for the appointment of a receiver. Clause 9 provided for the specific powers of the receiver. These clauses stated:
“8. At any time after the money owing upon this security shall have become due and payable as aforesaid the Bank shall have power by instrument in writing to appoint any person or persons whether an Officer or Officers of the Bank or not to be a Receiver or Receivers of the assets and may in like manner remove any such Receiver.
9. Any Receiver so appointed shall have power from time to time to take possession of collect and get in all or any of the assets and to carry on or concur in carrying on the business of the Company and (without being required to give any notice in that behalf) to sell or concur in selling all or any part of the assets including the goodwill of the Company’s business (and as to fixtures to sell or concur in selling the same either attached to or separated from the hereditaments to which they are fixed) and to make any arrangement or compromise which he may think expedient and to demise or to let the Company’s premises or any part or parts thereof for such term of years or from year to year or other less period than a year at such rent and subject to such agreements covenants and conditions and either with or without fine or premium as such Receiver shall think fit and may also accept surrenders of any Lease or Tenancy of the Company’s premises or any part thereof whether granted by such Receiver or not upon any terms (including the payment of money) which such Receiver shall think reasonable and may grant other Leases or Tenancies of the premises so surrendered or any part or parts thereof under the power aforesaid and may without the necessity for the Bank to give any written direction in that behalf effect any insurance execute any repairs and pay any outgoings which such Receiver shall think proper and may expend for such purposes not only any income which he may receive but also such further moneys as may be necessary such further moneys with interest to be repayable by the Company and in the meantime to be charged on the assets as if they had formed part of the moneys secured hereby at the time of the appointment of such Receiver and such Receiver may make any arrangement or compromise which he shall think expedient in the interests of the Bank and may take or defend any legal or other proceedings in the name of the Company or otherwise and may for the purpose of carrying on the business of the Company raise money on the assets in priority to the charge hereby created and may carry any sale demise or lease into effect by conveying assigning demising and leasing in the name and on behalf of the Company (for which purpose the Company hereby irrevocably appoints every Receiver appointed hereunder to be the Attorney of the Company) or otherwise and may make calls conditionally or unconditionally on the members of the Company in respect of the uncalled capital with such and the same powers for that purpose and for the purpose of enforcing payment of any so made as are by the Articles of Association of the Company conferred on the Directors thereof in respect of calls authorised to be made by them and in the names of the Directors or in that of the Company or otherwise and to the exclusion of the Directors’ power in that behalf and every Receiver appointed by the Bank shall be the agent of the Company and the Company shall be solely responsible for his acts or defaults and for his remuneration and in particular the receiver shall be entitled to work all or any mines and minerals the subject of this security.
10. All moneys received by any such Receiver shall after providing for the matters specified in paragraphs (i) (ii) and (iii) of Section 24 (8) of the Conveyancing and Law of Property Act 1881 and in Sections 98 and 285 of the Companies Act, 1963 and for all costs charges and expenses of and incidental to the exercise of the Receiver’s powers be paid to the Bank and applied in discharge or part discharge first of any interest and secondly of any principal due and payable to the Bank hereunder. The foregoing provisions shall take effect by way of variation and extension of Sections 19 and 21 to 24 inclusive of the Conveyancing and Law of Property Act 1881 as amended by the Conveyancing Act 1911 and the provisions of those Sections and the powers thereby conferred on a Mortgagee or Receiver as so varied and extended shall apply to and be exercisable by any such Receiver so far as applicable and Section 20 of the Conveyancing and Law of Property Act 1881 shall not apply.”
The Northern Bank Finance Corporation appointed the Receiver by deed dated the 8th October, 1985. It provided:
“NORTHERN BANK FINANCE CORPORATION LIMITED having its registered office at Griffin House, 7-8 Wilton Terrace in the City of Dublin (hereinafter called ‘the Bank’) being the registered holder of a Floating Charge and Mortgages specified in the Schedule hereto (hereinafter called ‘the Securities’) issued in its favour by BulaLimited (hereinafter called ‘the Company’) to secure the monies therein specified pursuant to the powers in that behalf contained HEREBY APPOINTS LAURENCE CROWLEY F.C.A. of 1, Stokes Place, St. Stephen’s Green, in the City of Dublin to be Receiver (hereinafter called ‘the Receiver’) of and over all the undertaking property and assets of the Company charged by the Securities to the intent and so that the Receiver may exercise all the powers conferred on the Receiver by the Securities.
Dated the 8th day of October 1985.
SCHEDULE
1. Floating Charge given on the 25th day of November 1974 by the Company in the favour of the Bank.
2. Mortgage given on the 12th day of July 1984 by the Company in favour of the Bank.
3. Mortgage given on the 8th day of November 1984 by the Company in favour of the Bank.
PRESENT when the Common Seal
of NORTHERN BANK FINANCE (signed)
CORPORATION LIMITED was affixed ———————–
hereto:- Authorised Signatory
(signed)
(signed)
————————
Authorised Signatory
I, the above-named Laurence Crowley F.C.A. do hereby agree to act as
Receiver of the undertaking property and assets of the Company charged by the Securities and I hereby undertake to discharge all the duties of such office and to duly and regularly account to the Bank for all monies received by me as Receiver.
Dated the 8th day of October 1985.
SIGNED by the said LAURENCE CROWLEY”
The essence of the central issue on this appeal is grounded on the above and similar relevant documents which once implemented led to the appointment of the Receiver. On the appointment of the Receiver a special relationship between the parties was established. The plaintiffs, including Bula, had agreed to the clauses relating to the provision of a receiver and to his powers. This was done in the context of a contractual relationship. The plaintiffs agreed to the terms of the agreements and to the specific clauses relating to the Receiver. The appointment of the Receiver was a fulfilment of a term of the contractual relationship.
(ii) Unique nature of the position of the Receiver
The second matter I would stress is the unique and exceptional nature of the position of a receiver. The position of a receiver is unique. The agency of a receiver is exceptional. There is a duality in the agency of the receiver. In an analysis of this unique position may be found the answer to the first appeal.
The nature of the position of a receiver has been considered extensively in case law. In Gomba Holdings v. Minories Finance [1989] BCLC 115 Fox L.J. said at p. 117:
“The agency of a receiver is not an ordinary agency. It is primarily a device to protect the mortgagee or debenture holder. Thus, the receiver acts as agent for the mortgagor in that he has power to affect the mortgagor’s position by acts which, though done for the benefit of the debenture holder, are treated as if they were the acts of the mortgagor. The relationship set up by the debenture, and the appointment of the receiver, however, is not simply between the mortgagor and the receiver. It is tripartite and involves the mortgagor, the receiver and the debenture holder. The receiver is appointed by the debenture holder, on the happening of specified events, and becomes the mortgagor’s agent whether the mortgagor likes it or not. And, as a matter of contract between the mortgagor and the debenture holder, the mortgagor will have to pay the receiver’s fees. Further, the mortgagor cannot dismiss the receiver, since that power is reserved to the debenture holder as another of the contractual terms of the loan. It is to be noted also that the mortgagor cannot instruct the receiver how to act in the conduct of the receivership.
All this is far removed from the ordinary principal and agent situation so far as the mortgagor and the receiver are concerned. Whilst the receiver is the agent of the mortgagor he is the appointee of the debenture holder and, in practical terms, has a close association with him. Moreover he owes fiduciary duties to the debenture holder, who has a right, as against the receiver, to be put in possession of all the information concerning the receivership available to the receiver: see Re Magadi Soda Co. Ltd. (1925) 41 TLR 297.
The result is that the receiver, in the course of the receivership, performs duties on behalf of the debenture holder as well as the mortgagor. And these duties may relate closely to the affairs of the entity which is the subject of the receivership. It is, therefore, not satisfactory to approach the problem of the ownership of documents which come into existence in the course of the receivership on the basis that ownership depends on whether the documents relate to the affairs of (in this case) the companies.”
I adopt this statement of the law. I favour especially the description of the agency of the receiver as primarily a device to protect the mortgagee. This primary duty to the secured creditor was referred to in Rottenberg and Ors. v. Monjack & Anor. [1993] BCLC 374 where Judge Roger Cooke stated at p. 377-378:
“It is quite clear, both from these powers and the purpose for which receivers are appointed and the job they are called on to do, that their duty must be to the secured creditor. They cannot be put in the position, negligence and dishonesty apart, of having to weigh discretions between the secured creditor and the debtor. If they behave efficiently and honestly, the secured creditor must come first.”
I adopt this statement of the law also. Applying that statement, the Receiver was put into place pursuant to the agreements for the primary benefit of the Banks in this case.
I adopt also the analysis of Fox L.J. of the tripartite relationship of the receiver involving the mortgagor, the receiver and the debenture holder, in other words, Bula, the Receiver and the Banks. This is far removed from the routine principle and agent situation.
The special and unique nature of the agency of a receiver was described in Irish Oil & Cake Mills Ltd. v. Donnelly (Unreported, High Court, 27th March, 1983, Costello J.) which is reported in Irish Company Law Reports (1963-1993) p. 564 at p. 567-8 where he stated:
“The agency here is of course very different from the ordinary agency arising every day in commercial transactions. Here the receiver has been appointed by the owner in equity of the companies’ assets with the object of realising their security and for this purpose to carry on the companies’ business.
The exceptional nature of his status is to be seen from the fact that notwithstanding his appointment as agent he is to be personally liable under contracts entered into by him (with a right of indemnity out of the assets) unless the contract otherwise provides (section 316 (2) Companies Act 1963).”
This exceptional and unique position of the receiver was also described in Ardmore Studios (Ir.) Ltd. v. Lynch and Others [1965] I.R. 1. McLoughlin J. at p. 38-9 stated:
“In re B. Johnson & Co. (Builders) [1955] 1 Ch. 634 . . . many of the views expressed by the distinguished judges who constituted the Court of Appeal in that case are certainly helpful. At page 644 Evershed M.R., after stating some of the powers given to the receiver under the debenture, which are similar to those in this case, continued:- ‘The situation of someone appointed by a mortgagee or a debenture holder to be a receiver and manager – as it is said, “out of Court” – is familiar. It has long been recognised and established that receivers and managers so appointed are, by the effect of the statute law, or the terms of the debenture, or both, treated, while in possession of the company’s assets and exercising the various powers conferred upon them, as agents of the company, in order that they may be able to deal effectively with third parties. But, in such a case as the present at any rate, it is quite plain that a person appointed as receiver and manager is concerned, not for the benefit of the company but for the benefit of the mortgagee bank, to realise the security; that is the whole purpose of his appointment, and the powers which are conferred upon him, and which I have to some extent recited, are . . . really ancillary to the main purpose of the appointment, which is the realisation by the mortgagee of the security (in this case, as commonly) by the sale of the assets.'”
I adopt and apply these statements of the law. The Receiver is in a unique and exceptional position. It is a position unlike that of the ordinary agent in commercial transactions. Thus the Receiver is treated while in possession of the company’s assets as an agent of the company so that he may deal effectively with third parties. But the Receiver is concerned for the benefit of the mortgagee bank to realise the security, which is usually, as in this case, by the sale of the assets.
It is this relationship which governs this case and is the key. Approaching the relationship from another aspect, this unique position may be further illustrated. In considering the possession of land one has to consider all the relevant circumstances. If a person is in possession with consent that is a critical factor.
In analysing the position of the Receiver, from another angle, the test set out in Murphy v. Murphy [1980] I.R. 183 may be a guide. At p. 193 Costello J. stated:
“The first question of fact to be determined is whether the defendant was ever in ‘possession’ of the widow’s lands. In a passage which was quoted with approval in Treloar v. Nute, [1976] 1 W.L.R. 1295 Lord O’Hagan in The Lord Advocate v. Lord Lovat (1880) 5 App. Cas. 273 said at p. 288 of the report: ‘As to possession, it must be considered in every case with reference to the peculiar circumstances. The acts, implying possession in one case, may be wholly inadequate to prove it in another. The character and value of the property, the suitable and natural mode of using it, the course of conduct which the proprietor might reasonably be expected to follow with a due regard to his own interests – all these things, greatly varying as they must, under various conditions, are to be taken into account in determining the sufficiency of a possession.'”
And at p. 195 he described a test:
“Turning, then, to the nature of the defendant’s possession, I think the test I should apply is this: Was the defendant’s possession inconsistent with and in denial of the widow’s rights as legal owner of the land? – see Moses v. Lovegrove [1952] 2 Q.B. 533 at p. 538 of the report. If it was, then the defendant would be ‘a person in whose favour the period of limitation could run’ within the meaning of s. 18 of the Act of 1957 and his possession would be adverse. In considering a problem of this sort, the relationship between the owner of the land and the person in possession and the nature of the lands in controversy are highly relevant matters to be taken into account. If a person is in possession of lands with the consent or licence of the owner, then his possession is not adverse: see Hughes v. Griffin [1969] 1 W.L.R. 23”
If it were necessary, which in fact I do not think it is, to go outside the analysis of the nature of the position of the Receiver, this test would be applicable. If one applied this test it would confirm that the rights of the mortgagees, the Banks, protected by the Receiver, would not be adversely affected by any concept of adverse possession. The Receiver in this case is in possession with consent. This is a matter upon which I would lay stress. Whether one considers the situation from the aspect of the title of Bula or the title of the Banks, the Receiver is in possession by consent. That is the beginning and end of the case. That consent within the unique relationship of the receiver governs the answer.
In analysing the facts of this case I would stress also that the Receiver has been an active receiver. He took control and possession of the assets. The length of time it took to sell the assets was as a direct consequence of the litigation brought by the plaintiffs.
The powers of this Receiver have already been recognised. In In Re Bula Ltd. [1990] 1 I.R. 440 a petition for the winding up of Bula was presented to the court by the secured creditors of the company, the Banks. The petition was brought on the grounds that the company was insolvent and unable to pay its debts and that in the circumstances it would be just and equitable to make the order. The High Court made the winding up order. However, on appeal the petition was dismissed. This Court held that where a petition was brought by secured creditors whose security attached to the entire assets of the debtor company and who had appointed a receiver whose power of sale was, effectively, at least as great as that of a liquidator, the court should refuse its aid. McCarthy J. stated, at p. 449:
“In proceedings that have existed since 2nd July, 1986, but have been substantially amended, Bula Holdings, and the guarantors have sued the Receiver and the Banks for, amongst other relief, an injunction restraining the Receiver from accepting any offers to purchase the assets of Bula until such time as all of four possible events shall have occurred.
(a) The resolution of a dispute concerning the purchase of the Harris lands. These lands offer access to the ore body; such access would increase the value.
(b) The Minister for Energy shall have refused to make an ancillary rights order on foot of the Minerals Development Act, 1940, in respect of the Harris lands – the effect of such order would be to afford access.
(c) Negotiations shall have taken place and irrevocably broken down between Bula and Tara Mines Ltd. in relation to possible co-operation in the exploiting of the entire ore body, implied, it is said, by paragraph (f) of the mining lease executed by the Minister for Energy and Tara Mines Limited. This aspect would appear to have a degree of unreality attaching to it but it is, nonetheless, part of the claim.
(d) The alleged liability of the banks to participate in a re-financing package.
In this Court, apparently for the first time, the argument has been advanced, not merely justifying the Receiver’s rejection of the several alleged avenues of improved sale, but that a winding up order and the consequent appointment of a liquidator who would have a statutory power of sale to be, it is said, exercised under the control of the Court, would create a better prospect of sale. On enquiry, it seemed to prove difficult for counsel for the banks to identify any particular area in which the liquidator would be at an advantage save in the general way that he would not be encumbered by the record of the Receiver and, obviously, would not be a defendant in the action by Bula against the Receiver. He would until the appropriate application were brought to the court, be a plaintiff in that he would be Bula. More to the point, however, it is inevitable that a liquidator, court appointed, with all the independence of action and professional integrity that would be at his command would lack the enthusiasm and momentum that would be second nature to the guarantors, who, presently, control the progress of the action. This is indeed a step further in the argument; it is, in effect, saying that a liquidator, suitably monitored by the court, would be as effective in pursuing a legitimate claim of Bula as those presently in command. In my view, there is no reality in this suggestion. With the best will in the world, a court attempting such supervision is very much in the hands of the liquidator; it is his enthusiasm or lack of enthusiasm that will govern the decisions of the court – it is he who brings the matter to court – it is he who presents the case, so to speak, for continuing with litigation or ending it. In a real sense he is dominus litis, however vigilant the court may wish to be and however resourceful those upon whom notice must be given of any intended application to the court.”
Having considered legal opinion McCarthy J. concluded at p. 451:
“Shorn of these expressions of legal opinion, many dependent upon a variety of single instances and special facts, in my judgment, in this case of special facts, where a petition is brought by secured creditors whose security attaches to the entire assets of the debtor company and who have appointed a Receiver whose power of sale is, effectively, at least as great as that of a liquidator, the Court should refuse its aid.
I would allow the appeal and dismiss the petition.”
Further relevant court decisions have been made. In Wymes v. Crowley (Unreported, High Court, 27th February, 1987, Murphy J.) reported in Irish Company Law Reports (1963-1993) the plaintiffs had sought to add Bula Ltd., Thomas C. Roche, Thomas J. Roche and Richard Wood to the main action as plaintiffs. The defendants objected to the addition of Bula Ltd. Murphy J. gave permission for Bula to be joined. He stated, however:
“I have no doubt that the directors of Bula Ltd. retain their power to institute proceedings in an appropriate case. The limitation on their powers is that they must not deprive the debenture holders of the security granted to them and the very practical difficulty that the extensive nature of the charge deprives the company of the means of financing litigation. That the directors of Bula Ltd. would be entitled to institute proceedings in the name of that company to sue for negligence a receiver appointed over the assets of that company could not be questioned as a matter of law.”
The receiver receives the assets of the mortgagor for the benefit of the mortgagee. Thus in this case the Receiver received the assets of Bula for the benefit of the Banks. The principal task of the Receiver is to secure the assets of the company which have been mortgaged in favour of the debenture holder which appointed him. Thus in this case the Receiver secured the assets of Bula in favour of the Banks. It is clear that a receiver appointed under a mortgage is there as a consequence of an agreement being activated and his position and powers follow accordingly. The appointment of the Receiver was a device to protect the Banks. Thus while the Receiver acts as agent for Bula, which was a party to the agreements pursuant to which he was appointed, his actions are for the benefit of the Banks. The Receiver took possession of the assets for the benefit of the Banks. It is an unusual and unique relationship. While the Receiver is the agent of Bula yet he has a special relationship with the Banks. It is a tripartite relationship. In this case the Receiver was appointed, on certain events happening, in accordance with the agreements, by the Banks, and, whilst the Receiver is the agent of Bula, that company cannot instruct the Receiver how to act in the receivership. Thus the Receiver has duties to both Bula and the Banks. However, the first duty of the Receiver is to the Banks. The object of his appointment was to realise the banks security, that is to sell the property of Bula in this case. The duty of the Receiver is to the Banks, to realise the security, to sell the assets. That, as Costello J. said, was the whole purpose of his appointment.
In this case all the circumstances have to be considered. They include the fact that the Banks moved quickly and the Receiver was appointed on the 8th October, 1985. The Receiver is an active receiver. Much of the activity over nearly two decades has been in relation to the litigation brought by the plaintiffs. The tripartite relationship, of Bula, the Receiver and the Banks, was brought about voluntarily, under agreements. The relationship of a receiver, (and this Receiver,) with mortgagors and mortgagees, with Bula and the Banks, is a unique and exceptional relationship unlike the normal agency in commercial actions. Acting in accordance with the agreements in this case, the Receiver went into possession of the assets by consent. That consent was given by both Bula and the Banks. In this case the Receiver had a duty to get in the property, take possession and sell it. This he has done. The Banks sought to be paid and exercised the remedy of the appointment of a receiver to achieve that end. The Receiver was appointed for the benefit of the Banks, under the agreements which had been entered into by Bula and the Banks. An action for possession does not arise as the Receiver was in possession of all the assets with the consent of all relevant parties. The question of the accrual of an action for possession does not arise and the Statute of Limitations, 1957 does not arise.
(iii) Adverse Possession
I am satisfied that it is not necessary to consider any further aspects of the claims of the plaintiffs. There was no adverse possession contrary to the owner. The Receiver had control of the assets as an agent. He was in control pursuant to the contractual agreements for the benefit of the Banks. There was no possession without the authority of the owner, whether you consider it from the title of Bula or the Banks. Consequently the concept of adverse possession does not arise or apply. I would uphold the reasoning and decision of the learned trial judge.
(iv) Yourell
The plaintiffs invoked the Yourell decision in their favour. I have considered Hibernian Bank v. Yourell [1916] 1 I.R. 312 (H.C. and C.A.), Yourell v. Hibernian Bank [1918] A.C. 372, and Hibernian Bank v. Yourell (No. 2) [1919] 1 I.R. 310. The first two cases referred to above are not relevant to the issues on this appeal. The third case referred to above, Hibernian Bank v.Yourell (No. 2) [1919] 1 I.R. 310, hereinafter referred to as Yourell, was opened on the appeal by the plaintiffs as authority for the proposition that “time can run against the debt of a secured creditor even when he has appointed a receiver; and, further, that time continues to run against the secured creditor thereafter.” However, Yourell decided that a receiver appointed by a mortgagee, being essentially the agent of the mortgagor, commits a breach of duty if he pays arrears of interest on a mortgage that is statute barred. In Franks, Limitations of Actions, 1959 at p. 161 this case is cited for the proposition that such a receiver cannot pay a statute barred debt. Also Picarda, The Law Relating to Receivers, Managers and Administrators, 2nd Edition, at p. 266 refers to the case as authority for the proposition that a receiver cannot pay statute barred interest. Similarly Falcon and Chambers, Fisher and Lightwood’s Law of Mortgage, 11th Ed. At para. 16.34 so refers. I am satisfied that Yourell is an authority for the proposition that a receiver cannot pay a statute barred debt, while acting as agent for the mortgagor. However, the plaintiffs have taken the matter a step further and submitted that Yourell stated that the Statute of Limitations can run in the face of an active receiver. However, I am satisfied that Yourell is not an authority for that proposition. It was neither argued nor decided that time ran against an active receiver. At issue were the specific debts in the specific situation. Consequently I would distinguish that case from the issues at the core of this case. The circumstances, facts and law of that case are not applicable.
(v) Remaining Points on the First Appeal
In light of my findings in this case it is unnecessary to analyse the Statute of Limitations, 1957 or to consider the construction of sections in that Act. Equally the issues of part payments and acknowledgements are not relevant. There is no good reason to take a “but if” approach and analyse further why the Act does not apply. The Statute of Limitations, 1957 does not apply in the circumstances of this case.
The decision on this first issue renders the other issues irrelevant and moot.
(vi) The Passage of Time
The passage of time has been a critical element in the appeals of the plaintiffs. Having considered the technical submissions and analysis of the nature of an active receiver, the Statute of Limitations and the concept of adverse possession, I am conscious also of the equity of the situation. In this case there has been a considerable passage of time. The main action has been in being for 17 years and has not yet come to trial. It was this time, this delay, which initiated this preliminary issue and case.
Without in any way making a pejorative statement about the actions of the plaintiffs over the last 17 years, and while not denying their right of access to the courts, the findings of fact by the learned trial judge must be noted. He stated:
“It is not in dispute that the purpose of the Banks in appointing the Receiver was that he would take control of the company’s assets and arrange for the sale of its lands, including the proposed mine, in discharge of the debts owing by Bula to the Banks. The Receiver has actively pursued that objective since appointment but has been frustrated in his efforts by persistent unsuccessful litigation orchestrated by the sixth defendant who has demonstrated that he is
implacably opposed to the sale of the potential Bula mine in any circumstances and is determined to place every possible obstacle in the way of the Banks obtaining the benefit of their securities through such a sale.”
It is clear that the learned trial judge had grounds to make such a finding. It is notable that the plaintiffs claimed that the Banks had lost rights because of a lapse of time which passage of time has arisen largely because of the plaintiffs’ war of attrition against the Banks. Concepts of equity are not before this court on the first issue on the first appeal. However, all courts must be conscious of the justice of a case.
The findings on this appeal are findings of law, regarding the nature of the relationships arising on the appointment of the Receiver. On this issue, related to the delay, the finding in law is also a finding in justice.
18. Conclusion on First Appeal
First, on the appointment of the Receiver a special relationship was established between Bula and the Receiver on the one hand and the Banks and the Receiver on the other hand. This relationship was grounded on agreements entered into between the plaintiffs, Bula and the Banks. On the Receiver being appointed in 1985 he went into possession and control of the assets of Bula. The possession was for the benefit of the Banks. The Banks did not suffer a reduction in their rights by their appointment of the Receiver: rather their rights were protected. The Receiver has been an active receiver but has been frustrated by litigation brought by the plaintiffs. There was no possession contrary to the interests of the Banks. There was no possession without authority. There was no possession without consent. There was no possession that would come within the concept of adverse possession. The Receiver was there as of right. The Statute of Limitations, 1957, which is concerned with the limitation of actions, has no application. I would uphold the judgment and order of the High Court on this first issue. I would also uphold the determination of the High Court that as a consequence of that determination the other issues are moot and it is unnecessary to address them, thus no further issues fall to be decided on this first appeal.
19. Second Appeal
The second appeal before this court was against the decision of the High Court (Barr J.) given on the 20th February, 2001. On that date the High Court excluded additional pleas. Full written submissions were filed on this issue and were considered carefully. The learned High Court judge gave a considered ruling on the matters in which reasons were set out for the decision. The importance and relevance of these matters is affected by the decision of this court as to the position of the Receiver and the non-applicability of the Statute of Limitations, 1957 to the circumstances.
I have considered the arguments of the plaintiffs and the legal cases to which they referred, especially Bula Ltd. v. Crowley the decision of Carroll J. delivered on the 15th December, 2000 in a motion related to the main action; Irish Trust Bank Ltd. v. Central Bank of Ireland [1976-7] I.L.R.M. 50; Irish Land Commission v. Ryan & Ors. [1900] 2 I.R. 565; Baulk v. Irish National Insurance Company Limited [1969] I.R. 66.
I am satisfied that it was within the jurisdiction of the learned High Court judge to conclude as he did. Further, he was entitled in all the circumstances to consider himself bound by the decision of Carroll J. The trial court was a court of equal jurisdiction and it was clearly within his jurisdiction to consider himself bound by the decision of Carroll J. As to the meaning of the judgment of Carroll J. the trial judge was entitled to find it clear (as indeed do I) and to interpret it correctly on its ordinary meaning.
I am satisfied that the learned trial judge was correct in refusing the proposed amendments in paragraphs 26 and 27 as a matter of law and as they had no bearing on the determination of the Statute of Limitation issues. Further I am satisfied that the learned trial judge was entirely within his jurisdiction in refusing the paragraph 33 amendment.
I am satisfied that it would not be appropriate to remit any of these matters to the High Court. There has been a careful and reasoned decision of the High Court which has been appealed. On the appeal I am satisfied that the plaintiffs have not made any case to succeed.
20. Third Appeal
The third appeal was against the decision of the High Court (Barr J.) disallowing the further discovery sought in support of these claims. Barr J. held:
“Further Discovery
I am satisfied that the remaining Statute of Limitations issues are essentially matters of law in relation to which no further discovery of documents is required. However, it is proper that there should be up-to-date discovery relating to the suspense accounts held by NBFC and AIIB in connection with Mr. Wood and any company controlled by him.”
I am satisfied that this was a ruling which the learned trial judge was entitled to make, it was within jurisdiction, without error, and in accordance with law, thus the application by the plaintiffs should fail.
21. Conclusion
For the reasons given I would dismiss the first appeal of the plaintiffs and make no orders on the notices to vary. I would also dismiss the second and third appeals of the plaintiffs.
Irish Bank Resolution Corporation Ltd & Ors -v- Quinn & Ors
[2012] IEHC 507
Kelly J.
The Receivers
28. The allegations made against the receivers are to the effect that (a) they have not acted impartially and/or in a way which demonstrates independence from the bank and (b) that employees of RSM Farrell Grant Sparks (Sparks), the firm to which the receivers belong, have some connection with either the bank or Quinn finance. I will deal with these allegations in turn.
29. Mr. Taite points out that neither he nor his co-receiver was a party to the action in which the Quinn family have brought proceedings against the bank nor is he a party to these proceedings. The receivers are disinterested as to the outcome of all of these proceedings.
30. Mr. McPartland’s affidavit deals in great detail with various items which he contends are supportive of this application. Since I am of opinion that this application misunderstands the independence which is required of the receivers it is not necessary to deal with them in minute detail. Rather, I will deal with the major elements of the complaints made.
Bazzely
31. Mr. McPartland alleges a lack of independence and partiality in favour of the bank on the part of the receivers, particularly in relation to a Portuguese company called Bazzely. The receiver’s solicitors raised a series of detailed questions concerning this company. It is alleged that this was inappropriate and furthermore that Arthur Cox have a conflict of interest in respect of it.
32. Insofar as the receiver is concerned, he points out that Bazzely was used by members of the Quinn family to purchase contracts for difference in the bank. Bazzely is beneficially and legally owned by a number of the defendants in these proceedings. That being so, it is incumbent on him as receiver of the Quinns’ assets to investigate their shareholding in it. That was why his solicitors wrote to the defendants’ former solicitors seeking such details. The information was not requested because of any instruction issued to him by the bank in a direct or indeed indirect form. The information, rather, was directly relevant to his investigation of the defendants’ assets. He does not share Mr. McPartland’s view that because Bazzely is allegedly valueless that it is not of any relevance to the receiver’s inquiries. He makes a similar point concerning allegations made regarding information sought by him in respect of Quinn Group (ROI) Limited. This was, he says, part and parcel of him doing his job of gathering information in furtherance of his work and not because he was in any way influenced by the bank.
