Derivative Action
Cases
Connolly -v- Seskin Properties Limited & Ors
[2012] IEHC 332
Kelly J.
“Derivative Action
52. At the outset of this judgment, I stated the rule in Foss v. Harbottle. As I pointed out, that rule admits of exceptions so as to ensure that the application of that legal rule does not bring about an injustice.
53. The general principles governing actions in respect of wrongs done to a company or irregularities in the conduct of its affairs were set out with clarity by Peter Gibson L.J. in delivering the leading judgment in the Court of Appeal in Barrett v. Duckett [1995] 1 BCLC 243. He said:-
“1. The proper plaintiff is prima facie the company.
2. Where the wrong or irregularity might be made binding on the company by a simple majority of its members, no individual shareholder is allowed to maintain an action in respect of that matter.
3. There are, however, recognised exceptions, one of which is where the wrongdoer has control which is or would be exercised to prevent a proper action being brought against the wrongdoer: in such a case, the shareholder may bring a derivative action (his rights being derived from the company) on behalf of the company.
4. Where a challenge is made to the right claimed by a shareholder to bring a derivative action on behalf of the company, it is the duty of the court to decide as a preliminary issue the question whether or not the plaintiff should be allowed to sue in that capacity.
5. In taking that decision, it is not enough for the court to say that there is no plain and obvious case for striking out; it is for the shareholder to establish to the satisfaction of the court that he should be allowed to sue on behalf of the company.
6. The shareholder will be allowed to sue on behalf of the company if he is bringing the action bona fide for the benefit of the company for wrongs to the company for which no other remedy is available. Conversely, if the action is brought for an ulterior purpose or if another adequate remedy is available, the court will not allow the derivative action to proceed.”
Derivative Action: The Test
54. In Prudential Assurance Company Limited v. Newman Industries Limited (No 2.)[1982] 1 Ch. 204, the Court of Appeal in England held that before a minority shareholder should be permitted to bring a derivative action on behalf of the company, he “ought at least be required before proceeding with his action to establish a prima facie case (i) that the company is entitled to the relief claimed and (ii) that the action falls within the proper boundaries of the exception to the rule in Foss v. Harbottle”. In a moment, I will consider the exceptions to the rule in Foss and Harbottle. Before doing so, however, I ought to point out that in this jurisdiction, Irvine J., in Fanning v. Murtagh [2009] 1 IR 551, held that the standard of proof required of an intended plaintiff is that he must establish “a realistic prospect of success”. It is accepted by the applicant that that is the more appropriate standard to apply rather than the establishment of a mere prima facie case as identified in the Prudential case supra.
Exceptions to the Rule in Foss v. Harbottle
55. These were dealt with by Irvine J. in Fanning v. Murtagh where she said:-
“There are four recognised exceptions to the rule in Foss v. Harbottle, which may permit an individual shareholder as a minority to sue on behalf of the other shareholders. These exceptions, briefly stated, comprise the following categories of wrongdoing namely:-
(a) an act which is illegal or ultra vires to (sic) the company;
(b) an irregularity in the passing of a resolution which requires a qualified majority;
(c) an act purporting to abridge or abolish the individual rights of a member;
(d) an act which constitutes a fraud against the minority and the wrongdoers are themselves in control of the company.”
56. The applicant invites me to accept a fifth exception relying in part upon the decision of the Supreme Court of Western Australia and a decision of Finlay Geoghegan J. in Glynn v. Owen [2007] IEHC 328.
57. The Australian case is Biala Pty Limited v. Mallina Holdings Limited [1993] ACSR 785. In that case, the court (Ipp J.) considered the question of whether or not a fifth exception to the rule in Foss and Harbottle exists. The judge pointed out that it is a matter of controversy. He quoted from Foss v. Harbottle itself where Sir James Wigram V.C. made remarks indicative of a view that there should be a general power of interference by the courts where justice demands that such a power be exercised. The quotation from Wigram V.C. reads:-
“If a case should arise of injury to a corporation by some of its members, for which no adequate remedy remained, except that of a suit by individual corporators in their private characters, and asking in such character the protection of those rights to which in their corporate character they were entitled, I cannot but think that the principles so forcibly laid down by Lord Cottenham in Walworth v. Holt 4 MYL and CR 365 (see also 17 VES 320 per Lord Eldon) and other cases would apply, and the claims of justice would be found superior to any difficulties arising out of technical rules respecting the mode in which corporations are required to sue.”