Sparks
33. Mr. McPartland alleges that Sparks “has already been instructed in matters in relation to the Quinn/Anglo dispute”. The receivers accept that Sparks was instructed by QuinnFinance to prepare reports on certain transactions that had been entered into concerning shares in and loans to certain Quinn Finance Group companies. It was asked to comment on whether, in its opinion, certain transfers of shareholdings in and loans to various companies within the Quinn Finance Group to third parties would have taken place for less than full value, and to comment on any commercial rationale for such transactions. That report was requested by Quinn Finance when a court case was ongoing but no representative of Sparks was called to give evidence at the trial. The particular engagement was not carried out by either of the receivers and neither they, nor any member of their team, were involved in the engagement. It is the receiver’s belief that no conflict arises as a result of this and he reiterates that he has no knowledge of the basis of an action by Quinn Finance’s against Mr. McPartland. Sparks have no involvement in that case. The fact that a former client of Sparks has sued Mr. McPartland he says cannot prevent him from acting as receiver in this case.
34. Mr. McPartland also averred to having carried out a web search with a view to identifying employees of Sparks who might have some connection to the bank. There are indeed persons who once worked for the bank and now work for Sparks and vice versa .
35. Two of the individuals named by Mr. McPartland are former employees of Sparks and now work for the bank. Four more once worked for the bank and now work or have worked for Sparks. None of these individuals have any involvement in the current engagement. Two of them ceased to be employees of the bank a number of years ago and a third, whilst formerly an employee of the bank, subsequently became an employee of Irish Nationwide Building Society and moved from there to Sparks.
36. The receivers contend that there is no actual or apparent conflict of interest and that they have not acted in a manner inconsistent with the duties imposed upon them by the court order. The receivers believe that having regard to the task imposed upon them they have acted properly and independently and are objective in their approach to their work.
37. The Quinns also contend that the receivers ought not to pass onto the bank any information which they may acquire. The intention to do so is alleged to be evidence of bias. The receivers say that in so doing in respect of relevant non-privileged information they are merely carrying out their task.
The Solicitors
38. The allegations made against the solicitors are that they have conflicts of interest and have demonstrated a lack of impartiality and independence and furthermore have attempted to mislead the Quinns.
39. Mr. William Day, a partner in Arthur Cox retained by the receivers has sworn a detailed affidavit dealing with these various allegations.
40. When Mr. Taite first approached Mr. Day, he contacted his firms’ conflicts committee and discussed the assignment with members of that committee in detail. He did this because he knew that his firm had acted in connection with and against the bank on many occasions on separate and distinct assignments. However, he points out that the issue of client confidentiality is treated with utmost seriousness by his firm and its members do not share information gained from instructions by third parties without client consent. Because of that it is not possible for him to go into the specifics of the other instructions and activities of his firm on behalf of different clients referred to in Mr. McPartland’s affidavit.
41. He admits that Cox’s were appointed to act for a syndicate of banks who are owed significant sums by Quinn Group Limited which was the holding company of the group of companies commonly referred to as the Quinn manufacturing group. Subsidiaries of Quinn Group Limited have provided guarantees in respect of the borrowings of that company. Neither Quinn Group Limited nor any of its subsidiary guarantors within the Quinn manufacturing group formed part of the international property group which is a distinct collection of companies established by the Quinn family that forms the subject matter of the proceedings which have resulted in the appointment of the receivers.
42. Quinn Group Limited was the counter party with whom the bank syndicate was obliged to deal with on the restructuring of the debts of the Quinn manufacturing group. Quinn Group Limited negotiated a consensual restructuring of the debt due by it to the banking syndicate. Cox’s did not act for the bank in relation to that matter and it was at all times represented by separate Irish and United Kingdom solicitors. The bank was not a creditor of Quinn Group Limited nor was it either an instigator or the instructing party in relation to the creditor’s contingency planning.
43. Mr. Day says that his firm’s involvement on behalf of the banking syndicate to the Quinn manufacturing group was a matter of public record and was known to both Seán Quinn Snr and Peter Darragh Quinn, both of whom were directors of Quinn Group Limited at the relevant time. There was, therefore, no question of Arthur Cox having attempted to mislead the defendants or anyone else.
44. Insofar as the queries raised concerning Bazzely are concerned, he says that these were made with a view to ascertaining what assets the defendants own so that the receiver could fulfil the duties imposed upon him by the court.
45. More generally, Mr. Day says that he believes that Mr. McPartland is of opinion is that if an individual or firm has acted for the bank or its shareholder, the Department of Finance, at any time, such involvement conflicts that person or firm and precludes them from acting for the receivers. He says that this proposition is incorrect and is not really believed by the Quinns because their former solicitors have acted for the bank themselves on many occasions. That firm only ceased to act for the defendants due to funding issues. Indeed, he points out that the profile of one member of Eversheds (the Quinns’ former solicitors) makes specific reference to his role as adviser to the joint administrators of Quinn Insurance Limited on the sale of the general insurance business to a joint venture entity.
46. Mr. Day swears that neither his firm nor himself have any conflict of interest in acting for the receivers. His firm upholds, he says, the correct highest standards of professional conduct and that there is and will be no question of client confidentiality being breached. He furthermore indicates that if the court is of opinion that he ought to, he is quite willing to withdraw and cease to act for the receivers.
The Legal Position
47. I am of opinion that the Quinns in seeking the discharge of the receivers and their solicitors have done so on a misunderstanding of the legal position coupled with a great distrust of the bank and its approach to them.
48. The receivers were appointed in aid of orders made by the court. Those orders required the defendants to disclose all of their assets in circumstances where there was a finding by Dunne J. that the assets of the Quinns had been dealt with by them with a view to placing them beyond the reach of the plaintiffs in these proceedings. The receivers’ role is an active rather than a passive one. It is not merely to preserve such assets as the defendants have chosen to disclose. Rather, it is to collect in and preserve all of the assets of the defendants in whatever jurisdiction they may be and whether they have chosen to disclose them or not.
49. The Quinns apprehend that information is going to be furnished by the receivers to the bank. They believe that this demonstrates a lack of independence which justifies the receivers removal. I believe this to be an incorrect view.
50. Nobody could dispute the statement contained in Kerr and Hunter on Receivers and Administrators (19th Ed.) relied upon by Mr. McPartland where at para. 12 it is said:-
“A receiver in a claim or other proceeding is an impartial person, appointed by the court to collect, protect and receive, pending the proceedings, the rents, issues and profits of land, personal estate or any other kind of asset which it does not seem reasonable to the court that either party should collect or receive, or for enabling the same to be distributed among the persons in title.”
51. In chapter 4 of the same work which was also relied upon by Mr. McPartland, the authors state:-
“A receiver appointed in a claim should, as a general rule, be a person wholly disinterested in the subject matter.”
That particular passage goes on to point out that it is competent for the court in a proper case to appoint as receiver a person who is interested in the subject matter of the claim if it is satisfied that the appointment will be attended with benefit to the estate.
52. In the present case, the crucial thing to bear in mind is that the receivers have to be wholly disinterested in the subject matter of this action. The receivers have no interest in the assets of the Quinns. That is not in dispute.
53. The receivers accept that they have important obligations to the court. These are summarised by Ferris J. in Mirror Group Newspapers Plc v. Maxwell [1998] 1 BCL 638 where he said:-
“The essential point which requires constantly to be borne in mind is that office holders are fiduciaries charged with the duty of protecting, getting in, realising and ultimately passing on to others assets and property which belong not to themselves but to creditors or beneficiaries of one kind or another. They are appointed because of their professional skills and experience and they are expected to exercise proper commercial judgment in the carrying out of their duties. Their fundamental obligation is, however, a duty to account, both for the way in which they exercise their powers and for the property which they deal with.”
54. Obviously, receivers are obliged not to place themselves in a position where their duties to the court are allowed to conflict with some other interest. The position was summarised by Millet L.J. in Bristol and West Building Society v. Mothew [1998] Ch 1 where he said:-
“A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal.”
55. In the present case, there is no dispute but that the receivers have no interest in the property which they are charged to preserve.
Onus of Proof – Receivers
56. It is trite law to state that he who asserts must prove. In the present case, the onus is on the Quinns to demonstrate grounds which would justify the removal of the receivers. They have to produce specific evidence of partiality or real or perceived bias.
57. In Thomas v. Dawkin [1792] 1 Ves Jun 452, Thurlow L.C., held that where an applicant seeks to set aside the appointment of a receiver on the grounds of bias there must be “some substantial objection to induce the court to overturn the appointment”.
58. Assistance as to the yardstick to be applied by the court on an application such as this can be gleaned from a number of more recent English cases. The first dealt with an application seeking to remove trustees in bankruptcy from their office on the grounds that they had colluded with a creditor of the bankrupt to work against the latter’s interest. The case is that of Doffman & Isaacs v. Wood & Hellard [2011] EWHC 4008. Proudman J. had this to say:-
“It is common ground that cause must be shown for removal and that case law generally on the removal of office holders is relevant. Section 298 uses similar wording to that of s. 172(2) relating to the removal of a liquidator on a compulsory winding up. The question of whether to remove an insolvency practitioner of any kind must therefore be measured by reference to the ‘real substantial honest interest’ of the process, and to the purpose for which the office holder is appointed: See Adam Eyton Limited [1887] 36 Ch D. 299 per Bowen L.J. at 306 quoted with approval in Re Edennote Limited [1996] 2 BCLC 389 at 398.”
59. An older English case in which such an application was successful was in Re Sir John Moore Gold Company [1879] 12 Ch D. 325. The liquidator in that case was sought to be removed because of partiality in circumstances where he had to investigate whether proceedings should be brought against the company’s former directors. He knew both of them. He expressed his support for one of the directors in a letter and expressed the view that there would be no evidence to support the allegation that he had acted improperly. Bacon V.C. held:-
“That is strong testimony in their favour, but it is also a proof that he takes their side very strongly. That being so, Mr. Dicker having expressed a strong view against the applicant, having himself an interest adverse to the application, and having according to his own view nothing of importance left to be done in the liquidation, I think that his continuing in the office of liquidator can have no other effect than to impede Schlotel’s proceedings. Everybody knows the difference which it makes in the conduct of such proceedings to have a liquidator who is hostile to them and disposed to put obstacles in the way. It seems to me that the case is one in which Mr. Dicker ought not to be continued as liquidator.”
60. In my view, where the removal of a court appointed receiver is sought because of alleged partiality or bias, the court has to be satisfied as to specific evidence of some improper conduct on the part of the receiver. It is not enough to suggest that the receiver will not be capable of acting independently because of a former relationship with one of the parties to the dispute. The relationship would have to be a subsisting one with evidence that the receiver will act improperly under the direction of one of the parties.
61. I am of the view that there is no basis established for removing the receivers because of their firm’s former involvement in the manner already described with aspects of Quinn Finance. Neither is there any case established by reference to employees who were or are employees of the bank.
62. I of the opinion that Mr. Taite did not act inappropriately in initially seeking the appointment of McCann Fitzgerald as his solicitors. While Dunne J. did not accede to that application she made no suggestion express or implied that he had acted inappropriately in seeking to do so. I have already dealt with his motivation for seeking to appoint McCann Fitzgerald and his belief that that course of action would save considerably on costs and time. Indeed, such occasionally occurs in official liquidations where liquidators have sought to instruct the solicitor who acted for a creditor which originally presented the petition. Whilst that does not happen frequently it nonetheless has had judicial approval as, for example, in Re Schuppan [1996] 2 All E.R. 664 where Robert-Walker J. held:-
“In a case where the real difficulties that are foreseen are in connection with the identification, tracing and recovery of assets for the bankrupt’s estate, the retainer of solicitors who already had a good grasp of these difficulties can be of great advantage to all the creditors, not just the petitioning creditor.”
63. A similar view was expressed by Pumfrey J. in Re Barron Investments (Holdings) Limited (In Liquidation) [2000] 1 BCLC 272, where he accepted that whilst it was unusual for a liquidator to seek to instruct the solicitor who had acted for the petitioning creditor, it would not be prohibited simply because of a theoretical possibility of conflict. He said:-
“I think that it is necessary to analyse the particular facts of the particular case in order accurately to identify the manner in which the conflict arising by reason of dual employment is said to occur. Then I think it is necessary to be satisfied that there is a genuine dual employment. It seems to me that if the apprehended conflict is a mere theoretical possibility, it will not always be necessary for the court to take steps to deal with it unless and until the actual conflict arises.”
64. Much emphasis was placed upon the receivers’ original decision to instruct McCann Fitzgerald. It created suspicion and soured the Quinn’s view thereafter. As I have shown there was nothing necessarily wrong with that decision, given the particular circumstances of this case. In any event, that appointment did not proceed. I am satisfied that the onus of proof to warrant the order sought has not been discharged by the applicants.
65. Likewise, I am of the view that there is no demonstration of partiality or bias by reference to the receivers’ activities concerning Bazzely. The Quinns seem to believe that the receivers are not obliged to carry out any investigative work. That is not so. In order to secure and preserve the assets, they must first locate them. I do not perceive any impropriety on the receivers’ part in this regard. Indeed, the receivers could be criticised for not pursuing this line of enquiry.
66. In due course the receivers will be entitled to disclose to the bank all relevant non-privileged information obtained by them pertaining to the assets. An intention to do so is not indicative of bias or partiality.
Onus of Proof – Solicitors
67. The onus of proof on somebody seeking to remove a solicitor is no less than that in respect of a receiver.
68. One begins with the proposition that parties are free to chose their own legal advisers. There is, nonetheless, a jurisdiction to intervene so as to ensure that a solicitor does not remain on record for any party where his doing so would not be in the interests of justice. The jurisdiction to remove a solicitor is, however, exercised sparingly. In Re Recover Limited [2003] 2 BC LC, Pumfrey J. said:-
“That jurisdiction must, in my view, be exercised with caution, as in general parties to litigation are entitled to the advisers they have chosen.”
69. It is not the law that a solicitor or a firm of solicitors can never act for and against a client, even in the same matter. In Re Schuppan [1996] 2 All E.R. 664, Robert Walker J. said:-
“It is not the law that a solicitor or firm of solicitors can never act for and against a client, even in the same matter. The law and practice in England is less inflexible that in (for instance) the United States (see Re a Firm of Solicitors [1995] 3 All E.R. 482 at 488 – 489 where Lightman J. said:-
‘The basis of the courts’ intervention is not a possible perception of impropriety: it is the protection of confidential information’.”
70. In Farrington v. Rowe McBride and Partners [1985] 1 NZLR 83, Richardson J. said:-
“A solicitor’s loyalty to his client must be undivided. He cannot properly discharge his duties to one whose interests are in opposition to those of another client. If there is a conflict in his responsibilities to one or both he must ensure that he fully discloses the material facts to both clients and obtains their informed consent to his so acting: no agent who has accepted an employment from one principal can in law accept an engagement inconsistent with his duty to the first principal from the second principal, unless he makes the fullest disclosure to each principal of his interest, and obtains the consent of each principal to the double employment. And there will be some circumstances in which it is impossible, notwithstanding such disclosure, for any solicitor to act fairly and adequately for both.”
71. That view was cited with approval by Sapolu C.J. in Apia Quality Meats Limited v. Westfield Holdings Limited [2007] 3 LRC 172.
72. Sometimes it is a former client who takes exception to his erstwhile solicitor acting against him. This has been considered on a number of occasions by the English courts.
73. In Prince Jeffri Bolkiah v. KPMG (A Firm) [1999] 2 AC 222, Lord Millett said this:-
“In Rakusen’s case the Court of Appeal founded the jurisdiction on the right of the former client to the protection of his confidential information. This was challenged by counsel for Prince Jefri, who contended for an absolute rule, such as that adopted in the United States, which precludes a solicitor or his firm altogether from acting for a client with an interest adverse to that of the former client in the same or a connected matter. In the course of argument, however, he modified his position, accepting that there was no ground on which the court could properly intervene unless two conditions were satisfied: (i) that the solicitor was in possession of information which was confidential to the former client and (ii) that such information was or might be relevant to the matter on which he was instructed by the second client. This makes the possession of relevant confidential information the test of what is comprehended within the expression ‘the same or a connected matter.’ On this footing the court’s intervention is founded not on the avoidance of any perception of possible impropriety but on the protection of confidential information.
My Lords, I would affirm this as the basis of the court’s jurisdiction to intervene on behalf of a former client. It is otherwise where the court’s intervention is sought by an existing client, for a fiduciary cannot act at the same time both for and against the same client, and his firm is in no better position. A man cannot without the consent of both clients act for one client while his partner is acting for another in the opposite interest. His disqualification has nothing to do with the confidentiality of client information. It is based on the inescapable conflict of interest which is inherent in the situation.”
74. In dealing with the position where a former client objects to a solicitor acting for a new client, Lord Millett said:-
“Where the court’s intervention is sought by a former client, however, the position is entirely different. The court’s jurisdiction cannot be based on any conflict of interest, real or perceived, for there is none. The fiduciary relationship which subsists between solicitor and client comes to an end with the termination of the retainer. Thereafter the solicitor has no obligation to defend and advance the interests of his former client. The only duty to the former client which survives the termination of the client relationship is a continuing duty to preserve the confidentiality of information imparted during its subsistence.”
75. Returning to the decision of Pumfrey J. in Re Barron Investments, he said:-
“I think that it is necessary to analyse the particular facts of the particular case in order accurately to identify the manner in which the conflict arising by reason of dual employment is said to occur. Then I think it is necessary to be satisfied that there is a genuine dual employment. It seems to me that if the apprehended conflict is a mere theoretical possibility, it will not always be necessary for the court to take steps to deal with it unless and until the actual conflict arises.”
76. The Quinns do not allege that Arthur Cox is in breach of the prohibition against dual employment. It is not alleged that the firm is currently acting for two clients whose interests are adverse to each other. Neither is it alleged that Arthur Cox may be in possession of information that is confidential to a former client and which is relevant to the matters on which Mr. Day has been instructed by the receivers.
77. What the Quinns contend is that because of the identity of some of its former clients, Arthur Cox may give biased evidence to the receivers or part with information confidential to the receivers. But in this regard, there is no evidence of any particular incidents of improper advice being given or of any apprehended or actual disclosure of confidential information. Merely because Cox’s have in the past acted for clients whose interests may be perceived by the Quinns to be adverse to theirs is not evidence of bias.
78. I do not find any evidence of any form of wrongdoing, conflict of interest or impropriety on the part of Mr. Day or Arthur Cox to warrant the making of the order sought.
Conclusion
79. It is for the above reasons that I dismissed the application to remove both the receivers and the solicitors.
Salthill Properties Ltd -v- Porterridge Trading Ltd
[2006] IESC 35
Supreme Court
Fennelly J., McCracken J., Kearns J.
Judgment by: McCracken J.
THE CORRECTNESS OF THE PROCEDURE
Section 316(1) of the Companies Act 1963 as amended by section 171 of the Companies Act 1990 permits a receiver to apply to the court for directions:-
“in relation to any matter in connection with the performances or otherwise by the receiver of his functions.”
Where such an application is made the section then provides that:-
“the court may give such directions, or make such order declaring the rights of persons before the court or otherwise as the court thinks just.”
Under Order 75, Rule 21 of the Rules of the Superior Courts it is provided that such applications shall be grounded on the affidavit of the party making the application and shall be heard and determined on affidavit unless the court authorises otherwise. This, of course, does not preclude the normal procedures whereby a person giving evidence on affidavit may be cross-examined on his affidavit.
The purpose of the procedures set out in section 316, and indeed the equivalent procedures relating to applications by liquidators, is to permit a person who has been effectively put in control of a company either on behalf of a specific creditor, in the case of a receiver, or on behalf of creditors in general as in the case of a liquidator, to control the affairs of the company and obtain the advices of the court in as efficient and speedy a manner as possible. It must be borne in mind that receivers and liquidators frequently find themselves in a position where the knowledge which they have of the affairs of the company derives mainly or solely from the written records of the company and documents in the possession of the company which may or may not be reliable, and where at times, and I am speaking in general terms and not in relation to this particular company, the receiver or liquidator may receive little or no co-operation from those who previously controlled the company.
I am quite satisfied that the directions sought by the receiver in this case clearly come within the provisions of section 316. The primary issue is the priority of charges on the assets of the company. If a receiver is to perform his functions properly, and in particular if he were to wish to sell the relevant assets, it is, of course, essential for him to know and identify such priorities. Furthermore, the section specifically empowers the court to make orders declaring the rights of persons before the court, in this case the rights of Porterridge as a lessee.
It is, of course, always open to the court to direct a hearing on oral evidence rather than on affidavit if the court feels this is necessary to do justice between the parties. This is a power which the court may exercise at its discretion, and will usually do so if there is a clear and direct conflict of evidence on affidavit. In those circumstances the correct procedure is for the court to direct pleadings, as far as they may be necessary, within the motion before it under section 316, rather than to direct the receiver to commence or join in plenary proceedings. In the present case, for reasons which I will indicate below, I am quite satisfied there was no such clear and direct conflict of evidence.
ONUS OF PROOF
I have already cited with approval the passage from Gough which was referred to in the judgment of the learned High Court judge. It is not disputed by Porterridge in this appeal that the onus is on it to show that it did not have actual knowledge of the negative covenants, but say that it has satisfied that onus of proof by showing that Porterridge is an independent and arms length company, as is averred by Ms Hynes in her affidavit. It is, of course, difficult for a party to proceedings to prove a negative, as is required in the present case. However, the learned trial judge clearly did not decide the case solely on the lack of evidence on the part of Porterridge to discharge the onus. As is shown by the passage of her judgment referred to above, she primarily relied on positive evidence adduced on behalf of the receiver as to the relationship between the company, Mr Cunningham and Porterridge.
Porterridge primarily rely on the affidavit of Ms Hynes to show its lack of actual knowledge of the negative covenant. It was also stated in court, although not put on affidavit, but accepted by the learned trial judge, that Ms Hynes had no personal knowledge of the negative covenant. What she said in her affidavit was that, as directors, she and her co-directors were independent and she rejected the assertion that Porterridge was “a mere puppet” of Mr Cunningham. She pointed to actions on the part of Porterridge, such as the obtaining of planning permission, to show its independence. What she did not say in so many words was that Porterridge as a separate legal identity had no actual knowledge of the negative covenants.
Much more seriously, however, was that Ms Hynes affidavit was the only evidence put forward on behalf of Porterridge to satisfy the onus of proof that was on them. There was no affidavit from Ms Hynes’s co-director Mr Quinn making similar averments, and there was no affidavit sworn by Mr Cunningham. This being so, as was pointed out by the learned trial judge, the evidence of the receiver as to the relationship between Mr Cunningham, the company, Porterridge and the directors of Porterridge was not contested. It was this uncontested evidence that was largely relied on by the learned trial judge.
CONCLUSION
I am quite satisfied that the evidence put forward on behalf of Porterridge did not discharge the onus of proof to show that it did not have actual knowledge of the negative covenants. It is argued on behalf of Porterridge that, even assuming that Mr Cunningham had actual knowledge of the covenant, the learned trial judge was incorrect in imputing that knowledge to the company as actual knowledge rather than constructive knowledge. This depends on the closeness of the relationship between Mr Cunningham and Porterridge, and the extent of the control which he exercised over the affairs of Porterridge, but in my view it would only be necessary to decide that issue if the onus of proof had shifted from Porterridge to the receiver, and it was for the receiver to show or prove that Porterridge had actual knowledge. I am quite satisfied that the evidence put forward on behalf of Porterridge was not sufficient to shift the onus of proof. However, the learned trial judge was perfectly entitled to take into account the knowledge of Mr Cunningham in assessing the strength of the evidence put forward by Porterridge. In my view she was quite correct in deciding on the evidence that Porterridge did have actual knowledge of the negative covenants and I would dismiss this appeal.
Anglo Irish Bank Corporation Ltd -v- Collins & Anor
[2011] IEHC 385
Dunne J.
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. Collinsless 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 valueplaced 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 vStevenson [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.
Edenfell Holdings Ltd., Re
[1997] IEHC 138; [1999] 1 IR 443
THE LAW
Section 316(1) of the 1963 Act provides that where a receiver of the property of a company is appointed under the powers contained in any instrument, any of the persons mentioned may apply to the Court for directions in relation to any matter in connection with the performance or otherwise by the receiver of his functions. The persons who are mentioned include the receiver and any officer or member of the company. It is acknowledged by the Receiver that Mr. Barrett is entitled to invoke Section 316(1) and to seek directions.
13. Section 316A of the 1963 Act, which was inserted by Section 172 of the Companies Act, 1990, provides in subsection (1) thereof as follows:-
“A receiver, in selling property of a company, shall exercise all reasonable care to obtain the best price reasonably obtainable for the property as at the time of the sale.”
14. That provision is merely a statutory restatement of the common law duty of care owed by a receiver in relation to the sale of property charged by the debenture under which he is appointed.
15. There are a number of situations analogous to the situation of a receiver selling property charged by a debenture on foot of the powers contained in the debenture. One is the situation of a mortgagee selling as such and his situation was considered by the Supreme Court in Holohan -v- Friends Provident and Century Life Office [1966] I.R. 1. In that case, the defendant mortgagee, in exercise of its power of sale as legal mortgagee, entered into a contract for the sale to a Mr. Sweeney of certain property of which the plaintiff was mortgagor. In negotiating the sale and the purchase price to be paid, the defendant offered the premises for sale on an investment basis without attempting to disturb the occupying tenants and refused to consider an alternative mode of offering the premises for sale, notwithstanding the advices of auctioneers and house agents that a sale with vacant possession would realise an enhanced purchase price. The plaintiff mortgagor sought an order restraining the defendant from completing the sale. In his judgment, O’Dalaigh C.J. stated at page 21 that the test to be applied was whether the defendant acted as a reasonable man would in selling the plaintiff’s property and he held that it did not. The significant point for present purposes which emerges from the judgment of O’Dalaigh C.J. is that an issue arose after the appeal to the Supreme Court had been argued but before judgment as to whether, in the absence of Mr. Sweeney, the purchaser under the contract, as a party to the proceedings and in the light of the provisions of Section 21(2) of the Conveyancing Act, 1881 and Section 5(1) of the Conveyancing Act, 1911, the plaintiff’s remedy, if any, should lie in damages only. The matter was relisted for argument on this point before judgment was given. In his judgment, O’Dalaigh C.J. said at page 26:-
“… I am satisfied, firstly, that Section 21 subsection (2) cannot have any application until a conveyance has been made. In this case, no conveyance has been made. And, secondly, as to Section 5 subsection (1) of the Act of 1911, I am also satisfied that a purchaser who in fact has notice, actual or constructive, of an irregularity in the exercise of the power of sale before completion by conveyance could not get a good title. No question of a remedy in damages between the parties before the Court can arise: the contract of sale is either properly made or it is not. If not, then it cannot be permitted to be completed and the appropriate remedy is an injunction. Whatever Mr. Sweeney’s rights against the mortgagee’s may be, they are not for consideration now”.
16. It was submitted by Counsel on behalf of the Receiver that, even if the sale to Astra was not at ” the best price reasonably obtainable ” as at 25th November, 1996, the appropriate remedy to be pursued by any person who was owed a duty of care by the Receiver is an action for damages. The Receiver does not deny that a duty of care was owed by him to Mr. Barrett. Mr. Barrett can be compensated for any loss incurred by reason of the sale to Astra by an award for damages and, in fact, Mr. Barrett has already instituted proceedings in this Court (1997 No. 6128p) on 25th May, 1997 claiming a declaration that the contract with Astra was in breach of the Receiver’s duty of care to him and damages. Similarly, the remedy of the Liquidator for any breach of Section 316A is an action for damages. It was contended that none of the Notice Parties is entitled to upset the contract for sale with Astra, which the Receiver was entitled to enter into under his powers in the Debenture. That contract is binding on the Receiver and must be completed and Notice Parties, if they so wish, can bring an action for damages against the Receiver.
17. By virtue of Section 316A, the Receiver was under a duty to exercise all reasonable care to obtain the best price reasonably obtainable for the Carrigaline lands as at 25th November, 1996. If he was in breach of that duty in entering into the contract for sale with Astra, then on the authority of the judgment of the Supreme Court in Holohan -v- Friends Provident and Century Life Office , that contract was not properly made and the completion of it must be restrained by injunction.
APPLICATION OF THE LAW TO THE FACTS
18. In his grounding Affidavit, the Receiver has averred that he was advised by the auctioneers and estate agents he had retained, Mr. Ryan and Mr. Chesser, to sell to Astra and that he took the following factors into account:-
(a) that the Supreme Court appeal, and the doubt and uncertainty caused by it, would be removed forthwith;
(b) that negotiations with other interested parties up to then had all been on the basis that the purchaser would apply for planning permission and would require a closing date some six months later;
(c) that the monthly accrual of interest at that time was approximately £12,000 and that any delay in closing would be to the detriment of other creditors, secured and unsecured;
(d) that he believed that Astra would not wait beyond 25th November and that he had no knowledge what the outcome of negotiations with other parties would then be;
(e) that the indications from other interested parties did not contain the element of certainty involved in the offer from Astra; and
(f) that at the hearing of the Stormdust proceedings in the High Court in April 1996, Stormdust had adduced evidence that £920,000 was a reasonable price for the Carrigaline lands in May 1995 and that, at that time, the highest value the Receiver’s own valuers, Mr. Ryan and Mr. Chesser, put on the property was £1.2 million.
19. When the Astra offer materialised in mid-November 1996, the Receiver’s joint agents had been endeavouring to sell the Carrigaline lands for some time. In fact, Mr. Ryan had been in negotiations with Anglo Eire for over six months. It is true that the other interested parties were given rather peremptory notice on 21st November, 1996 to make their final offer. Nonetheless, in my view, the Receiver could not be regarded as acting unreasonably in not giving more time and in not waiting longer to see if further offers were forthcoming, given the time limit imposed by Astra for acceptance of its offer, assuming the Astra offer was an offer which could properly be accepted by him. The Receiver had to have regard to commercial realities and, in particular, to the fact that if he allowed the Astra offer to lapse, he might have had to wait some time, while interest was accruing on the Bank’s debt, before getting any further offer which matched or bettered the offers he already had, including Astra’s offer.
20. The issue I have to decide is whether, on evidence adduced, the Receiver exercised all reasonable care to obtain the best price reasonably obtainable for the Carrigaline lands as at 25th November, 1996. The fact that Anglo Eire made an offer of £1.8 million, subject to contract, on 18th December, 1996 cannot influence that decision. There was an offer from Anglo Eire before the Receiver on the relevant date, 25th November, 1996, and it must be assumed that that offer reflected the “best price” which Anglo Eire was prepared to pay for the Carrigaline lands at that date.
21. A comparison of the offers which the Receiver had on 25th November, 1996 reveals the following:-
(a) The Astra offer was an unconditional offer in that the contracts produced by the Receiver had been executed on behalf of Astra. It provided for a purchase price of £1.5 million and it provided for a closing date of 19th December, 1996.
(b) The offer from Anglo Eire was a “subject to contract” offer, which meant that the offeror was not bound until a contract was concluded. It stipulated a price of £1.6 million ” on the same basis as the offer from the other party “, which I interpret as an intention on the part of Anglo Eire to purchase subject to the Stormdust appeal but subject to the further condition stipulated in the offer. That condition was that Anglo Eire must be satisfied with the contents of the documents and opinions in relation to the appeal. This was an extremely vague stipulation and it is not the type of stipulation which, in my view, a reasonable vendor could be expected to accept. No closing date was mentioned in the Anglo Eire offer.
22. The two offers, in my view, are no more comparable than “apples and oranges”. Given the dual conditional nature of the Anglo Eire offer, it would have been difficult, if not possible, for the Receiver to evaluate its worth and I do not think the Receiver could be regarded as being unreasonable in concluding that the Astra offer was the more attractive offer of the two.
23. But that is not the end of the matter. It is quite clear that Astra was a very eager purchaser and that the Carrigaline lands were worth £1.6 million to Astra, which was the aggregate amount which Astra was prepared to outlay to get the lands, albeit free from the encumbrance created by the Stormdust appeal. There is no evidence whatsoever that the Receiver gave any consideration to whether paying £100,000 out of the £1.6 million, which was available to acquire the lands, to Stormdust to procure the withdrawal of the appeal at that juncture was a reasonable and prudent course. While it is undoubtedly the case that the appeal gave rise to a number of imponderables –
(i) whether the appeal would be successful, the prevailing view now being that there was an overwhelming probability that it would not,
(ii) how long it would take for the appeal to be determined by the Supreme Court and, in particular, would it take the eight months it would take to accumulate £100,000 of interest charges under the Debenture, and
(iii) what costs and outlay would be incurred in responding to the appeal, and, if the appeal was unsuccessful, were these costs likely to be recoverable from Stormdust,
the Receiver should have considered all of these matters before becoming involved in an arrangement under which £100,000, which would otherwise have been available to the Company as part of the price of the land, was paid to Stormdust. Moreover, given the limited nature of the authority conferred by the Order of 20th November, 1995, the Receiver should have considered applying to Court on notice to the Liquidator for leave to enter into the arrangement before committing himself to it. There was £1.6 million available for the acquisition of the lands free from the appeal on 25th November, 1996. Under the arrangement entered into by the Receiver, the Company would only get £1.5 million for the land. I am not satisfied, on the evidence, that the Receiver exercised all reasonable care to free the lands of the encumbrance which the appeal constituted and to obtain for the Company the best price reasonably obtainable for the lands as of 25th November, 1996.
DECISION
24. Accordingly, I will direct the Receiver not to complete the contract with Astra and to return to Astra the deposit paid by it thereunder. I will hear submissions from the Receiver and the Liquidator as to the mode of resale.
25. I am not deciding the issue raised by Mr. Barrett as to whether the Receiver is entitled to deduct £105,000 in respect of the costs of the Stormdust proceedings from the proceeds of any sale, as I consider that this aspect of the matter was not sufficiently argued before me. I will adjourn this issue generally with liberty to re-enter.
Moran -v- Hughes & ors
[2013] IEHC 522 Laffoy J.
46. The core question raised on the claim underlying Direction 8 is the following: under what, if any, duty is a receiver appointed over a company to provide information to the officers of the company in relation to what has transpired since the appointment? Counsel for the Receivers referred to two Irish authorities on that question.
47. The first was a decision of the High Court (Costello J.) in Irish Oil and Cake Mills Ltd. v. Donnelly (Unreported, 27th March, 1983). That was a decision on an application in a plenary action for an interlocutory injunction claiming a mandatory order directing the defendant receiver over the plaintiff company to furnish certain information which had been requested by letter, for example, financial management accounts for periods subsequent to the appointment of the defendant receiver, the latest balance sheet analysed as to all debtors and stocks and all creditors, details of all sales and purchase contracts and suchlike. Having stated that the defendant receiver derived his appointment and his authority from the contract entered into between the parties, namely, the debenture given by the company to the lender bank which appointed the receiver, and having analysed the provision therein to the effect that the defendant receiver was to be treated as the agent of the plaintiff company, Costello J. stated that he could find no basis for implying a term into the contract which would oblige the defendant receiver to furnish the information sought. In the background was an agreement by the defendant receiver to sell an asset of the plaintiff company, which it was alleged was being sold at an undervalue and which it was alleged amounted to a breach of a duty of care owed by the defendant receiver to the plaintiff company.
48. The passage from the judgment of Costello J. cited by counsel for the Receivers and, indeed, the passage most frequently cited by commentators on the topic of the duty of a receiver to a company over which he is appointed and its officers, is the following passage:
“The plaintiffs advanced a second argument to support the contention that the Receiver is in breach of a duty of care he owes to the Company. It is said that apart from the special facts of this case the general duty on Receiver and Manager to take reasonable steps to secure the best possible price for the Company’s assets include a duty ‘to keep the Company appraised of how the business of the Company is going’. This is a very far-reaching proposition, unsupported by any authority and I must reject it. There may well be circumstances in which, to ensure that the best price possible is obtained for the assets, trading information since the appointment of a Receiver should be given to the Company’s Directors. But in the absence of special circumstances which might favourably affect the price, a Receiver/Manager is not under any duty of care which involves him in reporting as suggested to the Directors on his management of the business.
It cannot be said that a Receiver/Manager is under no duty to account to the Company whose affairs he is managing nor did the Defendant so urge in this case. The extent and nature of the duty and the extent and nature of the accounts he must furnish would depend on the facts of each individual case. Smiths Limited v. Middleton (1979) 3 All ER 842 illustrates this point. That was a case in which an account was ordered after a receivership had come to an end, the Court holding that as an agent an equitable obligation to account existed which had not been obviated by statute. But the Plaintiffs (having perhaps been misled by the headnote to the report) are not correct in finding in that case a general proposition to support their contentions in this case.” (Emphasis in original)
Costello J. refused to grant the injunction sought, stating that the information sought was wholly exceptional and he could find nothing in the evidence to justify him exceeding to the application.
49. The decision in Smiths Ltd. v. Middleton was a decision of the Chancery Division of the English High Court. The receivership had terminated when the proceedings were brought because the debt due to the bank, which had appointed the receiver, was discharged. The headnote in the report accurately summarises the decision of Blackett-Ord V-C. The headnote (in which in quoting it below, in order to simplify its meaning, I have substituted for the relevant provisions of the Companies Act 1948 in England and Wales the corresponding provisions of the Act of 1963) stated:
“A receiver appointed under a debenture providing for him to be the agent of the debtor company, in practice ran the company on behalf of its directors and was, therefore, answerable to the company for the conduct of its affairs. That being so, the receiver was under a duty to keep full accounts (i.e. fuller than the abstracts of receipts and payments required under [s. 319(2)]) and to produce those accounts to the company when required to do so. In order to enforce that right the company required a remedy beyond that provided in [s.322]. The receiver would be treated as an accounting party to the company.”
In that case, the company was disputing the figures supplied by the receiver in the abstracts filed and was seeking more information for the purposes of producing its audited accounts. No such dispute has been pointed to by the applicant in relation to the abstracts filed by the Receivers in the CRO. It is also worth recalling that in his first replying affidavit, Mr. Charleton expressed concern as to the motives of the applicant in seeking the information.
50. The other Irish authority cited by counsel for the Receivers was the decision of the High Court (Budd J.) in Kinsella v. Somers [1999] IEHC 44, which was an application under s. 316. The company in issue, Dublin Gas Company, had been in receivership for twelve years when the application was brought by the applicant, who was a director and shareholder of the company. In addressing the duty of a receiver to provide information, Budd J. referred to the decision of Costello J. in the Irish Oil and Cake Mills case and he also referred to the decision in Smiths Ltd. v. Middleton. He also considered authorities on the broader question of the duty of a receiver/manager to the company over which he is appointed. In rejecting the application, Budd J. stated:
“I conclude that the Applicant has not proved that the matter comes within the peculiar circumstances in which the Court would consider it just to make an order. There has been a failure to show that the information is required for a specific purpose and there has been a failure to show that the Receiver has not been acting reasonably in refusing to give further information to the Applicant in his capacity as director and shareholder. Indeed, it is doubtful whether even the Company, to whom the Receiver clearly owes a duty to render appropriate accounts in respect of his dealings with the Company’s assets, would be able to make out a case that the Receiver was acting unreasonably at this stage in refusing to delve back into the documents with regard to the sale of the assets conducted more than ten years ago. Different considerations might well apply if the Applicant were able to prove that the refusal to give further information was actuated by bad faith on the part of the Receiver.”
Budd J. added that his decision would not “preclude an application being made on behalf of the Company for material information which may be relevant to the directors of the Company in exercising their responsibilities when the management of the Company is being returned to them as their responsibility”.
51. Lurking beneath the orders sought in Directions 7 and 8 are allegations by the applicant that the Receivers have mismanaged the business of the respondent companies, and, in particular, the business of the Holiday Inn Hotel and the business of the Blarney Inn. Two examples will illustrate the nature of the applicant’s complaints. They are the following allegations:
(a) The applicant alleged in the grounding affidavit that, inter alia, “due to the lack of attention to the businesses by the Receivers significant damage/loss has occurred to the value of the Holiday Inn Hotel in Pearse Street in Dublin by losing the Holiday Inn franchise in July 2011”. Mr. Charleton in his first replying affidavit has rejected that assertion and has explained the circumstances in which the Holiday Inn brand was removed from the Pearse Street property.
(b) In the grounding affidavit the applicant also alleged that the Receivers had failed “to implement the six year lease agreement negotiated and agreed by the Directors in December 2010 for the Blarney Inn premises” and alleged “mismanagement of the Blarney Inn business”, which resulted in the closure of the business in December 2011. Mr. Charleton in his first replying affidavit has rejected both of those propositions. He averred that, when the Receivers were appointed, there was no lease agreement in place and the previous lease had expired on 31st December, 2010. He also averred that the Blarney Inn business ceased trading as the Receivers were unable to reach agreement on a sustainable rental amount with the landlord of the premises.
52. In relation to both of those examples, the factual controversy continued through the subsequent exchange of affidavits. The factual controversies cannot be resolved on an application such as this which has been heard on oral evidence. However, the allegations made by the applicant necessitate some comment on a difficult legal question, namely, on the nature and extent of the obligations of the Receivers to the companies over which they are appointed in general.
53. In addressing that issue, counsel for the Receivers quoted from the judgment of Budd J. in Kinsella v Somers and he has also referred to the decision of the High Court of England and Wales in Medforth v. Blake [2000] Ch 86 and the comments thereon of Clarke J. in Mooreview Developments Ltd. v. First Active Plc [2009] IEHC 214. In the relevant part of his judgment, Clarke J. was considering an allegation of negligence against a receiver in conducting the business of the company over which he had been appointed receiver and manager and in managing its assets, which included a property development. Having considered two divergent lines of authority –
(a) the judgment of Sir Richard Scott V-C in Medford v. Blake , and
(b) a different line of authorities from the courts of England and Wales, which were referred to by Budd J. in Kinsella v. Somers, namely, Downsview Nominees Ltd. v. First City Corp Ltd. [1993] 1 A.C. 295 and Re B. Johnson & Co. (Builders) Ltd [1955] 1 Ch. 634,
Clarke J. observed (in para. 12.6 et seq.) as follows:
“12.6 It is possible, therefore, to discern two strands in the United Kingdom authorities. Cases such as Downsview are part of a line of authority which suggests that a receiver is immune from liability for acts carried out in the management of an asset (as opposed to the sale of the same asset), where no mala fides can be established.
12.7 However, Medforth v. Blake represents a different view which suggests that while the primary obligation of a receiver is towards the debenture holder, the receiver may, subject to that obligation, have a remaining obligation to the company.
12.8 The Irish authorities, so far as they go, appear to accept the Downsview position with no Irish authority being cited which has considered the expanded view of the potential liability of a receiver identified in Medforth v. Blake .”
54. Clarke J. then went on to consider whether Medforth v. Blake represents the law in this jurisdiction. Having stated that, in any event, Medforth v. Blake would not have availed the plaintiffs in the case before him, because no sufficient case had been made out for negligence on the part of the receiver or, of equal importance, for any causal link between the alleged negligence and any consequences for the plaintiff companies and that it would be inappropriate to seek to make a definitive ruling on the applicability of Medforth v. Blake in this jurisdiction, Clarke J. observed as follows (at para. 12.14):
“Any such view would, necessarily, be obiter. I would confine myself to indicating that I believe that there are at least arguable grounds for the proposition that Medforth v. Blake does represent the law in this jurisdiction. While understanding the practical difficulties which have led courts in the common law world to shy away from imposing a liability on receivers in such circumstances, (and in particular the difficulty in identifying the responsibility of a receiver to a company where the primary responsibility of that receiver is to the debenture holder), I am not convinced that a blanket immunity from liability on the part of receivers for the management of businesses placed in their hands is an appropriate response to the undoubted difficulties which arise. On the other hand, it is also necessary to take into account the fact that the legislature has decided to enact a specific provision providing for the liability of receivers in cases of sale at an undervalue without specifying any similar liability in cases of mismanagement. It is at least open to the view that, in so doing the legislature impliedly declined to extend the potential liability of receivers beyond the category of sale at an undervalue traditionally established at common law.”
The statutory provision to which Clarke J. was referring in the above passage was s. 316A of the Act of 1963, which was inserted by the Act of 1990. The applicant did not invoke that provision in this case.
55. I think it is important to emphasis that Clarke J. was considering the liability of a receiver for negligence in the management of the assets of the company over which he was receiver in a plenary action. If the applicant wishes to pursue a claim for alleged negligence against the Receivers which he alleges resulted in loss to him, the appropriate course would be to pursue his claim by way of a plenary action, not on an application for directions under s. 316. The applicant’s grounding affidavit contains no more than allegations of mismanagement by the Receivers with the alleged resulting loss, which the Receivers reject as being untrue, giving rise to a fundamental factual controversy which cannot be resolved on this application. Accordingly, it would be inappropriate to express a definitive view on the legal issue as to the liability of a receiver in negligence generally. Therefore, on the legal question, the matter cannot be advanced beyond what was stated by Clarke J. in the Mooreview case.
56. In this case the receivership is ongoing. Not only that, the applicant in the Commercial Court Proceedings is challenging the validity of the appointment of the Receivers. That being the case, there is justification for the Receivers being concerned about the motivation of the applicant in seeking the Directions 7 and 8. I am satisfied that the applicant, as an officer of the company, has not established an entitlement to the information he has sought, other than the information proffered by the Receivers in relation to the period up to their appointment, which the applicant has not taken up. In the circumstances, the Court must refuse to grant the orders sought in Directions 7 and 8.
Direction 9
57. In Point 3 of the original originating notice of motion, the applicant has invoked s. 318 of the Act of 1963. Sub-section (1) of s. 318 provides as follows:
“The Court may, on an application made to it by the liquidator of a company or by any creditor or member of the company, by order fix the amount to be paid by way of remuneration to any person who, under the powers contained in any instrument, has been appointed as receiver of the property of the company notwithstanding that the remuneration of such receiver has been fixed by or under that instrument.”
For the purposes of the application of s. 318, I am assuming that the applicant is a member of each of the respondent companies, although there is no evidence of that before the Court.
58. As to what is provided in the security documents on foot of which the Receivers have been appointed, as already noted, the Composite Debenture dated 30th June, 2005 and the Debenture dated 30th June, 2008 are both in the same form. In each, Clause 11.1 deals with the appointment of a receiver and provides that the appointment shall have effect –
“. . . upon such terms as to remuneration (and the restrictions in s. 24(6) of the Act shall not apply) and otherwise as the Bank may, from time to time, think fit . . ..
The Act referred to in that quotation is the Conveyancing Act 1881. Clause 12.1 of each of those security documents addresses appropriation of monies received by a receiver and provides that, subject to repayment of any claims having priority over the security documents, and save insofar as is otherwise directed by the Bank, the monies received should be discharged in the following order:
“(a) in payment of all Receiver Costs;
(b) in or towards payment to the Bank of the Secured Obligations;
(c) the surplus (if any) shall be paid to the Chargors or such other person or entity as may be entitled thereto.”
59. As regards the Debenture dated 16th June, 2008, although in a different format, in substance it is the same. Clause 12.2 provides that every receiver appointed by the Bank shall be appointed –
“. . . upon such terms as to remuneration and otherwise as the Bank shall from time to time fix or think fit to the intent that the restrictions contained in Section 24(6) of the Conveyancing Act shall not apply and so further that the amount of the Receivership Costs including the remuneration of any such Receiver may be fixed by the Bank at any time either upon or subsequent to the appointment of any such Receiver or after his discharge.”
The application of proceeds of the receivership is dealt with in Clause 13.1, which provides that, subject to any prior ranking claims, the monies received by the Receiver shall be applied firstly “in payment of all costs, charges and expenses of and incidental to the appointment of the Receiver and the exercise by him of all or any of the powers aforesaid including all Receivership Costs and all outgoings properly paid by him”.
60. Section 24(6) of the Conveyancing Act 1881, before its repeal, provided:
“The receiver shall be entitled to retain out of any money received by him, for his remuneration, and in satisfaction of all costs, charges, and expenses incurred by him as receiver, a commission at such rate, not exceeding five per centum on the gross amount of all money received, as is specified in his appointment, and if no rate is so specified, then at the rate of five per centum on that gross amount, or at such higher rate as the Court thinks fit to allow, on application made by him for that purpose.”
None of the deeds of appointment by virtue of which the Receivers were appointed specified a rate of remuneration.
61. The remuneration of a receiver was considered by the High Court (Geoghegan J.) in In re City Car Sales Limited [1995] 1 ILRM 221, a case which was relied on by counsel for the Receivers. The aspect of the judgment of Geoghegan J. relied on by counsel is summarised at (4) in the headnote as follows:
“A literal construction of s. 318 of the 1963 Act would give the court a power to permit a higher amount in respect of remuneration than would otherwise have been allowed by the debenture. However, s. 318 was designed to curb excessive remuneration being retained by a receiver and therefore the court should only exercise its discretion to interfere with contractual rights where the remuneration was clearly excessive. In re Potters Oils Ltd. (No. 2) [1986] 1 W.L.R. 201 approved.”
The issue of the remuneration of a receiver was also considered by this Court in Re Red Sale Frozen Foods Ltd. (In Receivership) [2007] 2 IR 361, in which In re City Car Sales Ltd. was followed.
62. It was submitted on behalf of the Receivers that no evidence has been put forward by the applicant to suggest that the remuneration of the Receivers is excessive. In fact, in his first replying affidavit Mr. Charleton averred that the Receivers had not sought or obtained any payments in respect of remuneration up to that date, so that no issue arose in relation to remuneration at that point in time. Counsel for the Receivers made the same point. However, apart from that, the applicant has put no evidence whatsoever before the Court on the basis of which the Court could by order fix the amount to be paid by way of remuneration to the Receivers pursuant to s. 318(1). That evidential deficiency disposes of the matter, in that there is absolutely no basis on which the Court could make an order under s. 318(1). Direction 9 is, accordingly, refused.
Direction 10
63. Direction 10 and Point 6 of the original originating notice of motion are framed slightly differently. In any event, the issue raised is an alleged conflict of interest on the part of Arthur Cox in acting as solicitors for the Receivers. The grounding affidavit contains a number of sweeping assertions in support of an order directing that Arthur Cox should be removed as solicitors to the Receivers, for example, that the firm were legal advisers to the Bank before and after its collapse and that they advised the Government on “the Bank Guarantee schemes” and “on the creation of NAMA”. As counsel for the Receivers submitted, no evidence has been tendered which demonstrates that these facts alone give rise to a conflict of interest.
64. More significantly, the applicant has asserted that Arthur Cox were solicitors to “the Holiday Inn, Blarney Inn” and to the applicant at the time the Receivers were appointed. The position of the Receivers, which has been supported on affidavit by Mr. Charleton, is that in the past the applicant was a client of Arthur Cox, but the respondent companies were not clients of Arthur Cox. In his third affidavit, the applicant averred that that “outright denial” was in direct contradiction to the facts. He exhibited a number of items of correspondence between Arthur Cox and himself. The first was an e-mail of 7th October, 2009, the gist of which was that Arthur Cox were prepared to represent him and the terms on which they were so prepared were set out. Secondly, there was an e-mail from Arthur Cox of 28th January, 2010 to the applicant furnishing draft letters to him for review and the applicant’s response to the effect that they were “fine”. Thirdly, there was an e-mail dated 4th April, 2011 from Arthur Cox to the applicant telling him that a motion in proceedings, which I interpret as being a motion for judgment in default of defence against the applicant personally, had been adjourned generally because the plaintiffs’ replies to the defendants’ notice for particulars remained outstanding. The applicant was advised that, practically speaking, the case was likely to become dormant. It is impossible to identify what the case in which the applicant was the defendant was about because the documentation exhibited has been redacted. However, in his third affidavit, Mr. Charleton referred to the exhibit and he stated that, at the time of the appointment of the Receivers, Arthur Cox was not acting for the companies over whose assets the Receivers were appointed. Nowhere is it apparent in the exhibited documents that Arthur Cox were acting for the respondent companies at that time.
65. Counsel for the Receivers referred to a number of decisions of courts in the United Kingdom in the context of the applicant’s claim that there is a conflict of interest and that Arthur Cox should be removed as solicitors for the Receivers. I propose only addressing one of them: Bolkiah v. KPMG [1999] 2 AC 222, which was a decision of the House of Lords. The facts in that case, as summarised in the headnote, indicate that KPMG had acted as auditors for an investment agency established to hold and manage the general reserve fund and external assets of the Government of Brunei. In 1996 the plaintiff, who was the then chairman of the agency, was involved in major litigation relating to his financial affairs and he retained KPMG to provide forensic accounting services and litigation support. In the course of that work, KPMG performed many tasks usually undertaken by solicitors and were given access to highly confidential information concerning the extent and location of the plaintiff’s assets. The litigation was settled in March 1998 and thereafter KPMG undertook no further work for the plaintiff. Around the same time the plaintiff was removed from his position as chairman of the agency. In June 1998 the Government of Brunei appointed a finance task force to conduct an investigation into the activities of the agency during the period when the plaintiff had been its chairman. The agency retained KPMG to investigate the whereabouts of certain assets which were suggested to have been used by the plaintiff for his own benefit. KPMG took steps to protect the plaintiff’s confidentiality by ensuring that the personnel who had been on the team assisting with the plaintiff’s litigation were not on the team working on the agency’s investigation, and by attempting to create an information barrier within its forensic accounting department so as to prevent the flow of information between the two teams.
66. The plaintiff in the Bolkiah case commenced an action for breach of confidence against KPMG and sought an interlocutory injunction restraining them from acting for the agency. He was granted the injunction at first instance, but the Court of Appeal discharged the injunction. The House of Lords allowed the appeal against that decision.
67. Lord Millett, with whom the other Law Lords concurred, pointed out that the issues raised had not been previously considered by the House of Lords. The controlling authority in England before that had been the decision of the Court of Appeal in Rakusen v. Ellis, Munday & Clarke [1912] 1 Ch. 831. Lord Millett said apropos of that case (at p. 234):
“The case is authority for two propositions:
(i) that there is no absolute rule of law in England that a solicitor may not act in litigation against a former client; and
(ii) that the solicitor may be restrained from acting if such restriction is necessary to avoid a significant risk of the disclosure or misuse of confidential information belonging to the former client.
Like most of the later authorities, the case was concerned with the duties of a solicitor. The duties of an accountant cannot be greater than those of a solicitor, and may be less, for information relating to his client’s affairs which is in the possession of a solicitor is usually privileged as well as confidential.”
Lord Millett went on to say that in Rakusen’s case the Court of Appeal founded the jurisdiction on the right of the former client to protection of his confidential information. The Court’s intervention is founded not on an avoidance of any perception of possible impropriety but on the protection of confidential information. Lord Millet affirmed that principle as “the basis of the court’s jurisdiction to intervene on behalf of a former client”.
68. Lord Millett went on to distinguish the position of an existing client stating (at p. 234):
“It is otherwise where the court’s intervention is sought by an existing client, for a fiduciary cannot act at the same time both for and against the same client, and his firm is in no better position. A man cannot without the consent of both clients act for one client while his partner is acting for another in the opposite interest. His disqualification has nothing to do with confidentiality of client information. It is based on the inescapable conflict of interest which is inherent in the situation.”
Lord Millett then reiterated the position of a former client as follows (at p. 235):
“Where the court’s intervention is sought by a former client, however, the position is entirely different. The court’s jurisdiction cannot be based on any conflict of interest, real or perceived, for there is none. The fiduciary relationship which subsists between solicitor and client comes to an end with the termination of the retainer. Thereafter the solicitor has no obligation to defend and advance the interests of his former client. The only duty to the former client which survives the termination of the client relationship is a continuing duty to preserve the confidentiality of information imparted during its subsistence.
Accordingly it is incumbent on a plaintiff who seeks to restrain his former solicitor from acting in a matter for another client to establish (i) that the solicitor is in position of information which is confidential to him and to the disclosure of which he has not consented and (ii) that the information is or may be relevant to the new matter in which the interest of the other client is or may be adverse to his own. Although the burden of proof is on the plaintiff, it is not a heavy one. The former may readily be inferred; the latter will often be obvious.”
69. The applicant has not established that, when these proceedings were initiated, he was an existing client of Arthur Cox. He clearly was not. Nor has he established that any of the respondent companies were ever clients of Arthur Cox. Therefore, following the reasoning of Lord Millett, there is not a conflict of interest inherent in this situation in which Arthur Cox are now acting for the Receivers in their capacity as receivers and managers of the respondent companies. On the other hand, the applicant is a former client of Arthur Cox, but he has not put before the Court any evidence which would enable the Court to conclude, on the balance of probabilities, that Arthur Cox is in possession of information which is confidential to him and which is relevant to the matters in respect of which he has sought directions against the Receivers, whose interests I would be prepared to presume are adverse to his. In short, the applicant has not discharged the onus of proof, even though it is not a heavy one, which would enable the Court to intervene on the basis of the principles expressed by Lord Millett.
70. At the end of the hearing, counsel for the Receivers referred the Court to one Irish authority: the decision of the Supreme Court in O’Carroll v. Diamond [2005] 4 I.R. 41. The Court was referred to a passage from the judgment of Hardiman J. (at para. 21, p. 52) to the following effect:
“I have had the opportunity of considering a very recent English case on solicitors’ duty, Hilton v. Barker Booth & Eastwood . . . [2005] 1 WLR 567. There, a firm of solicitors acted for two separate persons engaged in a property development. The firm was privy to information about one of those persons (that he had served a prison sentence for a commercial offence) in respect of which they owed him a duty of confidentiality. Accordingly, they did not disclose it to their other client. The House of Lords held that if a solicitor put himself into a position of having two irreconcilable duties, that was his own fault. The solicitor who had conflicting duties to two clients could not prefer one to the other. He had to perform both as best he could and ‘this may involve performing one duty to the letter of the obligation, and paying compensation for his failure to perform the other. But in any case the fact that he has chosen to put himself in an impossible position does not exonerate him from liability’. I have no doubt that this is correct. . . .. The impossible position referred to in Hilton v. Barker Booth & Eastwood , and in other cases dating back to Moody v. Cox and Hatt [1917] 2 Ch. D. 71, is that of accepting instructions from two persons with conflicting interests without disclosing that state of affairs.”
The type of impossible situation envisaged in that passage does not arise in this case, because Arthur Cox are not acting for the applicant and in relation to the matters in issue on this application they have not accepted instructions from two persons with conflicting interests without disclosing that state of affairs.
71. Accordingly, the Court refuses to grant the order sought in Direction 10 in relation to the involvement of Arthur Cox.
Direction 11
72. At Point 5 in the original originating notice of motion the applicant sought an order directing the removal of the Receivers, who are partners in Ernst & Young, as receivers and managers of the assets of the respondent companies. The basis on which the applicant sought such direction, as set out in the grounding affidavit, was that Ernst & Young had been the former auditors of the Bank until they resigned on 1st September, 2009. Mr. Charleton’s response in his first replying affidavit was that he was satisfied that no conflict of interest existed in the Receivers acting and continuing to act as such. I have outlined earlier the relevant facts in relation to the applicant’s complaint to CARB and the treatment by CARB of that complaint as set out in its letter of 29th June, 2012 and I have also referred to the applicant’s letter of 28th August, 2012 to CARB
73. I agree with the submission made by counsel for the Receivers that it is difficult to see how the ground of the applicant’s complaint to CARB falls within the conflict situation identified by the House of Lords in Bolkiah v. KPMG or that any conflict of interest arises at all. While Ernst & Young were the auditors of the Bank until 1st September, 2009, I cannot see how there was any conflict involved in two of their insolvency practitioners accepting, sixteen months later, an appointment by the Bank as receivers and managers of the respondent companies on foot of the security documents given in 2005 and 2008 by the respondent companies to the Bank. The Receivers must carry out their functions as such in accordance with statute law and in accordance with the contract between the respondent companies and the Bank. Any issue of conflict seems even more remote now that, since early February 2013, the Bank is in statutory liquidation pursuant to Irish Bank Resolution Corporation Act 2013.