Ipp J. then conducted a review of a series of cases before concluding:
“Equity is concerned with substance and not form, and it seems to me to be contrary to principle to require wronged minority shareholders to bring themselves within the boundaries of the well recognised exceptions and to deny jurisdiction to a court of equity even where an unjust or unconscionable result may otherwise ensue . . . accordingly, I uphold the argument of the plaintiffs that the court may allow a derivative action by shareholders in circumstances where the justice of the case so requires.”
57. This line of argument was considered by Finlay Geoghegan J. in Glynn v. Owen [2007] 1 IEHC 328. This is what she said:
“The plaintiffs, in the alternative, seek to pursue the derivative claims as an exception to the rule in Foss v. Harbottle ‘in the interests of justice’. In Crindle Investments v. Wymes Keane J., at p. 592, refers to this as ‘the less solidly based fifth exception which suggests that the rule may be relaxed where the interests of justice so require’. On the facts of that appeal, it was not necessary for the Supreme Court to decide whether such an exception exists.
Writing extra-judicially Keane C.J. at paragraph 26.20 of his Company Law, 4th Ed.,(Tottel, 2007), takes a more positive view and states:
‘While the view was advanced in earlier editions of this book that the Irish courts might be reluctant to extend the exceptions to the rule, that is probably to err on the side of caution. While it is true that the wide import of the term ‘fraud’ enables most deserving cases to avail of the third exception where the other two are not available, there is probably no good reason why the courts should not carve out further exceptions if justice so requires. Not only should the judicial comments in support of that view already cited be borne in mind; it is also worth noting that in the two seminal cases of Foss v Harbottle itself and Edwards v Halliwell, Wigram V-C and Jenkins LJ both observed that the rule should not be applied in so rigorous a fashion in any case as to lead to injustice’.
I respectfully agree that the formulation of the rule in the earlier cases makes clear that it should not be applied in such a way as to lead to injustice. Nevertheless, the entitlement of a shareholder to pursue by way of derivative action a claim for and on behalf of a company is an exception to an ‘elementary principle’ as referred to above. As such, it should not be broadly or liberally applied. A very strong case would have to be made out. It would also have to be consistent with the principles underlying the rule in Foss v. Harbottle and the exceptions to it. These include the reluctance of the courts to interfere in the internal management of a company.”
58. I respectfully agree with this approach.
In the Matter of Murph’s Restaurants Ltd
1979 No. 1174 P
High Court
5 April 1979
31 July 1979
[1979] I.L.R.M. 141
(McWilliam J)
(Gannon J)
McWILLIAM J
delivered his judgment on 5 April 1979 saying: These proceedings have been initiated by the petitioner to wind up Murph’s Restaurant Ltd (hereinafter called the company). At the time of the filing of the petition, my copy of which does not bear any date, the petitioner appears to have been a director of the company. He had been served with a notice calling an extraordinary general meeting of the company on 12 March 1979 for the purpose of considering a resolution that the petitioner be removed from office as a director of the company. There were three directors and the petitioner has objected that he was not given any notice of the meeting of the board at which it was decided to convene the extraordinary general meeting. It is unlikely that this is very material, even if correct. It appears that the meeting called for 12 March did not take place and it may be assumed that the petitioner is still a director. It is admitted that the petitioner has been refused any participation in the affairs of the company as a director and he also alleges that the other directors are attempting to purchase his shares at a gross undervalue. The three directors are the only shareholders in the company and they have equal shareholdings. In correspondence prior to the issue of the petition it was stated on behalf of the petitioner that the petition for winding up was being filed pursuant to the *143 provisions of s. 213 (g) of the Act.
The present motion is brought on behalf of the company for an order restraining the petitioner from advertising the petition.
S. 213 of the Act provides that:
A company may be wound up by the court if …
(f) the court is of opinion that it is just and equitable that the company be wound up;
(g) the court is satisfied that the company’s affairs are being conducted, or the powers of the directors are being exercised, in a manner oppressive to any member or in disregard of his interests as a member and that, despite the existence of an alternative remedy, winding up would be justified in the general circumstances of the case so, however, that the court may dismiss a petition to wind up under this paragraph if it is of opinion that proceedings under section 205 would, in all the circumstances, be more appropriate.