74. I consider that the applicant has not established any ground for concluding that conflict of interest arises as between the Receivers and the respondent companies or the applicant. Accordingly, the Court must refuse the order sought in Direction 11.
Order
75. There will be an order refusing all of the reliefs sought on the amended notice of motion and dismissing the application.
Medforth v Blake & Ors
[1999] EWCA Civ 1482 [1999] Lloyd’s Rep PN 844, [2000] Ch 86, [1999] 29 EG 119, [1999] 3 All ER 97, [1999] 2 EGLR 75, [1999] PNLR 920, [1999] BPIR 712, [1999] EG 81, [1999] 3 WLR 922, [1999] EWCA Civ 1482, [1999] BCC 771, [1999] 2 BCLC 221The Merrow Ltd -v- Bank of Scotland Plc & Anor [2013] IEHC 130 (22 March 2013)
Mr Smith has sought to justify this proposition both by reference to the historical origin of receiverships and by reference to authority.
As to historical origin, the position prior to Lord Cranworth’s Act (23 & 24 Vict.c.145), enacted in 1860, was that a mortgagee had no power to appoint a receiver unless he had expressly stipulated for it in the mortgage. If he did appoint a receiver, not having stipulated for any power to do so, the receiver was the mortgagee’s agent and, in taking possession of the mortgaged property, rendered the mortgagee, his principal, liable to account to the mortgagor on the footing of wilful default. Mortgagees, in order to avoid the disadvantages of becoming mortgagees in possession, began to insist on a contractual provision requiring the mortgagor to appoint a receiver at the request of the mortgagee, with the receiver being directed to apply the income of the mortgaged property in paying the interest on the secured debt and any surplus to the mortgagor. All directions given to and powers conferred on the receiver were, in form if not in substance, given and conferred by the mortgagor whose agent the receiver became. This practice was given statutory recognition, first in Lord Cranworth’s Act (sections 11 and 17 to 23) and, later, in the Conveyancing Act 1881 (section 24). The relevant statutory provisions are now contained in section 109 of the Law of Property Act 1925 (see generally the explanation given by Rigby L.J. in Gaskell -v- Gosling [1896] 1 Q.B. 669 in his dissenting judgment later upheld in the House of Lords [1897] A.C. 575).
Mr Smith pointed out that the main reason for the development of the system under which the receiver is appointed by the mortgagee but is treated nonetheless as the agent of the mortgagor, is to enable the mortgagee to avoid becoming a mortgagee in possession while enjoying the advantages of his nominee, the receiver, displacing the mortgagor from control of the mortgaged property and from the receipt of the income derived from it. He argued that if the receiver is held to owe obligations to the mortgagor that go beyond duties of good faith, the advantages intended to be derived by mortgages from the receivership system will be undermined. They will be undermined, he said, because if the receiver is held to owe the mortgagor the same sort of obligations as a mortgagee in possession would owe, there will be no advantage to the mortgagee in avoiding being a mortgagee in possession. I am unable to accept these arguments.
If receivers who decide to carry on a mortgaged business do owe a duty to the mortgagor to do so with reasonable competence, I do not follow how that could adversely affect the mortgagee. If the receivers are in breach of that duty they will be answerable to the mortgagor. Mr Smith suggested that the mortgagee would then have to indemnify the receivers. Why should they do so? If a mortgagee, on appointing a receiver, has undertaken to indemnify the receiver against any claims for default made against the receiver by the mortgagor, that undertaking might have to be honoured. But, if mortgagees choose to give indemnities to guard receivers against the consequences of the receivers’ defaults, that is their affair. It is no reason at all for contending that the system of receivership is being undermined. In any event, Mr Smith accepted that a failure on the part of a receiver to show reasonable competence in his management of the mortgaged property would probably constitute a breach of a duty owed by the receiver to the mortgagee who had appointed him. A mortgagee would hardly be likely to give a contractual undertaking to indemnify a receiveragainst the consequences of conduct which constituted a breach of the receiver’s duty to the mortgagee.
Mr Smith argued that the mortgagee might have given instructions to the receiver as to the manner in which the receiver should manage the business that was to be carried on. He argued that an action by the mortgagor based upon a complaint that the receiver had been managing the business in that manner would entitle the receiver to look to the mortgagee for an indemnity. It is difficult to deal with a submission of this sort otherwise than by reference to particular facts. A mortgagee who has appointed a receiver has no general right to instruct the receiver as to how or when to exercise the powers that have been conferred on the receiver. The mortgagee retains his own powers as mortgagee. He does not, for example, lose his power to sell by appointing a receiver with a power of sale. The receiver, on appointment, exercises his powers as agent for the mortgagor. Paragraphs 3(g) and (h) of the Agricultural charges in the present case so provide. So does section 109(2) of the 1925 Act. If a mortgagee establishes a relationship with the receiver he has appointed under which the receiver exercises his powers in accordance with instructions given by the mortgagee, I can see the force of an argument that if the receiver is liable to the mortgagor then so will the mortgagee be liable. But this begs the question whether or not it is right that the receiver should be liable to the mortgagor. Take the present case as an example. Suppose that the reason why the Receivers had done nothing to obtain the freely available discounts was that the Midland Bank, the mortgagee, had instructed them not to do so. The proposition that the law should refrain from holding the Receivers liable to the mortgagor because to do so would lead to liability being imposed also on the mortgagee and that that would, in effect, be treating the mortgagee as a mortgagee in possession does not seem to me to make any sense. I agree that, on the supposed facts, if the Receivers were liable to the mortgagor, the mortgagee would be liable too. And why not? If the mortgagee chooses to instruct the Receivers to carry on the business in a manner that is a breach of the Receivers’ duty to the mortgagor, it seems to me quite right that the mortgagee, as well as the Receivers, should incur liability. This conclusion does not in the least undermine the receivership system. What it might do is to promote caution on the part of mortgagees in seeking to direct receivers as to the manner in which they (the receivers) should exercise their powers. I would regard that as salutary.
For these reasons, Mr Smith’s reliance on the history of receiverships as a justifying the exoneration of receivers from any duty to mortgagors other than that of good faith, falls, so far as I am concerned, on stony ground.
Let me now turn to the three authorities on which Mr Smith particularly relied. They were in re B. Johnson & Co (Builders) Ltd [1955] Ch. 635, and Downsview Nominees Ltd -v- First City Corporation [1993] AC 295 and Yorkshire Bank plc -v- Hall [1999] 1 A.E.R. 879).
In re: B. Johnson & Co (Builders) Ltd was a decision of the Court of Appeal. The issue was whether a receiver and manager, who had been appointed under a debenture, was an “officer” of the company for the purposes of section 333(1) of the Companies Act 1948. A second issue, assuming that the receiver/manager was an “officer”, was whether a case of misfeasance had been disclosed. On the first issue the court held that the receiver/manager was not an “officer” for section 333 purposes. The court dealt, also, with the second issue although its finding on the first issue had made that unnecessary.
In dealing with the first issue, Sir Raymond Evershed, Master of the Rolls, emphasised that the receiver/manager “is not managing on the company’s behalf but is managing in order to facilitate the exercise by him, for the mortgagees, of the mortgagees’ power to enforce the security”. It is, I think, important, whenever considering the exercise by receivers of their powers, to bear in mind the point made by the Master of the Rolls. The receivers’ main function is to assist the mortgagee in obtaining payment of the secured debt. The Master of the Rolls commented, also, that:-
“it is elementary that a mortgagee seeking to realise his security has no duty of care to see that there is as much as possible left over for those who are interested in what is called the equity”.
This statement of principle has been qualified, but not invalidated, by Cuckmere Brick Co. Ltd -v- Mutual Finance Ltd [1971] Ch 949, a case to which I will return. On the second point, the Master of the Rolls analysed the pleaded complaints against the receiver/manager as constituting no more than “charges of mere negligence” (p. 852). A case of mere negligence could not, he held, be prosecuted under section 333.
Both Jenkins L.J. and Parker L.J. agreed with the Master of the Rolls that the receiver/manager was not an “officer” for section 333 purposes. Jenkins L.J., in doing so, made remarks about the nature of a receiver/manager’s duty on which Mr Smith relies. After stating that “The primary duty of the receiver is to the debenture holders and not to the company” Jenkins L.J. continued, at p. 662, as follows:-
“But the whole purpose of the receiver and manager’s appointment would obviously be stultified if the company could claim that a receiver and manager owes it any duty comparable to the duty owed to a company by its own directors or managers …
He is under no obligation to carry on the company’s business at the expense of the debenture holders. Therefore he commits no breach of duty to the company by refusing to do so, even though his discontinuance of the business may be detrimental from the company’s point of view. Again, his power of sale is, in effect, that of a mortgagee, and he therefore commits no breach of duty to the company by a bona fide sale, even though he might have obtained a higher price and even though, from the point of view of the company, as distinct from the debenture holders, the terms might be regarded as disadvantageous.
In a word, in the absence of fraud or mala fides (of which there is not the faintest suggestion here), the company cannot complain of any act or omission of the receiver and manager, provided that he does nothing that he is not empowered to do, and omits nothing that he is enjoined to do by the terms of his appointment. If the company conceives that it has any claim against the receiver and manager for breach of some duty owed by him to the company, the issue is not whether the receiver and manager has done or omitted to do anything which it would be wrongful in a manager of a company to do or omit, but whether he has exceeded or abused or wrongfully omitted to use the special powers and discretions vested in him pursuant to the contract of loan constituted by the debenture for the special purpose of enabling the assets comprised in the debenture holders’ security to be preserved and realized. That seems to me to be an issue wholly outside the scope of section 333”.
This was not a reserved judgment and it is important to be clear about the object of Jenkins L.J’s remarks. He was distinguishing the duties of a receiver/manager from those of a director/manager in order to explain why section 333 applied only to the latter. Mr Smith is, however, entitled to point to the sentence commencing “In a word, in the absence of fraud or mala fides …” as supporting his submissions.
Downsview Nominees Ltd -v- First City Corporation was a Privy Council decision on an appeal from the Court of Appeal of New Zealand. The judgment of the Board was given by Lord Templeman. Lord Templeman made clear his view that such duty as a receiver/manager owed to the mortgagor was, like the duty owed by the mortgagee, a duty imposed by equity. It was not a duty in tort. It was not attributable to the application of the Donaghue -v- Stevenson “neighbour” principle. This was important because the first instance judge, Gault J., had held that “the proposition that a receiver will not be liable in negligence so long as he acts honestly and in good faith no longer represents the law of New Zealand: …” and that “a receiver owes a duty to the debenture holders to take reasonable care in dealing with the assets of the company …”, and the Court of Appeal had held that “… if there were any duties on the part of the … receiver to a subsequent debenture holder, they would have to be based in negligence”. Lord Templeman did not disagree that the receiver owed duties to the subsequent debenture holder but insisted that they were duties arising in equity and were not common law duties of care. In the result, Gault J’s monetary award against the receiver and in favour of the subsequent debenture holder was upheld, but placed on a different jurisprudential basis.
Lord Templeman cited with approval the passage from Jenkins L.J’s judgment in In re B. Johnson (Builders) Ltd that I have cited and, at p.315, said this:-
“The general duty of care said to be owed by a mortgagee to subsequent encumbrancers and the mortgagor in negligence is inconsistent with the right of the mortgagee and the duties which the courts applying equitable principles have imposed on the mortgagee. If a mortgagee enters into possession he is liable to account for rent on the basis of wilful default; he must keep mortgage premises in repair; he is liable for waste. Those duties were imposed to ensure that a mortgagee is diligent in discharging his mortgage and returning the property to the mortgagor. If a mortgagee exercises his power of sale in good faith for the purpose of protecting his security, he is not liable to the mortgagor even though he might have obtained a higher price and even though the terms might be regarded as disadvantageous to the mortgagor. Cuckmere Brick Co. Ltd -v- Mutual Finance Ltd . [1971] Ch 949 is Court of Appeal authority for the proposition that, if the mortgagee decides to sell, he must take reasonable care to obtain a proper price but is no authority for any wider proposition. A receiver exercising his power of sale also owes the same specific duties as the mortgagee. But that apart, the general duty of a receiverand manager appointed by a debenture holder, as defined by Jenkins L.J. in In re B. Johnson & Co (Builders) Ltd [1955] Ch. 634, 661, leaves no room for the imposition of a general duty to use reasonable care in dealing with the assets of the company. The duties imposed by equity on a mortgagee and on a receiver and manager would be quite unnecessary if there existed a general duty in negligence to take reasonable care in the exercise of powers and to take reasonable care in dealing with the assets of the mortgagor company”.
As a Privy Council case, Downsview Nominees is not binding but, as Mr Smith submitted, is a persuasive authority of great weight. But what did it decide as to the duties owed by a receiver/managerto a mortgagor? It decided that the duty lies in equity, not in tort. It decided that there is no general duty of care in negligence. It held that the receiver/manager owes the same specific duties when exercising the power of sale as are owed by a mortgagee when exercising the power of sale. Lord Templeman cited with approval the Cuckmere Brick Co. Ltd test, namely, that the mortgagee must take reasonable care to obtain a proper price. So, a receiver/manager when selling must take reasonable care to obtain a proper price. In so deciding, Lord Templeman departed from the proposition to be found in Jenkins L.J’s judgment in Johnson.
In Yorkshire Bank plc -v- Hall Robert Walker L.J., at p. 893 reviewed a mortgagee’s duty to his mortgagor. He referred to China and South Sea Bank Ltd -v- Tan [1990] 1 AC 536, National Bank of Greece -v- Pinios Shipping Co [1990 1 AC 637 and the Downsview Nominees case and then said this:-
“These cases together establish or reaffirm that a mortgagee’s duty to the mortgagor or to a surety depend partly on the express terms on which the transaction was agreed and partly on duties (some general and some particular) which equity imposes for the protection of the mortgagor and the surety. The mortgagee’s duty is not a duty imposed under the tort of negligence, nor are contractual duties to be implied. The general duty (owed both to subsequent incumbrancers and to the mortgagor) is for the mortgagee to use his powers only for proper purposes and to act in good faith … . The specific duties arise if the mortgagee exercises his express or statutory powers … If he exercises his power to take possession, he becomes liable to account on a strict basis (which is why mortgagees and debenture holders operate by appointing receivers whenever they can). If he exercises his power of sale, he must take reasonable care to obtain a proper price”.
These remarks apply, in my view, equally to the exercise by a receiver of a receiver’s powers.
The Cuckmere Brick Co. Ltd test can impose liability on a mortgagee notwithstanding the absence of fraud or mala fides. It follows from Downsview Nominees and Yorkshire Bank -v- Hall that a receiver/manager who sells but fails to take reasonable care to obtain a proper price may incur liability notwithstanding the absence of fraud of mala fides. Why should the approach be any different if what is under review is not the conduct of a sale but conduct in carrying on a business? If a receiver exercises this power, why does not a specific duty, corresponding to the duty to take reasonable steps to obtain a proper price, arise? If the business is being carried on by a mortgagee, the mortgagee will be liable, as a mortgagee in possession, for loss caused by his failure to do so with due diligence. Why should not the receiver/manager, who, as Lord Templeman held, owes the same specific duties as the mortgagee when selling, owe comparable specific duties when conducting the mortgaged business? It may be that the particularly onerous duties constructed by courts of equity for mortgagees in possession would not be appropriate to apply to a receiver. But, no duties at all save a duty of good faith? That does not seem to me to make commercial sense nor, more important, to correspond with the principles expressed in the bulk of the authorities.
In the Cuckmere Brick Co. Ltd case, the Court of Appeal held that a mortgagee when exercising his power of sale owed a duty to the mortgagor “to take reasonable precautions to obtain the true market value of the mortgaged property at the date on which he decides to sell it” (p. 968). This is firmly established now as a duty in equity.
In Tse Kwong Lam -v- Wong Chit Sen [1983] 1 WLR 1349, a Privy Council decision on an appeal from the Court of Appeal of Hong Kong, the Board held that a sale by a mortgagee to a company in which the mortgagee was interested “can only be supported if the mortgagee proves that he took reasonable precautions to obtain the best price reasonably obtainable at the time of sale” (p. 1356). The same, applying what Lord Templeman said in Downsview Nominees about specific duties, would apply to a receiver. This is not consistent with the notion that a receiver owes only a duty of good faith.
In Tomlin -v- Luce 43 Ch. 191, the Court of Appeal held a mortgagee liable to second mortgagees for any loss occasioned by the insertion in auction particulars of a misstatement. Cotton L.J. said that “the first mortgagees are answerable for any loss which was occasioned by the blunder made by the auctioneer at the sale” (p. 194). A receiver in similar circumstances would similarly have been liable.
Knight -v- Lawrence [1991] BCC 411 was a case in which a receiver of mortgaged properties which were tenanted failed to serve on the tenants the notices which were necessary to put in motion rent review procedures. As a result the opportunity to obtain increases in the rent was lost. The mortgagor successfully sued the receiver in negligence. It is, I think, now established that the mortgagor ought to have sued on a duty of care owed in equity rather than on a tortious duty of care. But the distinction is an immaterial one. The extent of the duty of care, whether in equity or at common law, depends on all the circumstances of the case. What standard of conduct in all the circumstances does the law require of the receiver in managing the mortgaged properties? Sir Nicholas Browne-Wilkinson, the then Vice-Chancellor held that the circumstances imposed on the receiver a duty of care in regard to the service of the rent review notices. There can be no doubt but that if a mortgagee in possession had failed to serve the notices he would have been accountable to the mortgagor for the loss caused by the default. Sir Nicholas Browne-Wilkinson said this about the receiver:-
“In my judgment [the receiver] had a total misapprehension about the functions of a receiver. He regarded himself as being there to do what he was told by his appointor …; provided he discharged what they told him to do he had discharged his functions. He was, in his own eyes nothing but a rent collector. That to my mind, is an unhappy misapprehension of the functions of a receiver. … it is one of the first functions of a receiver in a case like this to get solicitors or others to review the position of the rent review clause, and to take such steps as are necessary to ensure that the reviews take place …” (p. 418).
There is, in my judgment, no difficulty whatever in regarding the passage I have cited as expressing correctly the duty imposed by equity on the receiver in the circumstances in which the receiverfound himself. The duty was, in my opinion, owed both to the mortgagee and to the mortgagor. Each had an interest in the value of the mortgaged property being safeguarded by the service of the rent review notices.
McHugh -v- Union Bank of Canada 1913 AC 299 concerned a chattel mortgage of a herd of horses on a ranch about 55 miles from Calgary. The mortgagee bank took possession of the horses and drove them to Calgary for sale. But they were driven so hurriedly, without being allowed sufficient time to feed, that they lost condition and some of them died. On the taking of the mortgage account the mortgagor sought to charge the mortgagee with damages for his negligent want of care of the horses. The trial judge found negligence proved and assessed the damages to be allowed to the mortgagor in the mortgage account. The Privy Council upheld his decision. There was no suggestion of fraud or mala fides. Suppose a receiver had been appointed and the receiver had managed the drive to Calgary in the same way as the mortgagee had done and with the same result. Mr Smith’s submissions would excuse the receiver from any liability for his negligence.
Mr Smith has submitted that to hold a receiver liable to the mortgagor for anything more than a breach of a duty of good faith would require a number of established authorities on the law of mortgages to be torn up and thrown away. He instanced Kennedy -v- de Trafford [1897] A.C. 181. This was a case where the mortgagors were two tenants in common. The mortgagees, in exercise of their power of sale, sold to one of the two. The trustee in bankruptcy of the other tenant in common applied to the court to have the sale set aside. He claimed, alternatively, damages against the mortgages for negligence in the exercise of the power of sale. The report of the case in the House of Lords shows that the trustee’s main complaint was that the purchaser from the mortgagees had been one of the two mortgagor tenants in common. It was argued that this individual stood in a fiduciary relationship to his co-tenant and was disqualified from purchasing. It was argued, also, that the sale had been at an undervalue. The House of Lords dealt with the case peremptorily. Counsel for the respondents was not called on. Judgment was delivered at once. Lord Herschell, in rejecting the argument based on sale at an undervalue said that:-
“… if a mortgagee in exercising his power of sale exercises it in good faith without any intention of dealing unfairly by his mortgagor, it would be very difficult indeed, if not impossible, to establish that he had been guilty of any breach of duty towards the mortgagor. Lindley L.J., in the court below, says that “it is not right or proper or legal for him either fraudulently or wilfully or recklessly to sacrifice the property of the mortgagor”. Well I think that is all covered really by his exercising the power committed to him in good faith. It is very difficult to define exhaustively all that would be included in the words “good faith”, but I think it would be unreasonable to require the mortgagee to do more than exercise his power of sale in that fashion. Of course, if he wilfully and recklessly deals with the property in such a manner that the interests of the mortgagor are sacrificed, I should say that he had not been exercising his power of sale in good faith.
My Lords it is not necessary in this case to give an exhaustive definition of the duties of a mortgagee to a mortgagor, because it appears to me that, if you were to accept the definition of them for which the appellant contends, namely, that the mortgagee is bound to take reasonable precautions in the exercise of his power of sale, as well as to act in good faith, still in this case he did take reasonable precautions”. (p. 185).
The other members of the House agreed.
Mr Smith submits that the Cuckmere Brick Co. case is inconsistent with Lord Herschell’s statements of principle in Kennedy -v- de Trafford . He reserves the right to contend in a higher court that the Cuckmere Brick Co case was wrongly decided. In my judgment, Kennedy -v- de Trafford did not lay down as an inflexible principle that the only duty owed by a mortgagee when selling was a duty of good faith. Lord Herschell’s remarks about the difficulty of proving any breach of duty in a case where no want of good faith could be alleged show that he was leaving open the possibility of a case where, on the facts, that difficulty could be overcome.
Moreover, in my view, it is inappropriate to treat expressions of principle delivered ex tempore by no matter how august a judge as if they were of statutory effect. One of the great virtues of the common law duty of care is its inherent flexibility and its scope for development and adjustment in order to meet the changing requirements of society. Principles of equity, we were all taught, were introduced by Lord Chancellors and their deputies, the Vice-Chancellors sitting in the Chancery Courts, in order to provide relief from the inflexibility of common law rules. The equity of redemption was a Chancery invention, introduced in order to ensure that a conveyance by way of mortgage remained a security for the repayment of money whether or not the date fixed for repayment and re-conveyance had passed. The duties imposed on a mortgagee in possession, and on a mortgagee exercising his powers whether or not in possession, were introduced in order to ensure that a mortgagee dealt fairly and equitably with the mortgagor. The duties of a receiver towards the mortgagor have the same origin. They are duties in equity imposed in order to ensure that a receiver, while discharging his duties to manage the property with a view to repayment of the secured debt, nonetheless in doing so takes account of the interests of the mortgagor and others interested in the mortgaged property. These duties are not inflexible. What a mortgagee or a receiver must do to discharge them depends upon the particular facts of the particular case. A want of good faith or the exercise of powers for an improper motive will always suffice to establish a breach of duty. What else may suffice will depend upon the facts. Tse Kwong Lam -v- Wong Chit Sen is a very good example. The fact that the mortgagee had an interest in the purchasing company placed the mortgagee under an obligation to show that a proper price had been obtained. This was an obligation more onerous than would otherwise have been required. It is true that Lord Herschell in Kennedy -v- de Trafford expressed the duty on the mortgagee in terms much less onerous than the terms in which Salmon L.J. expressed the duty in the Cuckmere Brick Co. case. That does not make the two cases inconsistent with one another. The facts that constituted the mortgagors’ complaints were different. And the duty in equity appropriate to have been owed by a mortgagee selling in 1888 is not necessarily of the same weight as the duty appropriate to have been owed by a mortgagee selling in 1967. Equity is at least as flexible as the common law in adjusting the duties owed so as to make them fit the requirements of the time.
I do not accept that there is any difference between the answer that would be given by the common law to the question what duties are owed by a receiver managing a mortgaged property to those interested in the equity of redemption and the answer that would be given by equity to that question. I do not, for my part, think it matters one jot whether the duty is expressed as a common law duty or as a duty in equity. The result is the same. The origin of the receiver’s duty, like the mortgagee’s duty, lies, however, in equity and we might as well continue to refer to it as a duty in equity.
In my judgment, in principle and on the authorities, the following propositions can be stated:-
(1) A receiver managing mortgaged property owes duties to the mortgagor and anyone else with an interest in the equity of redemption.
(2) The duties include, but are not necessarily confined to, a duty of good faith.
(3) The extent and scope of any duty additional to that of good faith will depend on the facts and circumstances of the particular case.
(4) In exercising his powers of management the primary duty of the receiver is to try and bring about a situation in which interest on the secured debt can be paid and the debt itself re-paid.
(5) Subject to that primary duty, the receiver owes a duty to manage the property with due diligence.
(6) Due diligence does not oblige the receiver to continue to carry on a business on the mortgaged premises previously carried on by the mortgagor.
(7) If the receiver does carry on a business on the mortgaged premises, due diligence requires reasonable steps to be taken in order to try to do so profitably.
In my judgment, Judge McGonigal’s answers to the preliminary issue were, with one or two minor qualifications, in accordance with principle and correct. The minor qualifications are these:-
(i) The judge held that a receiver’s power to manage a business was ancillary to the power of sale. I do not think it is. I would agree that in many cases, a receiver will manage a business in order to bring the mortgaged property to a state in which the business can then be sold as a going concern. But the power to manage is, in my view, independent of the power to sell. A receiver can manage a business for the purpose of generating profits from which the secured debt can be discharged. The management of the business does not have to be ancillary to an intended eventual sale. But I agree that in the management of the business an equitable duty of care is owed.
(ii) I do not think that the concept of good faith should be diluted by treating it as capable of being breached by conduct that is not dishonest or otherwise tainted by bad faith. It is sometimes said that recklessness is equivalent to intent. Shutting one’s eyes deliberately to the consequences of what one is doing may make it impossible to deny an intention to bring about those consequences. Thereapart, however, the concepts of negligence on the one hand and fraud or bad faith on the other ought, in my view, to be kept strictly apart. Equity has not always done so. The equitable doctrine of “fraud on a power” has little, if anything, to do with fraud. Lord Herschell in Kennedy -v- de Trafford gave an explanation of a lack of good faith that would have allowed conduct that was grossly negligent to have qualified notwithstanding that the consequences of the conduct were not intended. In my judgment, the breach of a duty of good faith should, in this area as in all others, require some dishonesty or improper motive, some element of bad faith, to be established.
Finally, although I am not sure that it is strictly an answer to a question posed by the preliminary issue, in my judgment the facts pleaded in the Amended Statement of Claim and Reply would, if proved, and in the absence of any answer pleaded in the Amended Defence other than denial, constitute a breach by the Receivers of the duty they owed in equity to Mr Medforth.
I would dismiss this appeal.
LORD JUSTICE SWINTON THOMAS: I agree with judgment of the Vice-Chancellor.
LORD JUSTICE TUCKEY: I also agree.
Ardmore Studios (Ir.) Ltd. v. Lynch and Others.
[1965] IR 1 McLoughlin J.
This brings me to consider the effect of the appointment of the receiver on the relationship between the Company and the Electrical Trades Union (Ireland). On this aspect it is relevant first to refer to paragraphs 14 and 15 of the deed of mortgage and charge:
“14. The lender may at any time after the mortgage debt shall have become payable appoint by writing under its seal a receiver of the mortgaged property or any part thereof and remove any receiver so appointed and appoint another in his stead and the following provisions shall have effect:
(a) Such receiver shall in the exercise of his power authorities and discretions conform to the directions from time to time given by the lender.
(b) The lender may from time to time fix the remuneration of any such receiver and direct payment thereof out of the mortgaged property.
(c) The receiver shall be the agent of the borrower and the borrower shall be solely responsible for his acts and default and for his remuneration.
15. A receiver so appointed shall have power:
(a) to enter upon take possession of collect and get in the mortgaged property or any part thereof and for that purpose to take possession in the name of the borrower or otherwise as he may deem fit.
(b) To carry on or concur in carrying on the business of the borrower or any part thereof and in particular (without restricting the generality of the foregoing power) to employ and dismiss managers, agents, servants and others upon such terms and with such salaries wages or remuneration as he shall think proper and to pay out of the mortgaged property or the proceeds thereof for materials and machinery and things as he may consider necessary and (with the consent in writing of the lender) to raise money on the mortgaged property or any part thereof in priority to this security.
(c) To sell or concur in selling all or any part of the mortgaged property and to carry any such sale into effect by assuring the same in the name and on behalf of the borrower.
d) To make any arrangement or compromise which he shall consider expedient.
PROVIDED that nothing in this clause shall prejudice the right or power of the lender itself as mortgagees to enter into possession of the mortgaged property or any part thereof or to exercise the power of sale applicable hereto and other mortgagee powers hereby or by the Statute conferred.”
In pursuance of the powers contained in this deed the lender by deed of appointment appointed Mr. Sandys to be receiver and delegated to him the powers set out in para. 2 of the deed of appointment, which reads as follows:
“2. Delegate to the receiver the powers following that is to say:
(a) Power to enter upon take possession of collect and get in the mortgaged property or any part or parts thereof and for that purpose to take proceedings in the name and on behalf of the borrower or otherwise as it may seem expedient.
(b) To carry on or concur in carrying on the business of the borrower or any part thereof and in particular (without restricting the generality of the foregoing powers) to employ and dismiss managers, agents, servants and others upon such terms and with such salaries wages or remuneration as he shall think proper and pay out of the said mortgaged property or the proceedings thereof for materials and machinery and things as he may consider necessary and with the consent in writing of the credit company to raise money on the security of the mortgaged property or any part thereof in priority to the said recited mortgage debenture and deeds of further charge.
(c) To sell or concur in selling the mortgaged property or any part thereof and to carry any such sale or sales into effect on behalf of the borrower or otherwise convey the same to a purchaser.
(d) To make any arrangement or compromise which he shall think expedient in the interests of the credit company.
(e) To do all such other acts and things as may be necessary and expedient in pursuance of the powers conferred on the receiver by law and by the said recited mortgage debenture and deeds of further charge.”
There is also the proviso in the deed of appointment,”Provided always that the receiver shall for all purposes be the agent of the borrower and the borrower alone shall be responsible for his acts and defaults.”
It is also relevant to quote s. 316, sub-s. 2, of the Companies Act, 1963, which is as follows:
“A receiver of the property of a company shall be personally liable on any contract entered into by him in the performance of his functions (whether such contract is entered into by him in the name of such company or in his own name as receiver or otherwise) unless the contract provides that he is not to be personally liable on such contract, and he shall be entitled in respect of that liability to indemnity out of the assets; but nothing in this sub-section shall be taken as limiting any right to indemnity which he would have apart from this sub-section, or as limiting his liability on contracts entered into without authority or as conferring any right to indemnity in respect of that liability.”
This sub-section is similar to sub.-s. 2 of s. 369 of the English Companies Act, 1948, as to the effect of which I have been referred to Palmer’s Company Precedents (16th ed., 1952, Part 3), at p. 19:”It is usual to provide that the receiver shall be the agent of the company so as to prevent him being held to be the agent of the debenture holders or being personably liable on contracts entered into by him. Sect. 369 (2), however, now provides that he is to be personably liable to the same extent as if he had been appointed by the Court, on any contract entered into by him in the performance of his functions, ‘except in so far as the contract otherwise provides.'”
Now as of the date of his appointment, the 1st October, 1963, the receiver went into possession of the mortgaged property and took over the management of the business of the Company in exercise of the powers of the lender under the deed of mortgage delegated to him by the deed of appointment, and advertised the mortgaged property for sale.
In the course of the argument I have been referred to many cases as to the effect of the appointment of a receiver for debenture holders but I do not find it necessary to refer to all of them. I obtained most assistance in dealing with this branch of the case from those which I shall now refer to and I shall quote from the reports.
In re B. Johnson & Co. (Builders) (1) is not directly in point on the issue whether or not the receiver is bound or not by the alleged seniority list agreement, but many of the views expressed by the distinguished judges who constituted the Court of Appeal in that case are certainly helpful. At page 644 Evershed M.R., after stating some of the powers given to the receiver under the debenture, which are similar to those in this case, continued:”The situation of someone appointed by a mortgagee or a debenture holder to be a receiver and manager as it is said, ‘out of Court’is familiar. It has long been recognised and established that receivers and managers so appointed are, by the effect of the statute law, or the terms of the debenture, or both, treated, while in possession of the
company’s assets and exercising the various powers conferred upon them, as agents of the company, in order that they may be able to deal effectively with third parties. But, in such a case as the present at any rate, it is quite plain that a person appointed as receiver and manager is concerned, not for the benefit of the company but for the benefit of the mortgagee bank, to realise the security; that is the whole purpose of his appointment, and the powers which are conferred upon him, and which I have to some extent recited, are . . . really ancillary to the main purpose of the appointment, which is the realisation by the mortgagee of the security (in this case, as commonly) by the sale of the assets.
All that is perhaps elementary; but it bears upon what I shall have to say as regards the charges made against the receiver; for it appears to me inevitably to negative the proposition that a person appointed, as Mr. Aizlewood was appointed, owes some duty to the company to carry on the business of the company and to preserve its goodwill.”
Jenkins L.J., in the course of his judgment, says (for the sake of brevity I begin the quotation in the middle of a paragraph, at p. 661):”. . . whereas a receiver and manager for debenture holders is a person appointed by the debenture holders to whom the company has given powers of management pursuant to the contract of loan constituted by the debenture, and, as a condition of obtaining the loan, to enable him to preserve and realise the assets comprised in the security for the benefit of the debenture holders. The company gets the loan on terms that the lenders shall be entitled, for the purpose of making their security effective, to appoint a receiver with powers of sale and of management pending sale, and with full discretion as to the exercise and mode of exercising those powers. The primary duty of the receiver is to the debenture holders and not to the company.”
Finally, Parker L.J., at p. 664, says:”What, however, in my judgment, is decisive of the case is that any work of management done by a receiver is not done as manager of the company. The powers of management are ancillary to his position as receiver, and, in exercising those powers, he is not acting as manager of the company but as manager of the whole or part of the property of the company.”
This case, of course, is not an authority binding on me, but the views expressed in it are very persuasive and deserving of respectful consideration.
Another up-to-date English case, Robbie & Co. v. Witney Warehouse Co. (1) is not directly in point, but, in effect, seems to support the contention that a receiver appointed by debenture holders is not bound by a contract made by the company before his appointment.
During the course of the argument I was referred to many other English casesno Irish cases were cited to me on this branch of the casebut I did not get much assistance from them, many of them being liquidation and winding up cases and cases where the receiver was appointed by the Court and subject to control as an officer of the Court.
The defendants’ argument put most reliance on the clause in the debenture deed that the receiver is made the agent of the Company, but it should be pointed out that this does not make him the servant of the Company, the same clause number 14 (c) of the debenture deedalso provides that the receiver shall in the exercise of the powers authorities and discretions conform to the directions from time to time given by the debenture holder. As agent for the Company, the Company is made fully responsible for his acts but it is not a corollary to this that he is bound by all Company contracts and agreements entered into by the Company before the date of his appointment.
The mortgaged property of which the receiver entered into possession as defined by the deed includes also the property charged and assigned, i.e., all the undertaking and assets, machinery, book debts and goodwill; the argument of the defendants amounts to this: that he also took over, by operation of law, the obligations of the Company under the alleged agreement by the Company to employ the Union’s electricians on the production of films in the studio. In as much as I find that it was the Union’s insistence on this agreement that gave rise to the circumstances leading to the debenture holders putting in a receiver over all the Company’s property and assets, this would seem to lead to an absurdity. I have no hesitation in holding that there is no legal basis for their contention that the agreement as to the seniority list, even if it existed as an agreement on the date of the appointment of the receiver, became binding on him.
The last line of defence of the defendants is this: it is argued for them that, even if the agreement was not binding on the receiver the defendants bona fide believed it to be so binding and had reasonable grounds for so believing. Now it is quite clear in this case that there was no contact between the receiver and the Union or its members until at the end of May of this year. The Union tried to raise a dispute; the receiver had never employed any of the Union’s electricians or sought to employ them; the dispute the Union sought to raise was based on a contention that the seniority list was binding on the receiver and that it was his breach of that agreement which entitled the Union to put a picket on the premises at Ardmore. This is evidenced by the correspondence which took place between the parties at the end of May and beginning of June, which I have already read.
The Union was entirely misconceived in stating that the seniority list was endorsed in the High Court and, as I have already stated, I cannot see how anybody could reasonably believe that the Company could be held to agree to carry on on the basis of the seniority list after the conference that was held in the Department of Industry and Commerce in September, 1963. All the more so, it must be said, that no person could reasonably believe that the receiver could be bound by such agreement.
It may be that the Union executive was wrongly advised on the law. If that was so, it is not, in my opinion, sufficient to raise a justifiable trade dispute and the burden for their mistake must fall on the Union and its members, not on the receiver for the debenture holders.
In the result, I find that the plaintiff Company in this action, brought at the instance of the receiver in the name of the Company, is entitled to the relief claimed.
Cognotec Ltd (in recievership) -v- Companies Acts
[2010] IEHC 309
McGovern J.
The law
9. Section 60(14) provides:
“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.”
There was no disagreement between the parties as to what kind of notice was required, namely, actual notice. The case of Bank of Ireland Finance Ltd. v. Rockfield Ltd. [1979] 21, involved the loan of money by the plaintiff to two individuals for the purchase of lands on the understanding that the property would be conveyed by them to a company called Rockfield Limited. Unknown to the plaintiff, the defendant company was the owner of the property and that fact was recorded on the Folio in the Register of Freeholders in County Wicklow. Prior to advancing the money, the plaintiff did not make any enquiries about the ownership of the property and had not seen either the Folio or the Certificate of Title. The two individuals concerned used the money to buy the issued shares in the defendant company and, thus, obtain control over it. It was, therefore, an act coming within the ambit of s. 60(1) of the Companies Act 1963. The bank had taken security for the loan, which, it transpired, was for the purchase of shares in the company. The Supreme Court held that “notice” within the meaning of s. 60(14) meant actual notice and not constructive notice. Kenny J. stated, at p. 36:
“This is the first case, as far as I know, in which the meaning of sub-s. 14 of s. 60 has been considered by any court in this country. The onus of proving that the money was advanced for the purchase of shares in the defendant company lies on the person who alleges this. The plaintiffs do not have to prove that they had no notice of facts which constituted a breach of section 60. What has to be established is that the plaintiffs had notice, when lending the money, that it was to be used for the purchase of shares in the defendant company. The fact which constituted such breach in this case was the application of £150,000 to the purchase of the shares in the defendant company. As the purchase followed the loan, the defendants must establish that the plaintiffs knew, at the time when they made the loan, that it was to be applied for this purpose. If they got notice of this, subsequently, that is irrelevant.
The notice referred to in sub-s. 14 of s. 60 is actual notice and not constructive notice. As there has been considerable confusion as to the meaning of the terms ‘actual notice’ and ‘imputed notice’ and ‘constructive notice’ – a confusion which has been pointed out by many judges and text-book writers – I wish to say that I use the term ‘actual notice’ as meaning, in this case, that the plaintiff bank, or any of its officials, had been informed, either verbally or in writing, that part of the advance was to be applied in the purchase of shares in the defendant company, or that they knew facts from which they must have inferred that part of the advance was to be applied for this purpose.”
10. In Lombard and Ulster Banking Ltd. v. Bank of Ireland and Brook House School (Unreported, High Court, 2nd June, 1997), there was further judicial analysis of the meaning of s. 60(14) of the Act, by Costello J. In that case, the company sought to avail of the validation procedure under the section, but there were a number of procedural defects in the manner in which this was done. The company agreed to give the bank a guarantee and charge as security for a loan to buy shares in the company. The bank had incorrectly been told that the validation procedure had been complied with when this was not so. Costello J. stated, at p. 10 of the judgment:
“What [s. 60(14)] means is (a) that although a transaction in breach of the section is illegal, it is only ‘voidable’ not void, and (b) it is only voidable against a person who had notice of the facts which constituted the breach.
There are three issues arising on the ‘notice’ point in this case. Firstly, the liquidator has argued that the phrase ‘transaction in breach of the section’ means the carrying out of a transaction prohibited by s.(1) and that as Lombard and Ulster knew that the transaction was prohibited by sub-section (1), it had sufficient ‘notice’ for the purposes of sub-section (14) to enable the company to avoid the transaction. I do not think that that can be correct. The sub-section does not permit the avoidance of a transaction which is ‘in breach of sub-section (1) of this section’, but ‘any transaction in breach of this section’. And so, if a lender knows that an attempt to validate a prohibited transaction and avoid breaching the section by adopting the procedures set out in sub-sections (2), (3) and (4) is to be made, I do not think that he has notice of any breach within the meaning of the sub-section unless it can be shown (a) that there was, in fact, non-compliance with the sub-sections and (b) that he knew of the facts which resulted in non-compliance.
Secondly, as to the onus of proof, if, as has happened in this case, a defendant puts in issue the validity of a transaction prohibited by s. 60, the onus is on the plaintiff to establish his case. However, if he fails to establish the validity of a transaction, it does not follow that his claim on foot of a Deed which is part of the transaction and is otherwise valid, fails – the transaction is merely a voidable one. And it seems to me that the onus is then on the company which seeks to avoid it to show that the plaintiff had ‘notice’ as required by sub-section (14). This means that in this case, the liquidator must establish, as a matter of probability, that Lombard and Ulster had ‘notice’ that there was non-compliance with the provisions of sub-sections (2), (3) and (4). If he cannot do so, the deed of charge is enforceable.
Thirdly, as to the nature of the ‘notice’, it is not sufficient for the liquidator to show that if Lombard and Ulster had made proper enquiries, that they would have ascertained that the company had failed to comply with the sub-section. It must be shown that Lombard and Ulster had ‘actual notice’ of the facts which constituted the breach, that is, (a) that they or their officials actually knew that the required procedures were not adopted, or that they knew facts from which they must have inferred that the company had failed to adopt the required procedures, or (b) that an agent of theirs actually knew of the failure or knew facts from which he must have inferred that a failure had occurred (see; Bank of Ireland v. Rockfield Ltd. [1979] I.R. 21, 37). ‘Constructive notice’ of the failure is not sufficient for sub-section (14).”
11. The Lombard and Ulster case has a direct relevance to the issues before me because it is quite clear that all the parties to the agreement to provide financial assistance knew that it was for the purchase of shares in the Company and therefore, prima facie, unlawful, unless a permitted validation under the section could be effected.
12. A significant plank in the Company’s submission in seeking to void the transaction is that the Bank knew that the provision of finance was an illegal transaction as it was to enable the Company to purchase its own shares. I do not accept that submission because the test is not whether the Bank knew the transaction was in breach of s. 60(1), but whether it was a transaction in breach of the entire section. A similar argument was made in the Lombard and Ulster case and was rejected by Costello J. who stated that sub-section 14 referred to “ . . . any transaction in breach of this section . . .” and not the voidance of a transaction which is “in breach of sub-section (1)”. There is no ambiguity in the words of the section and I entirely agree with the views expressed by Costello J. and would adopt them. In the case of Bank of Ireland v. Rockfield Ltd., the issue was whether or not the bank knew that the transaction was one involving s. 60(1), but that is not the issue here.
13. From the decisions referred to above, three principles emerge:-
(i) The onus of establishing that a person is on notice of a breach of s. 60 lies on the person asserting it.
(ii) The notice required to be established is actual notice not constructive notice.
(iii) The party asserting that a person is affected by actual notice must establish that they had such notice (of the relevant breach) prior to or simultaneously with the transaction sought to be impugned – and not thereafter.
14. On 7th March, 2006, US$10m was drawn down and the debenture was created on the same date. On this date, the directors also swore the necessary statutory declaration. The balance of the facility which was US$2,500,000 was drawn down on 18th July, 2006. As I have already stated, this was not for the purchase of the Company’s shares. A copy of the statutory declaration should have been furnished to the Registrar of Companies for Registration within twenty-one days from the date on which financial assistance was given (7th March, 2006). This was to comply with s. 60, sub-section (2)(b). Messrs. McCann Fitzgerald, solicitors for the Company, had undertaken to deliver the statutory declaration to the Companies Registration Office but for reasons which are unexplained, this was not done in time. The Bank only became aware of the late filing of the statutory declaration in October 2007 when conducting a review of its security.
15. On 19th March, 2010, the directors of the Company purported to hold a board meeting in Jerusalem, Israel, to void the security in accordance with the provisions of section 60(14). The circumstances surrounding the meeting were unusual. There were three directors of the Company, namely, Mr. Brian MacCaba, Mr. John Byrne and Ms. Hilary Guiney. Evidence was given on affidavit that Ms. Guiney and Mr. MacCaba attended the meeting at Mr. MacCaba’s home in Jerusalem and that the third named director, Mr. Byrne, joined the meeting by telephone from London. The evidence concerning the meeting was, to say the least, unsatisfactory and incomplete.
16. The question of an alleged breach of the statutory validation procedures under s. 60 was first raised by Syndicated Investments (“Syndicated”) which is a shareholder in the Company and was one of the purchasing shareholders of its Softbank shares. Subsequent to the appointment of the receiver, Syndicated made a number of claims in respect of the Company. It alleged that it had a first fixed charge over the Company’s Intellectual Property in priority to that of the Bank. Secondly, it alleged that it was the owner of the Company’s Intellectual Property. In order to deal with these assertions, the receiver instituted proceedings against Syndicated [2010 No. 1125 P] and also against the directors of the Company [2010 No. 73 COS]. A default judgment was entered in the proceedings against Syndicated. In the course of the hearing of this present application, counsel for the receiver sought to impugn the motives of the directors of the Company and Syndicated in seeking to void the transaction which is the subject matter of this dispute. They raised issues which would be of serious concern if they were established in evidence. Issues concerning the validity of the board meeting in Jerusalem were also raised. Mr. Sreenan S.C. for the receiver, relied on the case of United Dominions Trust (Ireland) Ltd. [1993] I.R. 412. In that case, Keane J. stated at p. 416:
“It is clear that when a receiver is appointed by a debenture holder under the powers in that behalf in the debenture, the powers vested by law in the directors of the company are not thereby terminated. They may not, however, be exercised in such a manner as to inhibit the receiver in dealing with and disposing of the assets charged by the debenture or in a manner which would adversely affect the position of the debenture holder by threatening or imperilling the assets which are subject to the charge. Subject to that important qualification, the powers vested in law in the directors remain exercisable by them and include the power to maintain and institute proceedings in the name of the company where, so to do, would be in the interests of the company or its creditors.”
Counsel for the receiver argued that the directors did not have the power to convene a board meeting to void the security, having regard to the fact that they had already taken the necessary steps to validate the procedure at an earlier date, and that there was no evidence that they could show that the interests of the Company or its creditors would be served by such action. In fact, he pointed out that they might be liable for criminal sanctions under the terms of the section, if they were to void the security, because they would then be acting in breach of the provisions of s. 60 as provided for in sub-section 15.
17. Before adjudicating on these matters, it is necessary to determine whether or not the Bank had actual notice of the fact which constituted a breach of s. 60 in this case, which was the late delivery of a copy of the statutory declaration to the Registrar of Companies for Registration. If the Company did not have notice of that breach, then the transaction was not voidable at the incidence of the Company and any purported decision made at the board meeting in Jerusalem on 19th March, 2010, would have no effect in that regard.
Conclusions
18. I accept the evidence offered on behalf of the Bank in this case that they did not have actual notice of the breach. Any failure to deliver the statutory declaration for registration within the time allowed only taints the validation procedure and becomes relevant if the Bank had actual notice. Although I was referred to the decision In Re N.L. Electrical Ltd., Ghosh and Another v. 3i plc. [1994] 1 B.C.L.C 22, which dealt with the consequences of failing to deliver the particulars to the Companies Registration Office, it is not necessary to consider its application in this jurisdiction in circumstances where the Bank did not have notice of the failure to deliver the declaration for registration. Nor do I have to construe sub-section 14 to determine whether it could have been the intention of the legislature that a failure to deliver the declaration for registration would have the effect contended for by the Company.
19. I give the following directions on the motion brought, pursuant to s. 316 of the Companies Act 1963:
(a) The debenture dated 7th March, 2006, created by the Company in favour of Barclays Bank Ireland plc. is a valid debenture;
(b) the appointment of Mr. Kieran Wallace, pursuant to the debenture, is valid;
(c) the debenture, the appointment of Kieran Wallace as receiver of the Company and the Bank’s interest as mortgagee and chargee of any property comprised in the debenture are not invalidated by any breach of s. 60 of the Companies Act 1963;
(d) the decision of the board meeting in Jerusalem on 19th March, 2010, purporting to void the security is null and void and shall not affect the debenture of 7th March, 2006, held by the Bank and the Company is estopped from voiding the debenture, pursuant to s. 60(1) of the Companies Act 1963;
(e) Mr. Kieran Wallace, as receiver of the Company, is entitled to pay to the Bank the proceeds of the sale of any property sold or otherwise realised by him on foot of and in accordance with the terms of the debenture.
In the matter of J.D. Brian Ltd (in Liquidation) t/a East Coast Print and Publicity
[2015] IESC 62
Supreme Court
Clarke J., Laffoy J., Charleton J.
Judgment by:
Laffoy J.
Statutory provisions
13. Section 285 of the Act of 1963, which is in Part VI of the Act of 1963 and applies to every mode of winding up, concerns the treatment of preferential payments in a winding up. Subs (1) defines “the relevant date”, by reference to which the cut-off point in relation to periods of time over which various preferential debts are given priority is identified. Sub-paragraph (i) of subs. (1), which is relevant to the circumstances here, provides that the relevant date means –
“where the company is ordered to be wound up compulsorily, the date of the appointment (or first appointment) of a provisional liquidator or, if no such appointment was made, the date of the winding-up order, unless in either case the company had commenced to be wound up voluntarily before that date.”
This Court was informed that the Liquidator was appointed as provisional liquidator on the day the petition to wind up was presented in the High Court. Therefore, the relevant date in this case is 13th November, 2009, the date of the appointment of the provisional liquidator. Sub-section (2) lists the debts which in a winding up shall be paid in priority to all other debts. To take an example in which the Revenue Commissioners would have an interest, subs. (2)(a)(ii) covers –
“all assessed taxes, including income tax and corporation profits tax, assessed on the company up to 5th April next before the relevant date and not exceeding in the whole one year’s assessment;”
The succeeding subss. (3) to (6) elaborate on the quantification of debts which have priority.
14. Subs. (7) of s. 285 provides:
“The foregoing debts shall –
(a) rank equally among themselves and be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions; and
(b) so far as the assets of the company available for payment of general creditors are insufficient to meet them, have priority over the claims of holders of debentures under any floating charge created by the company, and be paid accordingly out of any property comprised in or subject to that charge.”
While “debenture” is defined in the definitions section of the Act of 1963, s. 2, the expression “floating charge” is not defined. In section 2, which sets out general provisions as to interpretation, unless the context otherwise requires, “debenture” is defined as including –
“. . . debenture stock, bonds and any other securities of a company whether constituting a charge on the assets of the company or not”.
That definition, in my view, is not of any assistance in properly construing s. 285(7)(b).
15. Section 98 of the Act of 1963, while having no direct application to the facts of this case, is of some materiality because it applies the provisions of s. 285 to circumstances where a receiver is appointed under a floating charge and, in other jurisdictions, its counterpart has been considered in the context of considering issues similar to the issues which arise on this appeal. Subs. (1) of s. 98 provides:
“Where either a receiver is appointed on behalf of the holders of any debentures of a company secured by a floating charge, or possession is taken by or on behalf of those debenture holders of any property comprised in or subject to the charge, then, if the company is not at the time in course of being wound up, the debts which in every winding up are, under the provisions of Part VI relating to preferential payments to be paid in priority to all other debts, shall be paid out of any assets coming to the hands of the receiver or other person taking possession as aforesaid in priority to any claim for principal or interest in respect of the debentures.”
For the purposes of the application of s. 285 to the appointment of a receiver, it is provided in subs. (3) that periods of time shall be reckoned from the date of the appointment of the receiver.
16. Section 99 of the Act of 1963, which deals with the registration of charges created by companies, is only of peripheral materiality to the issues on this appeal, although it is worth noting that, while it applies to “a floating charge on the undertaking or property of the company” (subs. (2)(f)), it does not apply to the coming into being of a fixed charge on the conversion of a floating charge to a fixed charge.
17. As the authorities referred to later disclose, a new definition of “floating charge” was introduced by legislation in the United Kingdom in 1985 and 1986 and in New South Wales in 1971. There is no definition of floating charge in the Companies Act 2014 (the Act of 2014), most of the provisions of which came into operation on 1st June, 2015.
The process in and outcome of the High Court proceedings in outline
18. Having heard the Liquidator’s application in the High Court, the trial judge (Finlay Geoghegan J.) delivered judgment on 25th March, 2011 (the First Judgment). In the First Judgment, she addressed the proper construction of s. 285(7) of the Act of 1963. She stated (at para. 19):
“If there were no relevant judicial authority on the construction of s. 285(7) or a predecessor or similar section in the UK Companies Acts, I would have no hesitation in construing the section as giving priority to preferential debts over the claims of holders of debentures under floating charges which crystallise prior to the commencement of winding up. Further, I would construe the section as meaning that the preferential debts were entitled to be paid out of the realisation of assets subject to a floating charge in the Debenture, notwithstanding that such floating charge crystallised prior to the commencement of winding up.”
She then set out her reasons for so construing the section, in accordance with the ordinary and plain meaning of the words used, including the definition of debenture in s. 2 of the Act of 1963, in paras. 20 to 22 inclusive of the judgment. The reasons set out will be outlined later in addressing the issue of the construction of s. 285(7).
19. However, the trial judge recorded that there are relevant authorities from other jurisdictions upon which counsel for the Liquidator had relied in the High Court. Having conducted a comprehensive analysis of the relevant authorities relied on by the Liquidator she made it clear that she did not find the reasoning in the relevant authorities persuasive. Further, having stated that she concluded that s. 285(7) is not ambiguous in the meaning of s. 5 of the Interpretation Act 2005, so that it was not necessary to consider further its construction in accordance with the provisions of that Act, she stated (at para. 41):
“Accordingly, in my judgment the proper meaning of s. 285(7) is that the preferential debts rank in priority to the claim of the Bank, as debenture holder, to the funds realised from the assets subject to the floating charge pursuant to clause 5 of the Debenture, irrespective of whether the floating charge crystallised prior to the commencement of winding up.”
Later (at para. 65) she stated that the issue as to the effect of the Crystallisation Notice did not have to be resolved on the application by reason of her conclusion on the construction of s. 285(7) and she left it for future resolution, if that should become necessary.
20. Subsequent to the delivery of the First Judgment, the Liquidator, supported by the Bank, indicated that he had instructions to appeal to this Court the conclusion of the High Court on the construction of s. 285(7) and he sought a determination of the outstanding issue in order that all the relevant issues could be before this Court on the appeal. The Revenue Commissioners did not object to that approach. Having heard further submissions from all of the parties, the trial judge delivered a supplementary judgment on 11th July, 2011 (the Second Judgment). Both the First Judgment and the Second Judgment are reported in [2011] 3 IR 244.
21. In the Second Judgment (at para. 6), the trial judge explained the approach which the parties had agreed to as follows:
“. . . it was agreed by reason of the issue which had to be determined by the court i.e. the effect of the service of a notice pursuant to clause 10 of the Debenture in accordance with the proper construction of the Debenture and the requirement following the decision in In Re Wogan’s (Drogheda) Ltd. [1993] 1 I.R. 157, that such issue must be determined by construction of the terms of the Debenture and not any subsequent action by either party . . .”
It is appropriate to record that, in dealing with that issue, the trial judge stated (at para. 7) that she proposed referring to the debenture given by the second named company in the title hereof (J.D. Brian Motors Ltd.) and she recorded that it was agreed that, having regard to the business of the Company at the time of the creation of the Debenture, i.e. a motor business including buying and selling cars, and having regard to the terms of Clauses 4 and 5 of the Debenture, the property of the Company subject to the floating charge principally included stock-in-trade, cash-at-bank and other book debts.
22. Having analysed the provisions of the Debenture in the context of the proper approach to the construction of commercial contracts, for reasons set out in the Second Judgment, which will be considered later, the trial judge concluded (at para. 20) that, on a proper construction of the Debenture, the service of the Crystallisation Notice pursuant to Clause 10 of the Debenture, did not have “the effect of converting the property subject to the floating charge created by the Debenture into a first fixed charge over such property”.
23. The order of the High Court (Finlay Geoghegan J.) was dated 18th July, 2011 and it contained the following declarations:
“. . . pursuant to section 285(7) of the [Act of 1963] that the preferential debts of the Companies rank in priority to the claims of [the Bank] as debenture holder to the funds realised from the assets subject to the floating charges pursuant to Clause 5 of the Debentures irrespective of whether said floating charges were converted into fixed charges prior to the commencement of the winding up of the Companies
AND . . . that the service of notice by [the Bank] pursuant to the provisions of said Debentures did not have the effect of converting said floating charges into first fixed charges over the property.”
The appeal
24. The Liquidator is the appellant on the appeal. He has sought orders setting aside both of the declarations made by the High Court quoted above. The grounds of appeal are unusually succinct and to the point and, in essence, assert that the trial judge erred in law and in fact and/or in a mixed question of law and fact in making the findings embodied in the two declarations in the order dated 18th July, 2011 as to –
(a) the construction of s. 285(7) and
(b) the effect of each of the Crystallisation Notices dated 28th October, 2009,
and, further, in failing to hold that, as a result of the valid crystallisation of the floating charge in each Debenture prior to the winding up of the Company, s. 285(7) does not apply and that the preferential debts owed by the Company do not rank in priority to the claims of the Bank.
25. The Revenue Commissioners were, in reality, the respondents on the appeal. The Bank was also represented and made submissions and, in the main, adopted the approach of the Liquidator.
26. In addressing the issues which arise on the appeal, it seems to me logical to consider, first, whether the service by the Bank of the Crystallisation Notice on the Company had the effect of converting what was a floating charge in the Debenture into a fixed charge, so that no floating charge existed at the commencement of the winding up. Whether or not the service of the Crystallisation Notice had that effect, having regard to the finding of the trial judge on the construction of s. 285(7), it will be necessary to consider, secondly, whether, on the proper construction of that provision, the preferential creditors have priority over the claims of the Bank under what had been the floating charge in the Debenture before its conversion.
Effect, if any, of Crystallisation Notice: discussion
The judgments of the High Court
27. In the First Judgment (at para. 45) the trial judge identified two separate issues which needed to be addressed:
(i) whether, as a matter of principle, Irish law recognises that a chargee may, pursuant to an express contractual term, validly effect crystallisation by or on the occurrence of an expressly specified “non-traditional event” (meaning an event other than a business cessation event, such as a winding up, or a chargee intervention event, such as the appointment of a receiver), and thereby cause the floating charge to become fixed on all or specified assets; and
(ii) if, as a matter of principle, the chargee may do so, whether, on the facts, the service by the Bank of the Crystallisation Notice was effective to crystallise the floating charge created by the Debenture such that it then became a fixed charge on all the property which had been the subject of the floating charge.
28. On issue (i), the trial judge stated (at para. 56) of the First Judgment that she was of the view that there is no rule of law which precludes parties to a debenture creating a floating charge agreeing, as a matter of contract, that the floating charge will crystallise upon the happening of an event or a particular step taken by the chargee. That conclusion, with which I agree, is not disputed by any of the parties to the appeal. She then pointed out that whether the parties actually achieved their intention is a separate issue and she went on to consider that issue by reference to the decision of this Court in In re Keenan Bros. Ltd. [1985] I.R. 401 (Keenan Bros.), although emphasising that the issue here is not whether the charge as created by the Debenture was a fixed or a floating charge, but rather the effect of the service of the Crystallisation Notice pursuant to Clause 10 of the Debenture. She then summarised the task for the Court as follows (at para. 63):
“If the service of the notice, pursuant to Clause 10, in reality had the effect of converting the floating charge over the book debts and stock in trade of the Companies into a first fixed charge on such assets, then it must also have effected an equitable assignment of such assets to the Bank. As a consequence, the Companies would have lost the ability to deal in or dispose of those assets, save to the extent permitted by the Bank. The Court appears obliged, in accordance with the judgments in In Re Keenan Brothers, to determine whether, in reality, such was the effect of the service of the notice, pursuant to Clause 10 having regard to the other provisions of the Debenture and the notice served.”
29. As has been recorded above, in the First Judgment the trial judge left for future resolution that issue, given that it was not necessary to resolve it having regard to her conclusion on the construction of s. 285(7).
30. In the Second Judgment the trial judge quoted paras. 57 to 65 of the First Judgment, including the analysis of the decision of this Court in Keenan Bros. It is clear from the Second Judgment that there was a degree of consensus between the parties as to the approach to be adopted, as has already been recorded. In particular, it was recorded (at para. 8) that there was agreement that, if the effect of the Crystallisation Notice was to convert the floating charge into a fixed charge, then, as a matter of law, the Company was no longer thereafter entitled to deal with any of its stock, cash-at-bank or book debts without the consent of the Bank, which meant that the Company could no longer carry on its normal trade.
31. Moreover, there was no dispute as to the general principles which apply to the construction of an agreement between the parties which would include a debenture, reference being made to the decision of this Court in Analog Devices B.V. v Zurich Insurance [2005] 1 IR 274. However, by reference to the decision of the Privy Council in Agnew v. Commissioner of Inland Revenue [2001] 2 AC 710 (Agnew), the approach to determining whether or not a charge created by a debenture was or was not a fixed charge was stated to be a two-stage process, the first stage being to construe the debenture and seek to gather the intentions of the parties from the language they used, that is to say, to ascertain the nature of the rights and obligations which they intended to grant each other in respect of the charged assets. Thereafter, it was open to the Court to embark on the second stage of the process, categorisation, which is a matter of law and does not depend on the intention of the parties. The final sentence in the passage from the decision of the Privy Council quoted stated:
“If their intention, properly gathered from the language of the instrument, is to grant the company rights in respect of the charge assets which are inconsistent with the nature of a fixed charge, then the charge cannot be a fixed charge however they may have chosen to describe it.”
I agree with the observation of the trial judge that the approach of the Privy Council appears to be identical to that of Henchy J. and McCarthy J. in this Court in Keenan Bros.
32. The trial judge considered it appropriate to adopt a similar approach to determining whether the effect of the service of the Crystallisation Notice pursuant to Clause 10 of the Debenture was to convert the floating charge over the stock-in-trade, cash-at-bank and books debts into a fixed charge over such property, the first step being to construe the Debenture to ascertain the intention of the parties as to the rights and obligations granted to or imposed on each other in relation to the property the subject of the floating charge after service of such notice and the second stage being to determine whether such rights and obligations are consistent with the charge being a fixed charge.
33. The trial judge accepted as correct a submission made on behalf of the Liquidator and the Bank that the Court should have regard, when construing Clause 10 of the Debenture, to the fact that a notice may only be served by the Bank where the Bank considers the relevant property to be “in jeopardy”. However, she rejected the submission on behalf of the Liquidator and the Bank that the Court should construe Clause 10, by reason of the fact that it refers to the conversion of the floating charge into first fixed charge, as including, by necessary implication, a restriction on the Company thereafter from dealing or disposing of any of the assets the subject of the Crystallisation Notice without the consent of the Bank, the trial judge citing a passage from the speech of Lord Scott in Re Spectrum Plus Limited [2005] 2 AC 680 (Spectrum Plus), which will be quoted later, and suggesting that the submission “put the cart before the horse”. Having observed that the Debenture is silent as to any rights of the Bank or obligations of the Company in relation to the property the subject of the floating charge after service of the Crystallisation Notice, she stated (at para. 16) that there is nothing in the Debenture which restricts the entitlement of the Company to deal with or dispose of its stock-in-trade or to use the proceeds of its book debts or cash-at-bank specifically following the service of such notice.
34. The trial judge attached some significance to Clause 8 of the Debenture, insofar as it sets out obligations on the Company “at all times during the continuance of this security”. Referring to the obligations expressly set out in para. (a) that the Company shall “carry on and conduct its business in a proper efficient manner”, she found that such a continuing obligation was inconsistent with the existence of a fixed charge over its stock-in-trade, cash-at-bank and books debts. In relation to para. (k) of Clause 8, which is quoted above, the trial judge concluded that it was confined to property charged by the Debenture as a specific charge. The inclusion of restriction in relation to specifically charged property she considered “underscores the absence of any similar provision restricting sale or other disposal of property subject to the floating charge after the service of a notice, pursuant to Clause 10 of the Debenture and hence the absence of any such intention on the part of the parties expressed in the Debenture”.
35. On the foregoing basis, the trial judge concluded (at para. 19) that, as a matter of construction, “there is no intention expressed in the Debenture that the Company should after the service of the Crystallisation Notice be restricted in its use of the property subject to that notice, other than pursuant to Clause 8”. Therefore, she concluded that the Company continued to be entitled to use such property for the proper carrying on and conduct of its business, including selling stock-in-trade and making payments from cash-at-bank and realised book debts, without the necessity of obtaining the consent of the Bank for sale or other disposal. That entitlement she found to be inconsistent with the existence of a first fixed charge over the stock-in-trade, cash-at-bank and book debts in favour of the Bank. Accordingly, she found that the service of the Crystallisation Notice did not have the effect of converting the property the subject of the floating charge into a first fixed charge over such property.
36. Before considering the bases on which counsel for the Liquidator and the Bank dispute the correctness of those findings, it is convenient to consider the main authorities which were addressed on this point.
Authorities
37. The issue in Keenan Bros. arose on an application under s. 280 of the Act of 1963 by the liquidator of that company, which was being wound up by the Court. At a time when it was in serious financial difficulties, the company had executed a charge in favour of Allied Irish Banks Limited and created a debenture in favour of Allied Irish Investment Bank Limited. On each of those securities the company had given the chargee what was described as a first fixed charge on its book debts, present and future. Each contained restrictions on the manner in which the company could deal with book debts. For example, as is quoted in the report (at p. 404), the charge contained the following provisions:
“(ii) The company shall pay into an account with the bank designated for that purpose all moneys which it may receive in respect of the book debts and other debts hereby charged and shall not without the prior consent of the bank in writing make any withdrawals or direct any payment from the said account.
(iii) The company shall, if called upon to do so by the bank –
(a) execute a legal assignment of its book debts and other debts to the bank;
(b) deliver an account to the bank of the particulars of and amounts due in respect of its book debts and other debts at that date.
(iv) The company shall not without the prior consent in writing of the bank purport to charge, waive, assign or otherwise deal with its book debts or other debts in favour of any other person.”
The issues on which the liquidator had sought directions was whether the charge and the debenture from the outset created fixed or floating charges. It was held by this Court that fixed charges were created on the company’s book debts, both present and future from the outset.
38. In his judgment, before analysing the provisions of the charge and the debenture which are quoted above, Henchy J. made the following observations, which I consider to be of particular significance to the issue as to the effect of the service of the Crystallisation Notice, in that he outlined the legal effect in Irish law of a floating charge and a fixed charge and the legal effect of the crystallisation of a floating charge (at p. 418):
“One of the essential differences between a fixed charge and a floating charge given by a company is that a fixed charge takes effect, upon its creation, on the assets that are expressed to be subject to it, so that those assets, as they then exist, or, when the charge applies to future assets, as soon as they come into existence, will stand encumbered by the charge, and the company will be able to deal with those assets only to the extent permitted by the terms of the charge. On the other hand, in the case of a floating charge, while such charge is effective in law from the date of its creation, because it is of its nature, dormant and hovering, it does not attach to the assets expressed to be subject to it so as to prevent the company from continuing to deal with those assets in the ordinary course of business, until the happening of some event, such as the appointment of a liquidator, which shows that the company is no longer in business, or until the chargee intervenes. At that point, the floating charge is said to crystallise and the rights of the chargee become the same as if he had got a fixed charge; thereafter the company cannot deal with the assets in question except subject to the charge. A floating charge, so long as it remains floating, avoids the restricting (and in some cases, paralysing) effect on the use of the assets of the company resulting from a fixed charge. While a charge remains a floating one, the company may, unless there is agreement to the contrary, deal with its assets in the ordinary course of business just as if there were no floating charge.”
39. As regards the provisions contained in the charge, which I have outlined above, Henchy J. stated (at p. 419):
“Since the assets stated to be charged as a fixed charge were ‘the book and other debts present and future’, and since, under the provisions I have quoted, those assets were to be segregated in a special account and there to be virtually frozen and rendered unusable by the company save with the prior consent in writing of the Bank, I consider that the charge, far from being floating or dormant or hovering over those assets, had fixed on them to such an extent that they were unusable in the ordinary course of business save at the discretion of the Bank. The charge therefore was, as it was expressed to be, a fixed charge.”
Henchy J. came to a similar conclusion having considered the charging clause and the restrictions imposed on the company in the debenture, which he considered created such a degree of sequestration of the book debts when collected as made those monies incapable of being used in the ordinary course of business and meant that they were put, specifically and expressly, at the disposal of the bank.
40. McCarthy J. in his judgment came to the same conclusion. However, he made a number of observations which are worth recording. First, he referred to the decision of the High Court of England in Siebe Gorman v Barclays Bank [1979] 2 Lloyds Rep. 142 (Siebe Gorman), stating that there Slade J. “had given a judicial blessing in England to a claim by way of fixed charge on book debts, where this was purported to be created by an instrument with marked similarities to those the subject of this appeal.”. McCarthy J. stated that during the course of the hearing, the Court was informed that the securities were, in fact, modelled on those in Siebe Gorman, although it was emphasised that the monies received in respect of the book debts in the case being considered “were paid into a special account and not, as in Siebe Gorman, into the ordinary account of the mortgagor.” The purpose of adverting to those observations is because they may elucidate later references to Keenan Bros. in the context of subsequent consideration of Siebe Gorman by the United Kingdom courts.
41. In relation to the approach to construction of the security, McCarthy J. stated (at p. 421):
“It is not suggested that mere terminology itself, such as using the expression ‘fixed charge’, achieves the purpose; one must look, not within the narrow confines of such term, not to the declared intention of the parties alone, but to the effect of the instruments whereby they purported to carry out that intention; did they achieve what they intended or was the intention defeated by the ancillary requirements?”
That passage, in my view, bears out the statement of the trial judge that this Court in Keenan Bros. adopted a similar approach to that subsequently adopted by the Privy Council in Agnew.
42. In Re Holidair Limited [1994] 1 IR 416 (Holidair), this Court had to consider, in the context of an examinership, whether a charge, which was expressed to be “by way of first fixed charge” on “all book debts and other debts present now and from time to time due and owing to such company together with all rights and powers of recovery in respect thereof” at the outset created a fixed charge or a floating charge. Blayney J., having stated that the only provision in the debenture which might be relied upon as possibly preventing the companies from carrying on their business in the normal way using their book debts was Clause 3.08, which he had quoted, and which, in his opinion, did not have that effect. He set out his conclusion as follows (at p. 447):
“I am satisfied, accordingly, that the correct construction of the clause is that the trustee had a discretion to determine into what company account, with what bank, the proceeds of book debts should be paid from time to time. But there is no restriction in the clause on the companies drawing the monies out of these accounts. Accordingly, there is nothing in it to prevent the companies from using the proceeds of the book debts in the normal way for the purpose of carrying on their business. By reason of this the charge has also the third characteristic referred to by Romer L.J. in his judgment in In re Yorkshire Woolcombers’ Association Ltd. [1903] 2 Ch. 284 and is accordingly a floating charge and not a fixed charge.”
By way of explanation, the trustee referred to in that passage represented the interest of the debenture-holder banks. The third characteristic of a floating charge identified by Romer L.J. referred to in that passage was formulated as follows (at p. 295):
“. . . if you find that by the charge it is contemplated that, until some future step is taken by or on behalf of those interested in the charge, the company may carry on its business in the ordinary way as far as concerns the particular class of assets I am dealing with.”
43. About a quarter of a century after it was decided, the decision of the English High Court in Siebe Gorman was overruled by the House of Lords in Spectrum Plus. In Spectrum Plus the Law Lords considered the decisions of this Court in both Keenan Bros. and Holidair.
44. The most in-depth analysis of the question whether the security given by Spectrum Plus to the relevant bank created a fixed charge or a floating charge is to be found in the speech of Lord Scott. He stated (at para. 78) that the security created by the debenture was expressed to include “[a] specific charge [of] all book debts and other debts . . . now and from time to time due and owing to [Spectrum]” and also:
“[a] floating security [of] its undertaking and all its property assets and rights whatsoever and wheresoever present and/or future including those for the time being charged by way of specific charge pursuant to the foregoing paragraphs if and to the extent that such charges as aforesaid shall fail as specific charges but without prejudice to any such specific charges as shall continue to be effective.”
While noting (at para. 79) that the expression “specific charge” was potentially ambiguous, Lord Scott concluded that in the context in which it was used was intended to mean a fixed charge in contrast to a floating charge. Lord Scott (at para. 81) also quoted a provision of the debenture, which he then paraphrased as follows:
“This provision barred Spectrum from dealing with its book debts in any of the ways specified but left Spectrum free to deal with the debtors who owed the debts and, in particular, to collect the debts in the normal course of business.”
It is convenient at this juncture to observe that in this case there is a certain inconsistency in language between the charging clauses, in particular Clause 5, in each Debenture in issue here quoted at para. 3 above and Clause 10 quoted at para. 5 above. Clause 5 refers to “specific charge” and “floating security”, while Clause 10 refers to “first fixed charge” and “floating charge”. Adopting the approach adopted by Lord Scott, I conclude that, having regard to the context, the intention of the Company and the Bank in the case of Debenture was to mean a fixed charge in contrast to a floating charge in both clauses.
45. To put the passage from the speech of Lord Scott, which, as is mentioned in para. 33 above, was cited by the trial judge, into context it is appropriate to start at para. 116 thereof. There he stated that an attempt had been made to justify the categorisation of the charge as a fixed charge by looking no further than the receipt by the bank, through the operation of the clearing system, of the proceeds of cheques from Spectrum’s debtors that were paid in by Spectrum. The consequent crediting of Spectrum’s account with amounts equal to the proceeds of the cheques and Spectrum’s ability to draw on that account for its business purposes was not inconsistent, it was suggested, with the categorisation of the charge over the book debts as a fixed charge. It was stated that the point was stressed by Mr. Moss, Q.C., counsel for the bank. Lord Scott rejected that argument and he stated that the categorisation as a fixed charge must depend on what, if any, restrictions there were on the use the chargor could make of the credit to the account that reflects each payment in. He continued (at para. 117):
“The bank’s debenture placed no restrictions on the use that Spectrum could make of the balance on the account available to be drawn by Spectrum. Slade J in Siebe Gorman thought it might make a difference whether the accounts were in credit or in debit. I must respectfully disagree. The critical question, in my opinion, is whether the chargor can draw on the account. If the chargor’s bank account were in debit and the chargor had no right to draw on it, the account would have become, and would remain until the drawing rights were restored, a blocked account. The situation would be as it was in In re Keenan Bros Ltd. But so long as the chargor can draw on the account, and whether the account is in credit or debit, the money paid in is not being appropriated to the repayment of the debt owing to the debenture holder but is being made available for drawings on the account by the chargor.”
46. Against that background the passage (excluding the first sentence) quoted by the trial judge is to be found in para. 119 where Lord Scott stated:
“Slade J in Siebe Gorman, . . . and Mr Moss QC in his submission on behalf of the bank in the present case, attributed considerable significance to the labels that the parties to the debenture had chosen to attribute to the charge over book debts. Mr Moss indeed argued that a debenture expressed to grant a fixed charge thereby limited by necessary implication the ability of the chargor to deal with the charged assets. He argued that Spectrum had no right without the consent of the bank to draw on the account into which the cheques received by Spectrum in payment of its book debts had to be paid. This limitation was, he said, an inevitable result of the grant by the debenture of the fixed charge. This argument . . . puts the cart before the horse. The nature of the charge depends on the rights of the chargor and chargee respectively over the assets subject to the charge.”
While, as will appear later, I consider that the task of the Court here in ascertaining, as a matter of construction of the Debenture, the effect of the service of the Crystallisation Notice is fundamentally different to the task of determining, as a matter of construction of a debenture, whether a fixed charge or a floating charge on book debts is created on the execution of the debenture, with which the courts were confronted in Keenan Bros. and Spectrum Plus, I have set out the issue in the Spectrum Plus case and Lord Scott’s observations in some detail, because the trial judge attached weight to the observations at para. 15 in the Second Judgment.
47. Before leaving the decision of the House of Lords in Spectrum Plus it is worth recording that Lord Walker in his speech (at para. 150) quoted the passage from the judgment of Blayney J. in Holidair, which is quoted at para. 42 above, stating that the reasoning in it “is compelling”. In general, a comparison of the reasoning in Spectrum Plus, on the one hand, and the reasoning of this Court in Keenan Bros. and Holidair, on the other hand, does not disclose any major inconsistencies, so that, if Keenan Bros. had been decided by an English court, it is reasonable to assume that it would not have suffered the fate of Siebe Gorman and been overruled.
48. As noted above, both this Court in Keenan Bros. and the House of Lords in Spectrum Plus were concerned with the proper characterisation and effect of a charge over book debts when created, by reference to the charging clause and the other provisions of the Debenture. The United Kingdom authority in which issues most analogous to the issues on this appeal were considered was the decision of the Chancery Division of the High Court in Re Brightlife Limited [1987] Ch. 200 (Brightlife). There the company (Brightlife) was being wound up in a creditors’ voluntary liquidation. Brightlife owed over £200,000 to an American company, to which I will refer as the lender, and the debt was secured by a debenture. It also owed over £70,000 to the Commissioners of Customs and Excise for Value Added Tax. The issue was whether the lender’s debenture conferred only a floating charge so that the claim for Value Added Tax, being preferential, took priority under the provision in force in the U.K. at the relevant time corresponding to s. 285(7). That provision (s. 614(2)(b) of the Companies Act 1985) was in precisely the same terms as s. 285(7)(b).
49. In Brightlife the charging clause in the debenture had three elements. The first dealt with freehold and leasehold property. The second charged –
“by way of first specific charge (a) all book debts and other debts now or at any time during the continuance of this security due or owing to Brightlife and the benefit of all securities and guarantees now or at any time held by Brightlife in relation thereto; (b) the goodwill and uncalled capital for the time being of Brightlife; and (c) the benefit of any licences for the time being in Brightlife.”
The third element was a floating charge over after-acquired freehold and leasehold property and “the undertaking and all other property, assets and rights whatsoever present and future of Brightlife”, subject to a proviso prohibiting the creation of any other charges ranking in priority to or pari passu with the floating charge or the disposal of any assets subject to the floating charge contrary to the provisions of a covenant by Brightlife.
50. There were two further provisions of the debenture given by Brightlife which were considered to be of significance. The first was Clause 3B which provided:
“[The lender] may at any time by notice to Brightlife convert the floating charge into a specific charge as regards any assets specified in the notice which [the lender] shall consider to be in danger of being seized or sold under any form of distress or execution levied or threatened or to be otherwise in jeopardy and may appoint a receiver thereof.”
That was the provision which corresponded to Clause 10 of the Debenture in this case. The other provision was Clause 13, which was a covenant for further assurance and which provided as follows:
“Brightlife shall execute and do all such assurances, acts and things as [the lender] may reasonably require for perfecting or protecting the security created by these presents over the property hereby charged or any part thereof or for facilitating the realisation of such property and the exercise of all powers, authorities and discretions vested in [the lender] . . . and shall in particular execute all transfers, conveyances, assignments and assurances of such property whether [to] [the lender] or its nominees . . . which [the lender] may think expedient and for the purposes of this Clause a certificate in writing by [the lender] to the effect that any particular assurance, act or thing required by it is reasonably required shall be conclusive evidence of such fact.”
51. The first argument advanced on behalf of the lender, which, in my view, is not of particular relevance to this case, was that para. (a) of the second element of the charge in Clause 3 had from the outset created, according to its terms, a “first specific charge” over “all book debts and other debts”. Hoffman J. rejected that argument, stating that neither Siebe Gorman nor Keenan Bros., which he described as “an even stronger case” than Siebe Gorman, was of assistance to the lender, having stated earlier, in a passage referred to by Lord Scott in Re Spectrum Plus (at p. 209):
“In this debenture, the significant feature is that Brightlife was free to collect its debts and pay the proceeds into its bank account. Once in the account, they would be outside the charge over debts and at the free disposal of the company. In my judgment a right to deal in this way with the charged assets for its own account is a badge of a floating charge and is inconsistent with a fixed charge.”
52. Hoffman J. then went on to deal with the alternative submission on behalf of the lender, which, in my view, is of particular relevance to this case, namely that the floating charge was converted into a fixed charge before the resolution for winding up was passed. The chronology was that on 4th December, 1984, Brightlife had given notice of a creditors’ meeting to be held on 20th December, 1984 at which a resolution to voluntarily wind up Brightlife would be proposed. The lender then served four separate notices on Brightlife on 10th December, 1984, including a demand for payment, notice pursuant to Clause 3(B), and a demand pursuant to Clause 13 for execution forthwith of “a legal assignment of all book debts currently due to Brightlife . . . specifying full details of the said debts therein”. The notice pursuant to Clause 3(B) was expressed to be notice –
“of the conversion with immediate effect of the floating charge created [by the debenture] into a specific charge over all the assets of [Brightlife] the subject of the said floating charge.”
53. Having remarked that s. 614(2)(b), which he was applying, and s. 196, being the section of the U.K. Companies Act 1985 corresponding to s. 98 of the Act of 1963, originated in the Preferential Payments in Bankruptcy Amendment Act, 1897, Hoffman J. stated (at p. 211):
“One imagines that they were intended to ensure that in all cases preferential debts had priority over the holder of a charge originally created as a floating charge. It would be difficult to think of any reason for making distinctions according to the moment at which the charge crystallised or the event which brought this about. But Re Griffin Hotel Co. Ltd. revealed a defect in the drafting. It meant, for example, that if the floating charge crystallised before winding up, but otherwise than by the appointment of a receiver, the preferential debts would have no priority under either section. For example, if crystallisation occurred simply because the company ceased to carry on business before it was wound up, . . ., the preferential debts would have no priority. One could construct other examples of cases which would slip through the net. Counsel for [the lender] submits that this is such a case. He says that the notices under cll 3(B) and 13 caused crystallisation of the floating charge over all or part of the assets before the winding up but without the appointment of a receiver.”
It is perhaps apt to remark, lest it be considered overlooked, that as in the corresponding United Kingdom provision, under s. 98 of the Act of 1963 the taking of possession by or on behalf of the debenture holder of any property comprised in or subject to the charge also triggers the application of the priority of preferential creditors under s. 285(7). The reference to the fact that a defect in drafting was revealed by the decision in Re Griffin Hotel Limited will be considered further in considering the issue as to the proper construction of s. 285(7). Hoffman J. also recorded that, while since that decision Parliament had made many amendments to the Companies Acts, until very recently before his judgment no attempt had been made to reverse the effect of the decision. He then stated that the Insolvency Act 1985 had by then done so, by defining a “floating charge” as “a charge which as created was a floating charge”.
54. Having analysed the opposing submissions made on behalf of the Commissioners of Customs and Excise, and having determined that it would be inappropriate for the courts to impose additional restrictive rules on the grounds of public policy, a conclusion with which the trial judge expressly concurred in the First Judgment (at para. 56), and having noted that, on the case before him, it was not necessary to decide questions about automatic crystallisation, Hoffman J. stated (at p. 215):
“The notices under Clauses 3(B) and 13 constitute intervention by the debenture-holder and there is in my judgment no conceptual reason why they should not crystallise the floating charge if the terms of the charge upon their true construction have this effect.
Counsel for the commissioners last submission was that the actual notice under Clause 3(b) was ineffective because the assets over which the charge was to be crystallised were not ‘specified in the notice’. The notice said that it was to apply to ‘all the assets of Brightlife Ltd. the subject of the said floating charge’, In my judgment that is sufficient specification. It is not necessary to list each separate asset. Although my decision that the notice under Clause 3(B) crystallised the charge makes it unnecessary for me to decide whether the notice under Clause 13 did so in respect of the book debts, I will add for the sake of completeness that in my judgment it did. The company’s obligation to execute an assignment removed that freedom to deal with the debts which made the charge float.”
The outcome, accordingly, was that the debts secured by the debenture ranked in priority to the preferential debts in respect of all the assets in the hands of the liquidator.
55. Hoffman J. clearly considered that he was bound by the earlier decision of the English High Court in Re Griffin Hotel [1941] Ch. 129 (Griffin Hotel) on the construction of the counterpart of s. 285(7)(b). As noted at para. 53 above, he recorded in his judgment (at p. 211) that since Griffin Hotel, Parliament had made many amendments to the Companies Acts but until recently no attempt had been made to reverse the effect of the decision. However, the Insolvency Act 1985 had by then done so by introducing the definition of a “floating charge” quoted in para. 53 above. However, that provision had not been introduced at the time of the transactions under consideration by Hoffman J., so that he was deciding the matter by reference to a provision in identical terms to s. 285(7)(b). While the wording of Clause 10 of the Debenture under consideration here differs somewhat from the wording of the corresponding clause under consideration by Hoffman J. and there is no covenant for further assurance in the Debenture, if it is appropriate to apply the reasoning of Hoffman J. to this case, the outcome as regards the effect of service of the Crystallisation Notice should be the same as in Brightlife.
56. In embarking on the analysis of the judgment of Hoffman J. in Brightlife, I observed that it is the United Kingdom authority in which issues most analogous to the issues on this appeal were considered. That is because it necessitated a determination as to the effect of Clause 3B of the debenture in issue there, which provided that the debenture holder might by notice to Brightlife convert the floating charge into a specific charge. There is one Irish authority in which a somewhat similar clause was obliquely referred to. That is the decision of this Court in Re Wogan’s (Drogheda) Limited [1993] 1 I.R. 157. In that case, in the context of an examinership, this Court was considering the effect of a debenture given by the company in examinership to a lender and specifically whether a fixed charge or a floating charge was created over the book debts of the company. In the judgment of Finlay C.J., the relevant clauses of the debenture were outlined and these included, in addition to the charging clauses, Clause 8(a) which was quoted as being in the following terms:
“If the lender shall by notice in writing make a demand on the company as provided for in clause 8(a) hereof then the floating charge created by clause 4(e) hereof shall immediately on service of such notice on the company become crystallised and be a specific fixed charge on . . . all book debts and other debts and securities then due to the company . . ..”
Assuming that there is a typographical error in the report, in that the clause quoted is obviously not Clause 8(a) referred to in the body of the report, nonetheless, it is clear that the debenture provided that the lender could by notice effect the crystallisation of the floating charge into a specific fixed charge. The finding of this Court (at p. 170) was that the combined effect of the charging clauses in the debenture and Clause 8, to which express reference was made, was to confer upon the charge created by the debenture the precise characteristics of a fixed charge as set out by McCarthy J. in Keenan Bros. The commentary on that finding in Courtney on The Law of Companies (3rd Ed.) at para. 18.104 to the following effect is very persuasive:
“While the Supreme Court did not specifically comment upon the validity of this clause, Finlay C.J. referred to Clause 8 in the reasoning for his conclusion. It seems inconceivable that the Supreme Court could base its decision, albeit in part, on a clause which the law did not consider to be effective. Moreover, there is no sound policy reason why the giving of notice to that effect ought not effect crystallisation.”
Further, I agree with the views expressed by the trial judge in the First Judgment (at para. 44) that it is preferable to refer to a crystallisation of the type provided for in a clause such as Clause 10 under consideration here as “express crystallisation”, rather than “automatic” crystallisation.
57. Before considering the submissions made on behalf of the parties, I think it is appropriate to emphasise that the decision of Hoffman J. in Brightlife and in a subsequent authority which will be referred to in the context of the construction of s. 285(7) are no longer of relevance in the United Kingdom. The current position in the United Kingdom is succinctly summarised in the following passage in Lynch-Fannon and Murphy on Corporate Insolvency and Rescue (2nd Ed.) at para. 9.30:
“In relation to priorities, and the consequent effect of this decision [Brightlife], the situation in England is clarified by ss. 175(2) and 251 of the Insolvency Act 1986. Now a floating charge, which was created as a floating charge, will not have priority over preferential debts even though crystallising before the liquidation. The issue is therefore moot under English law.”
Submissions on behalf of the Liquidator
58. The Liquidator does not quibble with what the trial judge stated in para. 63 of the First Judgment, as quoted in para. 28 earlier. What he takes issue with is the finding in para. 16 of the Second Judgment that there is nothing in the Debenture which restricts the entitlement of the Company to deal with or dispose of its stock in trade or to use the proceeds of its book debts or cash-at-bank specifically following the service of the crystallisation notice. The gravamen of the Liquidator’s response is that Clause 10 of the Debenture must mean that the service of a Crystallisation Notice brings to an end the general freedom of the relevant Company to deal with its assets. It is submitted that crystallisation, whether happening as a matter of law (for example, as in the case of a receivership) or as a matter of contract, brings to an end, as a matter of law, the entitlement of the Company to use and dispose its assets in the ordinary course of business. Further, it is submitted that, because this restriction happens as a matter of law, it does not need to be expressly spelt out in the Debenture in order to occur. On the contrary, it is submitted that where a charge starts life as a “floating charge” but some contractual event occurs which the parties have agreed will convert it into a “fixed charge”, it inevitably follows that the parties have implicitly agreed that the consequences of fixed charge status will thereafter apply, namely, that the entitlement to use and dispose of the assets in question in the ordinary course of business will no longer be enjoyed by the chargor. It is submitted that any other interpretation would render the crystallisation clause, in this case Clause 10, a nullity.
59. As regards the covenants in Clause 8 of the Debenture and the fact that they are expressed to endure during the continuance of the security, the Liquidator’s position is that the covenant in para. (a) of Clause 8 in relation to carrying on and conducting business is of no relevance, in that it can only apply for so long as the chargor is actually carrying on business and not beyond crystallisation, for example, by the appointment of a receiver. By using the terminology of converting the floating charge “into a first fixed charge”, it is submitted that the parties to the Debenture clearly intended that upon service of the Crystallisation Notice the use of any charged assets would require the consent of the Bank. Any other conclusion, it is suggested, would run entirely counter to what the parties bargained for and what Irish business people have, for decades, understood to be the nature and effect of crystallisation. Clause 10, it is submitted, should be analysed and applied in the same way as Hoffman J. analysed Clause 3B in Brightlife.
Submissions on behalf of the Bank
60. In general, the Bank’s position is the same as that of the Liquidator. However, it is strongly urged on behalf of the Bank that the issue for this Court in determining the effect of the service of the Crystallisation Notice is entirely different from the task which faced the Court in Keenan Bros. and the later decisions of this Court in which it was considered. In each of those cases, it is submitted, the security document set out in detail the obligations and rights of the chargor and the chargee while the Company was operating as a going concern. So the question was not one of construction of the security document to ascertain to what restrictions the relevant asset (in each case book debts) was subject. Rather, the question in those cases was primarily one of characterisation by reference to the balance of control of the asset class. In this case, it is submitted, the situation is different, in that the primary question is not whether a listed set of restrictions and entitlements constituted a fixed or a floating charge, but rather whether, by use of specific legal terminology, the parties in fact intended, upon the service of the Crystallisation Notice, that any further disposition of a charged asset would require the consent of the Bank as chargee. The answer, it is submitted is that, by reason of the use of the term “first fixed charge” in Clause 10, a necessarily implied global prohibition on the use of any assets the subject of the floating charge arose on the service of the Crystallisation Notice. In short, the Bank’s position, which is put very convincingly, is that there is simply no basis for the conclusion in para. 19 of the Second Judgment that there is no intention expressed in the Debenture that the Company should, after service of the Crystallisation Notice, be restricted in its use of the property the subject of that notice.
Submissions on behalf of the Revenue Commissioners
61. The starting point in defining the position of the Revenue Commissioners on the effect of the service of the Crystallisation Notice is their reliance on and application of what is stated in para. 63 of the First Judgment, which is quoted at para. 28 above. The Revenue Commissioners correctly submit that there is no express provision in the Debenture that specifies that the service of a crystallisation notice pursuant to Clause 10 causes an equitable assignment of the assets the subject of the floating charge or that, in consequence, the Company is to lose the ability to deal in or dispose of those assets. The approach of the Revenue Commissioners, understandably, is to attack the bases on which the Liquidator and the Bank argue that, notwithstanding the absence of an express provision, the service of the Crystallisation Notice put to an end the entitlement of the Company to deal with the assets which have been the subject of the floating charge.
62. The Revenue Commissioners’ interpretation of Clause 10 is that it is “a trigger event” in the Debenture. In other words, it triggers the right of the Bank to appoint a receiver, an act which itself would result in the crystallisation of the floating charge, so as to effectively remove the assets from the control of the Company. In this connection Clause 12(j) is pointed to. That interpretation, it is submitted, means that there is an answer to the argument of the Liquidator and the Bank that the finding of the trial judge means that Clause 10 is devoid of effect. Further, it is suggested that the two step process which that interpretation gives rise to, the service of the Crystallisation Notice and the exercise of the right to appoint a receiver under Clause 12(j), is more suitable to redress the situation which gives rise to the entitlement to serve the Crystallisation Notice under Clause 10, namely, that the Bank considers that the property, assets and rights the subject of the floating charge are “in any way in jeopardy”. It is suggested by the Revenue Commissioners that the source of the jeopardy could be other than the financial state of the Company, for example, conditions of storage might put the assets in jeopardy, in which case the two step process could be commercially appropriate in that the Bank could serve the Crystallisation Notice as a warning and that might lead to the risk to the assets being dealt with by the Company.
63. Whatever benefits are perceived from interpreting Clause 10 as a “trigger event”, the fact is that on a plain reading of Clause 10, in the context of the provisions of all of the Debenture, it is not open to such interpretation. Clause 10 provides that in a certain situation (where the Bank considers that the property, assets and rights the subject of the floating charge are in any way in jeopardy), and where the Bank takes certain action (the service of a notice on the Company), the result will be to “convert the floating charge . . . into a fixed charge”. It is a separate and distinct action by the Bank in a particular situation which crystallises the floating charge. Other situations in which crystallisation occurs are set out in Clause 11, one being the appointment of a receiver. It is true that by virtue of Clause 12(j), where notice has been served under Clause 10, the Bank may appoint a receiver. However, Clauses 10, 11 and 12 read together are not open to the construction that, in order to crystallise the floating charge, if the Bank invokes Clause 10, it must also invoke Clause 12(j).
64. It is also suggested by the Revenue Commissioners that to have the effect which the Liquidator submits Clause 10 has, it will be necessary for the Court to imply into the Debenture a clause similar in terms to Clause 8(k), which is quoted in para. 4 above, which implication would be triggered by the service of the Crystallisation Notice. However, it is submitted that this would not be sufficient as regards book debts and that it would be necessary to go further and to imply in addition provisions similar to the provisions under consideration in Keenan Bros. That overlooks the fundamental difference between the situation being considered in Keenan Bros. and the situation being considered here. In Keenan Bros. this Court, on the basis of what was provided in the security documents, was determining whether from the outset a charge over book debts could be properly characterised as a fixed charge, so that, as Henchy J. put it, the company will be able to deal with the assets, the book debts, only to the extent permitted by the terms of the charge into the future. On the other hand, here the purpose of the Bank serving the Crystallisation Notice under Clause 10 is to “convert the floating charge . . . into a fixed charge”, which, when it happens, again using the words of Henchy J., means that the Company cannot deal with the assets in question except subject to the charge. In my view, the question of implying terms into Clause 10 does not arise.
65. In general, the Revenue Commissioners take issue with the contention of the Liquidator that, as a matter of law, upon the crystallisation of a floating charge, the ability of the chargor to deal with or dispose of the charged assets come to an end and they suggest that this proposition is not supported by any authority. In my view, once again, referring back to the statement from the judgment of Henchy J. in Keenan Bros. quoted above, the effect of the crystallisation of a floating charge is clearly stated there as that the company cannot deal with the assets in question except subject to the charge.
66. In opposing the Liquidator’s submission that crystallisation brings to an end, as a matter of law, the entitlement of the Company to use and dispose of its assets in the ordinary course of business, the Revenue Commissioners submit that the proposition is contrary to decisions of this Court with respect to the nature of fixed charges, including the decision in Keenan Bros. They rely, in particular, on the passage from the judgment of McCarthy J. in Keenan Bros., which is quoted at para. 41 above. It is submitted that there is no rational basis for taking a different approach to the categorisation of a security as a fixed or a floating charge based on whether it was purported to be a fixed security on creation, or whether it initially floated and was later to be converted. That, it seems to me, is the fundamental flaw in the reasoning of the Revenue Commissioners.
67. Before addressing the specifics of the flaw, I think it would be useful to make some general observations following on from the analysis of the decisions in Keenan Bros. and Agnew set out at para. 31 above. The approach which is found in those authorities is an example of an application of a broader principle. Where the law makes a formal distinction between two different types of legal arrangements, as it does in s. 285 of the Act of 1963 between floating and fixed charges, then the question concerning into which category a particular arrangement or agreement falls is determined by an objective analysis of the substance of the arrangement or agreement concerned in which the name given to the arrangement or agreement by the parties is not decisive. A similar approach can be seen in, for example, Irish Shell & BP Limited v. Costello [1981] ILRM 66 in the context of determining whether an agreement in respect of the occupation of a property in return for a periodic payment can properly be characterised as a lease or a licence. However, it is also important to emphasise that the description given by the parties to their arrangement or agreement remains an appropriate part of the overall analysis. The task is to identify the terms of the arrangement or agreement concerned in accordance with the appropriate principles of the construction of legally binding documents. This requires the application of the “text in context” approach. But text remains an important part of that analysis and, just as any other provision in an agreement or an arrangement must be considered as part of the overall assessment of the intention of the parties in the light of the words which they have used to express their agreement, so must all due regard be paid, in that exercise, to how the parties describe the arrangement concerned. That is not, of course, to say that if, properly construed, the entirety of the agreement creates a set of rights and obligations which makes it inconsistent to characterise that agreement in the way in which it is described by the parties, the Court is not required to depart from the term which the parties have chosen to use. But it would be wrong to suggest that the term used by the parties may not, in many cases, be important and can, at least in some cases, be decisive.
68. Returning to the specifics of the reasoning of the Revenue Commissioners, the task of the Court in a Keenan Bros. type situation is to construe the security document to determine the nature of the charge created over a particular class of assets, for example, book debts. As all the authorities make clear, the terminology deployed in the security document is not conclusive. The fact that the charge is referred to as a “fixed charge” does not necessarily mean it is a fixed charge. As McCarthy J. stated in Keenan Bros. the Court has to look to the effect of the security document to see whether it achieves what was intended, for instance, to create a fixed charge. It may contain provisions which defeat what the parties intended. This is illustrated by the authorities which have been considered earlier. For example, in Keenan Bros. this Court was satisfied that fixed charges were created by the two security documents, whereas in Holidair this Court found that the charge was a floating charge although described in the debenture as a fixed charge.
69. The task of the Court in this case, like the task of the High Court of England and Wales in Brightlife, is to determine whether a notice served in accordance with the express terms of a clause in the security document does, on a once-off basis, what it was intended to do, that is to say, convert a floating charge into a first fixed charge. There is no categorisation involved in this task where, as in this case, the notice relates to all of the property, assets and rights the subject of the floating charge. The only possible effect of the service of the notice in accordance with Clause 10 is to convert the floating charge into a first fixed charge. While the Revenue Commissioners acknowledge that there is a strong similarity between the facts and issues in this case and those considered in Brightlife, it is argued that Brightlife can be distinguished on a number of bases. As will be clear from my observation at the end of paragraph 55 above, I do not consider the differences to be of any materiality to the determination of the effect of the service of the Crystallisation Notice in this case.
Effect, if any, of Crystallisation Notice: conclusion
70. It will be recalled that in the First Judgment the trial judge concluded that there is no rule of law which precludes parties to a debenture creating a floating charge agreeing, as a matter of contract, that the floating charge will crystallise upon the happening of an event or a particular step taken by the chargee. I agree with that conclusion. However, she stated that whether the parties actually achieve their intention is a separate issue by reason, inter alia, of the Supreme Court decision in Keenan Bros. The line of authority starting with Keenan Bros. in this jurisdiction and ending with the decision of the House of Lords in Spectrum Plus has been examined in considerable detail earlier with a view to identifying the task which the Court had to consider in each of those cases and to comparing it with the task of the Court in this case. As I have stated in addressing the submissions made on behalf of the Revenue Commissioners, they are different tasks. The task in this case is to determine whether, on a once off basis, the service of the Crystallisation Notice under Clause 10 converted the floating charge into a fixed charge. I am satisfied that in applying the principles enunciated in Keenan Bros. in carrying out that task, the proper conclusion is that, as a matter of construction of Clause 10, the intention of the parties was that, on the service of the Crystallisation Notice, the Company would thereafter be restricted in the use of the property and assets and rights which had been the subject of the floating charge and, contrary to the view expressed by the trial judge at para. 19 of the Second Judgment, that the Company would cease to be entitled to use such property in carrying on its business without the consent of the Bank. That conclusion, in my view, is fully in accordance with the principles outlined in the judgments of Henchy J. and McCarthy J. in Keenan Bros.
71. On the plain wording of Clause 10 of the Debenture, the intention of parties is absolutely clear. The situation is identified in which the Bank has the right to serve a notice under Clause 10. That situation is that the Bank, in its sole judgment, considers the property, assets and rights the subject of the floating charge to be in jeopardy. It is assumed that the Bank considered that to be the position on 28th October, 2009. The purpose of the notice which the Bank acquired the right to serve in that situation is also clearly stated in Clause 10. It was to convert the floating charge in the Debenture into a first fixed charge. Accordingly, the clear intention of the parties was that, on the service of the notice, the floating charge would become a fixed charge and the consequences of that occurring, including the obligations flowing from the consequences, would be borne by the Company as chargor. It is true that those consequences were not spelt out in Clause 10, nor were they spelt out in relation to the conversion of a floating charge into a fixed charge by reason of the happening of an event specified in Clause 11. The consequences ensue as a matter of law on the service of the notice under Clause 10. In legal parlance the conversion of the floating charge into a fixed charge is known as crystallisation since the late nineteenth century. As the passage from the judgment of Henchy J. in Keenan Bros., which is quoted at para. 38 above, clearly demonstrates, the consequence of the intervention of a chargee which results in crystallisation, for example express crystallisation, is that –
“. . . the rights of the chargee become the same as if he got a fixed charge; thereafter the company cannot deal with the assets in question except subject to the charge.”
That was what was intended to happen under Clause 10 of the Debenture and it is what actually happened on the service of the Crystallisation Notice on 28th October, 2009.
72. In my view, there is nothing either in the Debenture or in the Crystallisation Notice which precludes that consequence. Once the floating charge crystallises, on whatever basis, the obligation of the Company under Clause 8(a) to carry on and conduct the business in a proper and efficient manner ceases, irrespective of the wording which suggests that the Company’s obligation will continue “at all time during the continuance of this security”. Clause 8(k) has no bearing on the crystallisation of the floating charge. It merely relates to and restricts dealing with property which was the subject of the specific charge provided for in Clause 5 of the Debenture from the outset.
73. In summary, Clause 10 is absolutely clear as to the intention of the parties in conferring the right on the Bank to serve notice on the Company, the intention being to convert the floating charge into a fixed charge. Such conversion, in other words, crystallisation of the floating charge, was intended to have and did have well established consequential effects on the respective obligations and rights of the chargor and the chargee. The effects flowed from the action of service of the notice. This is not a case of putting the cart before the horse.
Construction of s. 285(7): discussion
First Judgment of the High Court
74. In her analysis of s. 285(7) in the First Judgment, the trial judge stated (at para. 20):
“It is important to note that the section, by its words, gives priority ‘over the claims of holders of debentures under any floating charge created by the company’, and not over the claims of holders of any floating charge created by the Company. Debentures, as already stated, is defined in s. 2 to include ‘any other securities of a company, whether constituting a charge on the assets of the company or not’. It appears to me that the phrase ‘holders of debentures under any floating charge created by the company’ is deliberately worded, having regard to the potentiality for a floating charge to crystallise and become a fixed charge so as to include persons who hold security of whatever nature, provided it is held under or by reason of a floating charge created by the company. It is the floating charge created by the Company which gives the Bank the right to make a claim to the assets. It is only the nature of the claim which changes post-crystallisation. The Bank’s claim to the charged assets remains a claim as the holder of a debenture or security under the floating charge created by the company.” (Emphasis in original).
75. The trial judge expressed the view, in para. 21, that the word “charge” in the phrase “property comprised in or subject to that charge” refers to the floating charge created by the Company, notwithstanding that, by reason of crystallisation, such floating charge may have become fixed on such property prior to the commencement of the winding up.
76. I read the ordinary language of s. 285(7)(b), in the context of all of the provisions of the section and all of the provisions of the Act of 1963, differently. Section 285 comes into play “[in] a winding up”, which, where the winding up is a winding up by the Court, as here, comes into being when the winding up order is made by the Court. The section, in subs. (1) to (6), identifies debts due to certain creditors which are to be paid in priority to all other debts, identifying the creditors and the extent to which their debts are to get priority. How those creditors and those debts are to be treated inter se is dealt with in para. (a) of sub. (7). Paragraph (b) of sub. (7) deals with the situation where there is a shortfall of assets to meet the claims of the general body of creditors and it deals with two competing classes of debts or claims:
(i) the debts which have priority by virtue of subs. (1) to (6) and
(ii) the “claims of holders of debentures under any floating charge created by the company”.
Paragraph (b) of subs. (7) gives priority to the debts referred to at (i) over the claims referred to at (ii).
77. Looking at the application of para. (b) from the perspective of the Liquidator, after the winding up order was made on 7th December, 2009 he had to decide how to apply para. (b) of subs. (7), because there was a shortfall of assets to meet the claims of the general creditors and there is one holder of a debenture who is claiming against the assets, the Bank. The Liquidator had to decide whether the debts of preferential creditors, such as the Revenue Commissioners, get priority in accordance with para. (b) over the claims of the Bank as the holder of the Debenture. The debts of the preferential creditors would get priority provided the claims of the Bank were under the floating charge created by the Company in favour of the Bank by the Debenture. On the wording of s. 285 the Liquidator is assessing the situation in the winding up. Where, as here, the floating charge created by the Company in favour of the Bank had crystallised before the commencement of the winding up, the claim of the Bank is not a claim under a floating charge. Rather it is a claim under the fixed charge which came into existence on the crystallisation of the floating charge. That being the case, the Bank retains its priority as a fixed chargee. If it were otherwise, the Liquidator would be paying the priority debts, not out of property comprised in or subject to a floating charge, but rather out of property comprised in a fixed charge.
78. To read s. 285(7)(b) as entitling preferential creditors to priority for the priority debts specified in s. 285 over the claims of a debenture holder whose charge has crystallised into a fixed charge prior to the commencement of the winding up and to have those debts discharged out of property which at the time is subject to the fixed charge, by reason of the fact that the fixed charge evolved from a floating charge, in my view, would be to rewrite s. 285(7)(b). It is clear on the face of subs (7) that the operative time for the assessment of entitlement to priority in accordance with para. (b) is in the winding up, that is to say, after the winding up order is made. If the Oireachtas had intended that the holder of a debenture who, at the time of the assessment, has a fixed charge, but that fixed charge is the result of the crystallisation of a floating charge which occurred prior to the commencement of the winding up, should lose priority for its claims to the priority debts and that the priority debts should be paid out of property comprised in what at the commencement of the winding up was a fixed charge, that should have been provided for in para. (b) of subs. (7). In my view, as it stands, para. (b) cannot be read to achieve that end.
79. The trial judge (at para. 22 of the First Judgment) referred to the absence in s. 285(7) “of any specification by the Oireachtas as to the date upon which the nature of the claims of ‘holders of debentures under any floating charge’ is to be ascertained” as a subsidiary reason in support of what she considered the proper construction of the subsection. She stated:
“If it was intended by the Oireachtas that this should be ascertained at the date of commencement of the winding up, as is suggested by certain judicial authorities from other jurisdictions, then it appears to me that such date would have been specified by the Oireachtas, given that in s. 285(1), they have clearly specified a date which is potentially a date other than the commencement of the winding up as the relevant date for the ascertainment of preferential claims. This is not a point which appears to have been adverted to in the decisions of other jurisdictions to which I was referred.”
In my view, there is no lacuna in s. 285, if it is given the construction which I suggest it must be given in accordance with its ordinary language used. The expression “the relevant date” in subs. (1), as I stated at para. 13 above, is the date by reference to which the cut off point in relation to periods of time over which various preferential debts are given priority is identified. The application of subs. (7), however, occurs in the winding up and para. (b) must be applied in accordance with the situation which prevails after the commencement of the winding up in relation to the nature of the charge to which the claims of the debenture-holder relate, that is to say, whether it is then floating or fixed.
80. While I propose now considering the decisions of other jurisdictions referred to by the trial judge, on the basis of the analysis of s. 285 conducted above, I am of the view that the construction which the trial judge has put on subs. (7)(b) is only achievable by an amendment of that provision by the Oireachtas.
Decisions of other jurisdictions on counterpart of s. 285(7)(b)
81. As is clear from the judgment of Hoffman J. in Brightlife, he considered that he was bound by the decision of the High Court in Griffin Hotel. In that case, in November 1937 the company had issued a debenture to the lender which contained a charge by way of floating security upon the company’s undertaking and property, present and future, including its uncalled capital to secure its indebtedness to the lender. In December 1938 the lender issued a writ for the purpose of enforcing its debenture and subsequently in December 1938 an order was made in the action appointing a receiver and manager of part only of the property then subject to the debenture, the remaining property being purposely excluded as it was subject to prior charges. On 15th March, 1939 an order was made for the winding up of the company by the Court. The issue for the High Court was the application of two provisions of the UK Companies Act 1929: s. 78, which was in precisely the same terms as s. 98 of the Act of 1963; and s. 264(4)(b), which was in precisely the same terms as s. 285(7)(b) of the Act of 1963. In his judgment Bennett J. stated (at p. 135):
“. . . the provisions of s. 78 do not exclude or prevent the operation of s. 264(4)(b). There is, in my judgment, no language in the sections which excludes or prevents the operation of subs. 4(b) in the supposed case.
[However], that conclusion upon the construction and effect of the statutory provisions leaves open the question whether or not, in the supposed events, there is, when the winding up takes place, any floating charge or any property subject to that charge. In my judgment, s. 264(4)(b) only operates if, at the moment of the winding up, there is still floating a charge created by the company and it only gives the preferential creditors a priority over the claims of the debenture holders in any property which at that moment of time is comprised in or subject to that charge.
In the present case the debenture held by the plaintiffs contained a floating charge over all the borrowers’ property. On December 9, 1938, the charge ceased to be a floating charge upon the property and assets of which Mr. Veale was appointed receiver. The charge on that day crystallized and became fixed on that property and those assets. It remained a floating charge upon any other assets of the borrowers. At the moment before the winding up order was made, the charge still floated over any other assets of the borrowers, and over those other assets, if any, the preferential creditors as defined by s. 264(1) have a priority over the claims of the plaintiffs, by force of the provisions of s.264(4). This seems to be a corollary of the proposition established by In re Lewis Merthyr Consolidated Collieries Ltd. . . .”
82. The last sentence in that quotation has been the subject of criticism in the past. Indeed, in the First Judgment (at para. 36), having expressed the view that Bennett J. reached a conclusion on the wording of the section under consideration in the passage quoted in the preceding paragraph without any consideration of the phrase “the claims of holders of debentures under any floating charge created by the company”, the trial judge stated that Bennett J. did not explain why he considered that the section under consideration by him only operated “if, at the moment of the winding up, there is still a floating charge created by the company”, save the statement in the last sentence. The trial judge then set out the facts and judgments both in the High Court and the Court of Appeal in In re Lewis Merthyr Consolidated Collieries Ltd [1929] 1 Ch. 498 (Lewis Merthyr). She stated (at para. 31) that it did not appear to her that the decision in that case on the construction of s. 107 of the Companies Consolidation Act 1908, which was the section in that Act which corresponded to s. 98 of the Act of 1963, was such that the conclusion of Bennett J. in Griffin Hotel might be considered a corollary, stating that the corollary would be whether the provision under the legislation enacted in 1908 or 1929 which corresponded with s. 285(5) “granted priority over the claim of a debenture holder to assets the subject of a fixed charge created by a debenture, simply because the company also created a floating charge in the same debenture over different property”.
83. The decision in Lewis Merthyr, in my view, is not of assistance in resolving the issue as to the construction of s. 285(7) on the facts of this case, although it may explain what Bennett J. meant in the controversial sentence. As is noted above, the issue there concerned the application of the provision then corresponding to s. 98 of the Act of 1963 (s. 107 of the Companies (Consolidation) Act 1908) in circumstances where the debenture under which the receiver was appointed created both a fixed charge and a floating charge and the issue was over which assets, whether the assets the subject of the floating charge only or, alternatively, the assets the subject of the floating charge and the assets the subject of the fixed charge, priority was given to the preferential debts. It was held that the priority applied only to the assets the subject of the floating charge. One can understand why the losing party in the case argued the point. The corresponding section to s. 98, like s. 98, stipulated that the preferential payments “shall be paid . . . out of any assets coming into the hands of the receiver”. In the Court of Appeal Lord Handworth M.R., noting that the receiver was taking possession of property which was comprised in or subject to both the fixed charge and the floating charge stated (at p. 512):
“But s. 107 is only directed to debentures secured by a floating charge, so that when one comes to the words ‘any assets’ it must mean such assets as are subject to a floating charge which the receiver receives in his character of receiver. It is in respect of those assets that a duty is imposed upon him to deal with them in a particular way.”
Likewise, Lawrence L.J. stated that the assets the subject of the fixed charge were “outside the scope and purview” of the section.
84. In Griffin Hotel, Bennett J., having determined that, as regards the property over which a receiver had been appointed before the winding up order was made, what had been a floating charge had become a fixed charge, the circumstances were that he was applying the counterpart of s. 285(7)(b) to a situation where, at the commencement of the winding up, some assets of the company were subject to a fixed charge and other assets were subject to a floating charge, which mirrored the factual situation to which the Court of Appeal was applying the counterpart of s. 98 in Lewis Merthyr. Presumably that was why Bennett J. considered his decision flowed from the decision in Lewis Merthyr.
85. The suggestion by Bennett J. in Griffin Hotel that his reasoning was a corollary of the decision in Lewis Merthyr was also implicitly criticised in the dissenting judgment of Barwick C.J. in Stein v. Saywell (1969) CLR 529, which was a decision of the High Court of Australia on an appeal from the Supreme Court of New South Wales. The statutory provision under consideration there was the subsection of the Companies Act 1961 of New South Wales the relevant portion of which was in precisely the same terms as paragraph (b) of s. 285(7). The trial judge outlined the outcome of the appeal in the First Judgment (at para. 35) and quoted a long passage from the dissenting judgment of Barwick C.J. (at para. 36). Having regard to the chronological summary of the facts as set out in the majority judgments of McTiernan and Menzies JJ (at p. 547), I think it reasonable to truncate the events which gave rise to and the factual context of the application of the counterpart of s. 285(7) in that case to the following:
(i) A petition to wind up the company the subject of the proceedings was presented by a creditor on 13th August, 1965 and a provisional liquidator, Mr. Saywell, was appointed on that day.
(ii) On 24th August, 1965 Mr. Saywell was appointed as receiver and manager pursuant to the powers contained in a deed of floating charge created by the company in 1963. Significantly, that triggered the crystallisation of another floating charge contained in a debenture created in 1964 in favour of individuals, who were respondents on the appeal, whereupon, as stated in the summary, that floating charge “became fixed and specific ‘ipso facto’”, on 24th August, 1965, as Barwick C.J. acknowledged (at p. 542).
(iii) On 11th November, 1965 Mr. Saywell was appointed receiver and manager pursuant to the 1964 floating charge.
(iv) Finally, a winding up order was made on 22nd November, 1965, whereupon Mr. Saywell was appointed as liquidator.
86. The passage from the judgment of Barwick C.J. quoted in the First Judgment commences with the statement that the High Court of Australia was not bound by the decision in Griffin Hotel, after which he expressed his opinion that the proposition that s. 292(4) (the counterpart of s. 285(7)) did not defer the claim of the debenture- holder, if in any case before the making of the winding up order, or the commencement of the liquidation, the charge over the assets of the company had crystallised, was insupportable. Thereafter, much of the passage concerns the proper construction of the counterpart of s. 98 of the Act of 1963 and, in effect, Barwick C.J. construed the counterpart of s. 285(7) in the same sense as he had construed the counterpart of s. 98. Barwick C.J. went on to consider the policy behind and the interaction between the counterpart of s. 98 and the counterpart of s. 285(7) in some detail. He did so in the context that there existed in New South Wales law at the time (but apparently not in England when Griffin Hotel was decided) a provision similar to s. 220(2) of the Act of 1963 which provides that in a case in which subs. (1) does not apply, the winding up of a company by the court shall be deemed to commence at the presentation of the petition for the winding up. By way of explanation, subs. (1) of s. 220 of the Act of 1963 relates to a situation in which, before the presentation of the winding up petition, a resolution has been passed by the company for voluntary winding up. That was not the situation in this case, so that s. 220(2) applied and the commencement of the winding up of each Company related back to 13th November, 2009, the date of the presentation of the petition to the High Court.
87. Later, in a passage not quoted by the trial judge, Barwick C.J. repeated his conclusion as to the construction of the counterpart of s. 285(7) (at p. 546) stating:
“In my opinion, the operation of s. 292(4) cannot be limited to the occasions when the charge remains floating at the commencement of the winding up. It will come into play if the claims of the chargee to assets or their proceeds arises out of a security which initially created a floating charge which, having become specific, now comprises those assets. The final words of s. 292(4) ‘and shall be paid accordingly out of any property comprised in or subject to that charge’, in my opinion, support this view of the operation of the section.”
Of course, on the facts summarised above, the crystallisation of the floating charge had occurred after the presentation of the petition, but Barwick C.J. stated immediately before the passage quoted by the trial judge that he would prefer not to base his reasons “for the appellant’s success” on that ground, the appellant being the representative of the class of employees of the company who were claiming to be preferential creditors.
88. Following the decision in Griffin Hotel, the majority decision of the High Court of Australia in that case was that s. 292(4) (the counterpart of s. 285(7)) did not confer priority to preferential debts over the claims of the debenture holders under a floating charge which became specific after the presentation by a creditor of a winding up petition, but before the making of the winding up order. As the trial judge recorded in the First Judgment (para. 37), subsequent to the decision in Stein v. Saywell, a legislative amendment was introduced in 1971 in New South Wales by virtue of which “floating charge” was defined for the purposes of the relevant sections as including a charge which was “a floating charge at the date of its creation which has since become a fixed or specific charge”.
89. In the United Kingdom, Hoffman J. had occasion to re-visit the issue of the priority of preferential creditors in Re Permanent Houses (Holdings) Ltd. [1988] BCLC 563. However, it was the application of the equivalent of s. 98 of the Act of 1963 which was at issue there. The facts were complicated but the significant feature which emerges from the sequence of events which culminated in the appointment of the receiver, as set out in the judgment (at p. 566), is that the floating charge had crystallised before the receiver was appointed. Hoffman J. recorded the fact that, although the equivalent of s. 98 (s. 196 of the U.K. Companies Act 1985) had been amended by the Insolvency Act 1986, Schedule 13, Part I, to make it clear that the section applied when the charge “as created, was a floating charge”, the amendment did not apply to receivers appointed before it came into force on 29th December, 1986. Accordingly, he had to consider whether s. 196 required that the charge over the assets in question should be floating at the moment when the receiver is appointed or whether it was sufficient that it was floating when created. Hoffman J. stated (at p. 568) that he could not see any basis for giving s. 196 and s. 614 of the Companies Act 1985 (the counterparts of s. 98 and s. 285) different constructions, so that, in effect, he adopted the same approach as he had adopted in Brightlife. He noted that in Stein v. Saywell, none of the judges, including Barwick C.J., thought that the equivalent of s. 98 and the equivalent of s. 285(7) should be construed differently. Like the trial judge in this case, he did confess to “a personal preference for the powerful reasoning of Barwick C.J. in his dissenting judgment” but once again he considered himself bound by the decision in Griffin Hotel.
Submissions made on behalf of the parties
90. Predictably the line taken by the Liquidator and the Bank is that the Court should follow the approach adopted in Griffin Hotel and in the succeeding cases in the United Kingdom in which it was followed and that adopted by the majority in Stein v. Saywell. In essence, their position is that the words “as created” in respect of a floating charge such as the Debenture in the present case cannot be read into s. 285(7) and that, as happened in the United Kingdom, specific legislation is required if, in the case of a holder of a debenture, priority under s. 285(7)(b) is to be determined by reference to the fact that the debenture holders’ charge, as created, was a floating charge. As will be clear from my analysis of the wording of the provision at paras. 75 to 78 above, I consider that submission to be correct. It is important to emphasise that that conclusion is based on what I consider to be the proper reading of the ordinary language of s. 285(7). It is not based to any extent on the so-called “Barras Principle” invoked by the Liquidator and the Bank and referred to in this Court by Fennelly J. in Clinton v. An Bord Pleanála and ors. [2007] 1 IR 272.
91. The position of the Revenue Commissioners, also predictably, is that the statutory interpretation of the trial judge is impeccable. It is urged that, when examined on its merits, the decision in Griffin Hotel ought not to be followed. Once again, I would emphasise that my interpretation of s. 285(7)(b) is based on a reading of the ordinary language used in the section. Having said that, there are a number of points made by the Revenue Commissioners which I think it is appropriate to comment on. It is suggested that the interpretation of s. 285(7) urged on behalf of the Liquidator and the Bank would lead to an almost capricious ordering of priorities on insolvency. A debenture holder under a floating charge who can initiate an express crystallisation by service of a notice similar to the Crystallisation Notice before the appointment of a receiver or the commencement of a winding up will avoid the effects of both s. 98 and s. 285 and effectively leap-frog over the preferential creditors. That is certainly the case and, in my view, it is an unsatisfactory state of affairs. However, it can be rectified by amending legislation, as was done in the United Kingdom and in New South Wales.
92. The Revenue Commissioners submit that there is no necessity to insert the words “as created” into the legislation, as has been done in the United Kingdom. It is suggested that the words “created by the company” used in connection with “any floating charge” in para. (b) of s. 285(7) can only mean the charge as originally created, or later amended, by the Company. It is submitted that the conversion from a fixed charge to a floating charge which occurred in this case on the service of the Crystallisation Notice was not an act of the Company. The conversion was done unilaterally by the Bank and, thus, the conversion was created by the Bank, not by the Company. The reality is that only the Company could create a charge over its assets and only the Company could change the nature of a charge over its assets. It is true that the Company gave the Bank the authority to initiate the conversion. However, the conversion was the act of the Company.
93. The Revenue Commissioners attach particular significance to the word “under” in the phrase “under any floating charge created by the company” in s. 285(7)(b). As I understand the argument, it is that when the conversion of a floating charge to a fixed charge takes place on the service of the Crystallisation Notice, there is not, as a matter of law, any new charge created. While this is not clearly spelt out, I assume that the argument is that the original floating charge is still the charge. What is overlooked in that argument and what I think it is appropriate to reiterate is that the competing factors in the application of s. 285(7)(b) are the priority debts of the preferential creditors, on the one hand, and the claims of the holder of the debenture under a floating charge, on the other hand. Once the floating charge crystallises, the claims of the debenture holders are not claims under a floating charge; they are claims under a fixed charge.
94. Finally, in the context of addressing the so-called Barras Principle argument, the Revenue Commissioners brought to the Court’s attention s. 621(7) of the Act of 2014, which was due to come into operation on 1st June, 2015, and which is a verbatim replication of s. 285(7) of the Act of 1963, which it has now replaced. The point made by the Revenue Commissioners was that as s. 621(7) was enacted after the decision of the High Court, it is untenable to suggest that the will of the Oireachtas is properly to be determined according to a judgment at first instance in a foreign court, i.e. the judgment in Griffin Hotel. Being conscious of the volume of work which the Company Law Review Group and the State authorities involved put into the enactment of the Act of 2014, which, containing 1,448 sections and 17 schedules is, I understand, the largest piece of legislation ever enacted in the State, one regrets finding that what Hoffman J. characterised in Brightlife as “a defect in the drafting” is perpetuated in the Act of 2014.
Construction of s. 285(7): conclusion
95. For the reasons set out above and, in particular at paras. 75 to 78, I conclude that on the application of para. (b) of s. 285(7) of the Act of 1963, which occurs in the winding up of a company, the reference to “the claims of holders of debentures under any floating charge created by the company” means a floating charge which exists at the commencement of the winding up. It does not mean a floating charge which has been converted into a fixed charge by virtue of express crystallisation in accordance with the terms of the debenture prior to the commencement of the winding up. Accordingly, as, in this case, the floating charge of each Company in favour of the Bank had crystallised by service of the Crystallisation Notice on 28th October, 2009 prior to the presentation of the petition to wind up each company, the priority debts of the preferential creditors identified in subs. (1) to (6) of s. 285 do not have priority over the claims of the Bank under each of the Debentures and those priority debts may not be paid out of the property comprised in and subject to the property which was the subject of the floating charge before crystallisation.
96. That conclusion deals only with the specific facts of this case, where there was an express crystallisation under the terms of the contract between each Company and the Bank. No view needs to be, or is, expressed as to whether there would be a similar outcome on what is called an automatic crystallisation. Unfortunately, it does appear that the replacement of s. 285(7), s. 621(7) of the Act of 2014, requires to be amended to reverse the undoubtedly unsatisfactory outcome of this decision, which gives rise to a number of concerns.
97. One concern is the possibility that, absent amending legislation, a form of false crystallisation might be contrived in circumstances where the form of the documentation undoubtedly creates a crystallisation, but where, in substance, the debenture holder allows the business to continue as if the floating charge was still in existence. It is important to reiterate, as stated at para. 10 above, that there is no evidence before this Court as to what happened between the service of the Crystallisation Notice and the presentation of the petition to wind up in this case and there is no suggestion of any lack of genuineness in the crystallisation process. Accordingly, what follows is obiter. In the hypothetical situation envisaged an issue might well arise as to the effectiveness of the creation of a fixed charge by crystallisation on the service of the notice if there was evidence to suggest that, either with the knowledge or at least tacit approval of the debenture holder, things continued on after the service of the notice in a way which was inconsistent with the fact that a crystallisation had taken place. Acknowledging that what happened subsequent to an event cannot normally be used to interpret the legal consequences of the event itself, which must be assessed in the light of the facts at the time when it occurred and the language used in the documents giving effect to it, nonetheless, in such a hypothetical situation an affected preferential creditor could argue that the debenture holder had waived the crystallisation event or, alternatively, that it was estopped from relying on it, if it was clear that the debenture holder permitted the situation to continue more or less as if it were a floating charge after the crystallisation event. Given the current unsatisfactory legislative position on the basis of the finding as to the proper construction of s. 285(7), it is not unreasonable to postulate that a court faced with a hypothetical situation would be reluctant to accept what was in substance a purely nominal crystallisation which the debenture holder did not seek in substance to rely on in any way between the crystallisation event and the winding up.
98. Another concern brings me back to s. 99 of the Act of 1963, which is referred to in outlining the statutory provisions above, where it is noted that under that provision there was no requirement for the registration of the conversion of a floating charge to a fixed charge. The trial judge, as noted earlier, stated that there is no rule of law which precludes parties to a debenture creating a floating charge agreeing, as a matter of contract, that the floating charge will crystallise upon the happening of an event or a particular step taken by the chargee. That proposition, with which I agree, is a fundamental plank in the determination of the effect of the Crystallisation Notice in this case. However, in this connection, one is conscious of the concerns expressed in Lynch-Fannon and Murphy on Corporate Insolvency and Rescue at para. 9.36 on the current state of the law arising from that proposition. There it is stated that it may be necessary to re-visit the questions raised by certain forms of crystallisation in the short term and, in particular, against the backdrop of a consideration of fundamental insolvency law principles, which include the necessity of transparency as between creditors and debtor companies, it being suggested that the occurrence of less than public events is contrary to the principles which underpin the system of registration of company charges and other encumbrances.
Order
99. There will be an order allowing the appeal and setting aside the portions of the order of the High Court dated 18th July, 2011 referred to in the notice of appeal and substituting therefor the following directions:
(a) that the floating charge created by Clause 5 of each of the Debentures was converted into a fixed charge over the property of each Company by virtue of the service of the Crystallisation Notice by the Bank on 28th October, 2009 and, accordingly, prior to the commencement of the winding up of each Company; and
(b) that the claims of the Bank as debenture holder to the funds realised from the assets the subject of the floating charges created by the Debenture and converted into fixed charges on 28th October, 2009 shall rank in priority to the preferential debts due by the Company identified by reference to s. 285(1) to (6) of the Act of 1963.
United Bars Ltd. (In Receivership) v. Revenue Commissioners
[1991] IR 396 Murphy J
Ex tempore
Murphy J.
Although the facts of this case have been fully set out in the affidavit sworn by Mr. Raymond Jackson herein on the 20th January, 1988, and furthermore those facts have been fully explored and analysed in the arguments addressed to me by counsel earlier today, it may be helpful if I summarise the material facts as follows: United Bars Ltd. and Walkinstown Inns Ltd. are two companies within what is known as the Belton Group. That group of companies was apparently engaged in the licensed trade. On the 6th October, 1981, three documents were executed. The first was a mortgage debenture given by the United Bars Ltd. in favour of Irish International Bank Ltd. to whom I shall refer as the bank, whereby United Bars Ltd. charged by way of a floating security all its undertaking and assets with the payment of certain monies to the bank. It further charged and mortgaged to the bank certain lands and hereditaments consisting of licensed premises by way of further security for its indebtedness to the bank. The second of the documents executed in October, 1981, was a guarantee for the payment of United Bars Ltd.’s indebtedness to the bank by other members of the Belton Group, including, in particular, Walkinstown Inns Ltd. The third material document was a mortgage debenture given by Walkinstown Inns Ltd. in support of the guarantee already referred to. That mortgage debenture, like the one given by United Bars Ltd., comprised both a floating security and a fixed charge. A subsequent document was executed on the 17th October, 1983, but its provisions do not affect any matter of principle involved in these proceedings.
Subsequently United Bars Ltd. defaulted in the payment of monies due and owing by it to the bank. As a consequence the bank, on the 3rd December, 1986, appointed Mr. Jackson as receiver and manager of the properties of United Bars Ltd. comprised in the debenture already referred to, and a similar appointment was made on the same day of Mr. Jackson in respect of the properties of Walkinstown Inns Ltd. comprised in the debenture granted by that company. After his appointment Mr. Jackson proceeded to realise the property over which he had been appointed and happily, from the bank’s point of view at any rate, the realisation appears to have been very successful. The total amount received as a result of the sale of the premises charged by United Bars Ltd., amounted to £991,125. The amount realised by the sale of the licensed premises charged by Walkinstown Inn Ltd. in favour of the bank amounted to £127,876. Thus, the total amount received by Mr. Jackson by the realisation of the licensed premises which were subject to fixed charges amounted to £1,119,001. As the total due to the bank was £1,033,584 this left Mr. Jackson with a surplus of £85,417.
The question posed for the consideration of the court in these proceedings is whether the receiver is hound, having regard to provisions of s. 98, sub-s. 1 of the Companies Act, 1963, to use all or any part of the said sum of £85,417 in payment of the persons who are or would be preferential creditors of the company if and when those companies are wound up. It is necessary, therefore, to turn to section 98. Sub-section 1 of that section provides:
“Where either a receiver is appointed on behalf of the holders of any debentures of a company secured by a floating charge, or possession is taken by or on behalf of those debenture holders of any property comprised in or subject to the charge, then, if the company is not at the time in course of being wound up, the debts which in every winding up are, under the provisions of Part VI relating to preferential payments to be paid in priority to all other debts, shall be paid out of any assets coming to the hands of the receiver or other person taking possession as aforesaid in priority to any claim for principal or interest in respect of the debentures.”
Counsel on behalf of the receiver relied principally and primarily and indeed understandably on the decision of Nourse J. in In re G.L. Saunders Ltd. (in liquidation) [1986] 1 W.L.R. 215. That case has, to say the least of it, considerable similarity with the facts of the present case. The company, G.L. Saunders Ltd., executed two debentures, by which it created fixed and floating charges over its assets. A receiver was appointed and after paying the debts due to the bank, by whom he was appointed, the receiver was left with a surplus of £444,000 from the sale of the assets, subject to the fixed charges. The question arose whether all or part of that money should be used for the payment of preferential creditors or should be paid to the mortgagor, that is to say, the company. Nourse J. held that the money should be repaid to the company and not applied in payment of the preferential creditors. In essence, the decision of Nourse J. regarding s. 94 of the English Companies Act, 1948, which is similar to our s. 98, was based on an ex tempore judgment in In re Lewis Merthyr Consolidated Collieries [1929] 1 Ch. 498. In that case Tomlin J. held that s. 107 of the Companies Consolidation Act, 1908, which was the predecessor of s. 94 of the English Act of 1948 and s. 98 of the Act of 1963, applied only in respect of accounts coming into the hands of the receiver which were the subject of a floating charge and not to assets subject to a fixed charge. That decision was confirmed by the Court of Appeal.
That effectively disposed of the matter before Nourse J. in In re G.L. Saunders Ltd. (in liquidation) [1986] 1 W.L.R. 215 but he went on, having regard to the fact, as he said, that the issue was a vexed question on which different leading counsel were said to have expressed differing views, to express further views in an analysis which I find more difficult to follow. He explained that if debenture holders’ debts or the particular debt had been extinguished there was no principal or interest owing to the debenture holder and accordingly the section would have no application. As I say, I find that analysis difficult to follow. But the main part of the decision is simply the application of the long-standing decision in In re Lewis Merthyr Consolidated Collieries Ltd. [1929] 1 Ch. 498 and that is the primary basis of his decision.
In those circumstances counsel on behalf of the Revenue Commissioners, who are named as defendants in the proceedings, makes two points. First of all he draws attention to the form and content of the mortgage debenture given by United Bars Ltd. to the bank and points out that the charge is, in the first instance, and primarily, a charge by way of floating security, and it is only in the secondary phase that the document goes on to provide for further securing the monies aforesaid.
So that there was, as counsel pointed out, a floating charge on all of the assets of the company, necessarily including its fixed premises and there was an additional or secondary security in the form of the fixed charge. Accordingly it could be said in considering the rights of the bank or the nature of its security, that it had a floating charge, and indeed primarily had a floating charge on these in respect of which there was also an undoubted fixed charge.
That is the first distinction which is drawn. Secondly, counsel on behalf of the defendants courageously contend that the decision in In re Lewis Merthyr Consolidated Collieries [1929] 1 Ch. 498 was wrong and should not be followed. Counsel has analysed that decision and in particular the passage from the judgment of Tomlin J., starting at page 506:
“It is said by Mr. Grant that that language, if it is read literally and without importing into it any word which is not actually there, means this, and means this only, and I think he goes so far as to say cannot mean anything else, that is, that ‘any assets coming to the hands of the receiver’ covers all assets that may come to the hands of the receiver or other person taking possession derived from the debenture, whether in respect of the fixed charge or whether in respect of the floating charge.”
Mr. Grant had presented an argument apparently based on a literal interpretation, which it seems to me, and which counsel on behalf of the defendants contend, is an argument of substance and merit. That argument is then dealt with by Tomlin J. in the following paragraph as follows:
“. . . if you are bound to introduce some limitation, the question is whether that is the proper limitation, and reading the section as a whole, I feel no doubt myself that the limitation which ought to be introduced is the limitation of ‘assets coming to the hands of the receiver or other person taking possession subject to the floating charge,’ or some such words as that. The words, ‘or other person taking possession as aforesaid,’ refer back to the words ‘or possession is taken by or on behalf of those debenture holders of any property comprised in or subject to the charge,’ and if I am right in saying that ‘the charge’ must mean ‘the floating charge,’ because the floating charge is the only antecedent in the sentence to which ‘the charge’ can refer, then the words ‘other person taking possession as aforesaid’ must mean ‘other person taking possession as aforesaid, of assets comprised in the floating charge,’ and ‘assets’ there, in the direction for payment, must mean ‘assets representing assets comprised in the floating charge.’ It seems to me to follow inevitably from that.”
That analysis of the section is severely criticised by counsel on behalf of the defendants and I have considerable sympathy with that criticism. It seems to me that the learned judge was not inferring that the legislature intended to include a complex qualification on the word “assets”, not merely as to what it would include or what it would infer, but what would be excluded from it and no such words expressly appear in the section.
It is always a difficult task to read in a complex qualification to a section, indeed a qualification which the learned trial judge did not himself find it easy to draft or express. Nonetheless the judge has so decided and his decision on appeal was confirmed briefly and firmly in the words of Lawrence L.J. at page 512 of the report:
“In my judgment the fact that the debenture in the present case is one which combines with the floating charge, a fixed charge does not bring the section into operation as against the assets comprised in the fixed charge. Such assets are outside the scope and purview of the section.”
If the matter came before me de novo and I was untrammelled by any authorities either binding or persuasive, I might accede to the submissions made on behalf of the defendants. I do not know whether I would necessarily agree with the submission. There are, undoubtedly, ambiguities and difficulties in the interpretation of section 98. It is clear and rightly and necessarily agreed by both parties that assets subject to a fixed charge may and can be realised by a variety of procedures under which no question of payment of preferential creditors would arise. It may even be that where a receiver is appointed that the monies representing the proceeds of sales of some assets did not reach his hands. But perhaps the strongest point is one made by counsel on behalf of the receiver in saying that if s. 98 was to be interpreted in such a way that the proceeds of sale of fixed assets by a receiver were to be made available in whole or in part for preferential creditors, this would confer upon them a benefit or entitlement which they would not have in the event of a liquidation because in a liquidation their right would be to a priority over creditors who had a floating charge, not over those who had a fixed charge. If s. 98 were to be assessed as giving them priority over a fixed charge this would be an inexplicable and unwarranted additional benefit to the preferential creditors. The scheme of the Act of 1963 was to give a particular right to preferential creditors in a winding up whereas the function of s. 98 and its predecessors was to prevent that right being gained, either intentionally or accidentally, bar the appointment where no liquidation took place and the only purpose of s. 98 should be to equate the rights of preferential creditors in a receivership with those in a liquidation, not to improve on those rights.
These are factors which undoubtedly have to be taken into account in considering whether the literal interpretation or the teleological interpretation of the section is to be adopted. But at the end of the day it seems to me that predominant in In re Lewis Merthyr Consolidated Collieries Ltd. [1929] 1 Ch. 498 is neither a literal interpretation nor a teleological interpretation of the section. The fact that must influence me most is the fact that In re Lewis Merthyr Consolidated Collieries Ltd. has stood the test of time. That has been, although an English decision, part of the corpus of our law for nearly sixty years, and whilst it has not been referred to, so far as I am aware, in many cases it is known and existed in the authorities and I think one must presume was known to the legislature and its legal advisors at the time of the enactment of the Companies Act, 1963.
Furthermore, it seems to me of the utmost importance in dealing with commercial matters to maintain some measure of consistency, and to proceed on the footing that parties to commercial transactions have organised their affairs on the basis of the law as they understand and believe it to be for many years, and any change to or any revision or correction of that law should be made preferably by the Oireachtas or at any rate by the final court of appeal in this country. In the circumstances, it seems to me that I must apply the law as it was interpreted in In re Lewis Merthyr Consolidated Collieries [1929] 1 Ch. 498 originally and more recently in In re G.L. Saunders Ltd. (in liquidation) [1986] 1 W.L.R. 215 notwithstanding any reservations that I might have had based on the strength of the arguments brought forward by counsel on behalf of the defendants.
In the circumstances it seems to me that the question raised by the receiver should be answered to the effect that the surplus monies in his hands representing the proceeds of sales of assets subject to fixed charges should be paid by him to the company.
Industrial Development Authority v. Moran
[1978] IR 159
S.C.
O’Higgins C.J.
29th November 1978
I have read the judgment which Mr. Justice Kenny is about to deliver and I agree with it.
Kenny J.
Cork Shoe Company Ltd. was incorporated in the State in May, 1947. The regulations in Table A in the first schedule to the Companies (Consolidation) Act, 1908, including article 71 (with some exceptions which are not relevant to this case) applied to the company. The company subsequently acquired the lands in folio 43689 of the register of freeholders for the county of Cork, on which there were a number of factories.
On the 23rd October, 1965, the company gave a debenture under its seal to the Bank of Ireland to secure all moneys advanced to the company which were to be repayable on demand. The company charged its undertaking and all its property with repayment of the sum due and also, as a specific charge,
the lands in folio 43689. The debenture was registered as a burden on the folio.
This debenture was issued subject to and with the benefit of the conditions which were endorsed on it and which were to be deemed part of it. Conditions 10 and 14 are so important that I have to set them out:
10. “At any time after the principal moneys hereby secured become payable, the registered holder of this debenture may appoint by writing any person to be a receiver and manager of the property charged by this debenture . . . and any receiver and manager so appointed shall have power . . . (3) To sell or concur in selling, let or concur in letting any of the property charged by this debenture, and to carry any such sale into effect by deed in the name and on behalf of the company, or otherwise, to convey the same to the purchaser . . . .
14. The company hereby irrevocably appoints any receiver or receivers appointed as aforesaid the attorney or attorneys of the company for the company and in its name and on its behalf and as its act and deed to execute, seal and deliver and otherwise perfect any deed assurance agreement instrument or act which may be required or may be deemed proper for any of the purposes aforesaid.”
On the 24th July, 1973, the company adopted new articles of association which provided that the regulations in Table A in the first schedule to the Act of 1908 and in Table A in the first schedule to the Companies Act, 1963, should not apply to the company. The only relevant regulation is article 128 which reads:
“The seal shall be used only by the authority of the directors or of a committee of directors authorised by the directors in that behalf, and every instrument to which the seal shall be affixed shall be signed by a director and shall be countersigned by the secretary or by a second director or by some other person appointed by the directors for the purpose.”
In 1975 there was a substantial sum of money due by the company to the bank, and on the 12th May, 1975, the bank appointed Mr. Michael Gribben as receiver and manager of the company. He agreed to sell part of the lands in the folio to the Industrial Development Authority, who became the purchasers.
On the 8th October, 1976, a deed of transfer was executed; it was expressed to be made between the company of the first part, Michael Gribben of the second part and the purchasers of the third part. It recited that under the powers given by the conditions endorsed on the debenture of the 23rd October, 1965, Mr. Gribben had agreed with the purchasers to sell the lands to which the transfer related. The deed then witnessed that the company, the registered owner, acting by the receiver did thereby convey, and that Mr. Gribben as receiver in exercise of the powers given to him by the conditions endorsed on the debenture transferred, the lands described in the deed to the purchasers in fee simple. The testimonium to this deed reads: The common seal of Cork Shoe Company Limited was affixed hereto by the direction of Michael Gribben” and the seal of the company appeared opposite this. Immediately underneath this there appeared the words:”Signed, sealed and delivered by the said Michael Gribben in the presence of . . .” The deed was then executed by Michael Gribben in his own name, and the witness to the execution by Mr. Gribben signed his name.
When the deed was presented to the Registrar of Titles, he had some doubt about its validity and he referred the matter to the High Court under s. 19, sub-s. 2, of the Registration of Title Act, 1964. Mr. Justice Butler held that the seal of the company had been irregularly affixed and that the company had no power to appoint an attorney; the judge declared that the deed of the 8th October, 1976, was ineffectual to transfer to the purchasers the property described in that deed. The purchasers have appealed to this Court.
I think that the judge was correct on the first point concerning the use of the seal but that he was incorrect on the second point. In my view, the deed of the 8th October, 1976, was effective to transfer to the purchasers all the estate and interest of the company in the part of the lands in the folio to which the deed related.
When a receiver is appointed over the assets of a company, the articles of association continue in force and bind him. A receiver, as receiver, has no authority to use the seal of the company. Article 128 required that the seal should be used only by the authority of the directors, and that every instrument to which the seal was affixed should be signed by a director and should be countersigned by the secretary or by a second director. In this case the directors did not authorise the use of the seal and none of them signed the deed of the 8th October, 1976. Accordingly, the first part of the testimonium was without any effect.
The judge reached the conclusion that “a company has no power to act by attorney to execute deeds within the State” as an inference from s. 40 of the Companies Act, 1963, which reads:
“(1) A company may, by writing under its common seal, empower any person, either generally or in respect of any specified matters, as its attorney, to execute deeds on its behalf in any place outside the State.
(2) A deed signed by such attorney on behalf of the company and under his seal shall bind the company and have the same effect as if it were under its common seal.”
A somewhat similar provision appeared in s. 78 of the Act of 1908 and in s. 55 of the Companies Act, 1862. The inference which the judge drew from s. 40 of the Act of 1963 was incorrect. A company has power to act by attorney to execute deeds within the State and s. 40 of the Act of 1963 is intended to give a company the power to act by attorney outside the State. Some doubt existed whether a company had power to do this and so s. 55 of the Act of 1862 was enacted and was carried forward in the consolidating Acts of 1908 and 1963.
In volume 1 of Palmer’s Company Precedents, 17th edition (1956) the author at p. 950 deals with powers of attorney: “Powers of attorney are frequently required in connection with companies. Prima facie any company can appoint an attorney to act on its behalf, for the attorney is an agent, and, as a company can only act by agents, it has an implied power to appoint such agents.” The authority cited for this proposition is Ferguson v. Wilson 5 . The author continues: “Members of the public dealing with an agent having apparent authority to act on its behalf are in general entitled to assume that he had such authority unless it appears from the company’s registered documents that he had not the authority in question . . . . Whether, however, in any particular case the directors of a company have power to execute a power of attorney on the company’s behalf depends on the article. The general rule is delegatus non potest delegare. But directors are generally invested with wide general powers, and in virtue of such powers they are usually in a position to grant a power of attorney; otherwise the sanction of a general meeting must be obtained.”
The debenture was given in 1965 and so the validity of the appointment must be judged, not by the provisions of the new articles of association adopted in July, 1973, but by the articles in force in 1965. This point was not adverted to in the argument in this Court or before Mr. Justice Butler.
Article 71 of Table A in the Act of 1908, so far as relevant, reads:
“The business of the company shall be managed by the directors, who may pay all expenses incurred in getting up and registering the company, and may exercise all such powers of the company as are not, by the Companies (Consolidation) Act, 1908, or any statutory modification thereof for the time being in force, or by these articles, required to be exercised by the company in general meeting, subject nevertheless to any regulation of these articles, to the provisions of the said Act, and to such regulations, being not inconsistent with the aforesaid regulations or provisions, as may be prescribed by the company in general meeting.”
The articles of this company in force in 1965 did not require that a power of attorney could be given only by the company in general meeting and there was nothing in the Act of 1908 which required this. It is also relevant that a form of debenture with a clause exactly similar to clause 10 of the conditions in this case appears at p. 277 in the third volume of Palmer’s Company Precedents, which relates to debentures: 12th ed.1920. I take that edition because it was the last one before the English property legislation of 1925 and was edited by Mr. Alfred Topham, a well-known expert on company law. It is inconceivable to me that Mr. Topham would have included such a clause if a company had no power to appoint an attorney to execute deeds on its behalf.
As Mr. Gribben executed the deed of transfer in his own name, the provisions of s. 46, sub-s. 1, of the Conveyancing Act, 1881, make the deed of transfer fully effective. The sub-section reads:
“The donee of a power of attorney may, if he thinks fit, execute or do any assurance, instrument, or thing in and with his own name and signature and his own seal, where sealing is required, by the authority of the donor of the power; and every assurance, instrument, and thing so executed and done shall be as effectual in law, to all intents, as if it had been executed or done by the donee of the power in the name and with the signature and seal of the donor thereof.”
Accordingly, the deed of transfer of the 8th October, 1976, was effectual to transfer the lands described in it to the purchasers, and the order of the 1st May, 1978, should be set aside. This Court should declare that the deed dated the 8th October, 1976, was effective to transfer to the purchasers the property therein described as being transferred; and the Registrar of Titles should be directed to register its effect on the folio.
While the deed of transfer in this case is effective because of s. 46 of the Conveyancing Act, 1881, I wish to point out that the power given to the receiver by clause 10 is “to carry any such sale into effect by deed in the name and on behalf of the company.” When a receiver is selling under such a clause, the more usual and better practice is for him to execute the deed of transfer by writing the name of the company and underneath this to write words that indicate that the name of the company has been written by the receiver as attorney of the company under the power of attorney given by the debenture. In addition, he should execute the deed in his own name. In that way he has the best of both worlds. The writing of the name of the company by the authority of the company given when it executed the debenture brings the case within the words of the debenture itself, and execution by the attorney personally gives the advantage of s. 46 of the Conveyancing Act, 1881.
Parke J.
I have read the judgment delivered by Mr. Justice Kenny and I agree with it.