S. 215 provides as follows:
An application to the court for the winding up of a company shall be by petition presented, subject to the provision of this section, either by the company or by any creditor or creditors (including any contingent or prospective creditor or creditors), contributory or contributories, or by all of any of these parties, together or separately, so, however, that — (e) a petition for winding up on the grounds mentioned in paragraph (g) of s. 213 may be presented by any person entitled to bring proceedings for an order under s. 205.
S. 205 (1), provides as follows:
Any member of a company who complains that the affairs of the company are being conducted or that the powers of the directors of the company are being exercised in a manner oppressive to him or any of the members (including himself), or in disregard of his or their interests as members, may apply to the court for an order under this section.
The section then makes provision for remedies other than winding up.
It has been urged on behalf of the company that the advertisement of the petition would greatly damage the company, that the matters complained of by the petitioner are such as could properly be dealt with under the provisions of s. 205, that the petition is not presented in good faith, and that it is a case in which the court would, under the provisions of s. 213 (g), dismiss a petition to wind up on the grounds that proceedings under s. 205 would be more appropriate. I was referred to the case entitled Re a Company [1894] 2 Ch 394 as authority for the proposition that I have jurisdiction to restrain the advertisement of the petition if it is not presented in good faith but for the purpose of putting pressure on the company.
For the petitioner it is argued that his co-directors are trying to acquire his shares on unfavourable terms and that, if any of the matters complained of could be a ground for winding up, this application should be refused. I was referred to the case of Bryanstone Finance Ltd v de Vries (No. 2) [1976] Ch 63. I was also referred to the case of Mann v Goldstein [1968] 1 WLR 1091 in support of the proposition that pursuing a valid claim in a normal manner is not an abuse of the process of the court even though it is done with personal hostility and with some ulterior motive.
It occurs to me that some confusion may have been caused in the minds of both parties by the reference in the correspondence to s. 213 (g). This paragraph and s. 205 apply only to members of a company as members. Apart from the *144 allegations in para. 13 of the petitions, which are not grounded on any facts, the petition is based on facts which prejudice the petitioner in his capacity as director. Although there has been an offer to purchase the petitioner’s shares, this did not arise until the petitioner had threatened to issue his petition to have the company wound up on the ground that he was being deprived of his rights as a director and there does not appear to have been a threat of any sort to the petitioner’s shareholding or to his rights as a member.
On the other aspect of the case, it is perfectly clear that the directors are at loggerheads and that the petitioner has been deprived of all his functions as director. This appear to be a case, similar to that of Re Lundie Bros Ltd [1965] 1 WLR 1051, in which, in substance, a partnership exists between the three persons carrying on the business of the company together and that, prima facie, the petitioner would have been entitled to a dissolution of the partnership if it were a partnership and not a company, and that, accordingly, he has a bona fide claim to have a company wound up.
On the views I have taken that the petition is based on the petitioner’s office as director and as to the application of s. 205 and s. 213 (g), it does not appear to me to be open to the court to dismiss the petition on the grounds that proceedings under s. 205 would be more appropriate.
Under these circumstances, I will refuse the application to restrain the petitioner from advertising the petition, although it may well be that the petitioner should consider whether it is to his advantage to proceed with his petition or not.
I should add that I would be hesitant to restrain the advertisement of a petition if the circumstances were not such that I should also restrain any further proceedings on the petition, as was done in the case of Re a company.
GANNON J
delivered his judgment on 31 July 1979 saying: Murph’s Restaurants Ltd is a private company which was incorporated on 17 January 1972 with a share capital of 3,000 ordinary shares of £1 each of which 2,400 are fully paid up. There are only three shareholders namely Brian Suiter, Kevin O’Driscoll and G. Murph O’Driscoll who are also directors of the company. The present value of the assets of the company is estimated by the company’s accountant to be little short of £190,000. Brian Suiter has petitioned the court purusant to s. 213 of the Companies Act, 1963 to order that the company be wound up on the grounds that the affairs of the company are being conducted and the powers of the directors being exercised in a manner which is oppressive to him and in disregard of his interests and also that it is just and equitable so to order. The company on the hearing of this petition is represented by the other two shareholders/directors Kevin and Murph O’Driscoll, who on their part claim that the petitioner has been removed from the position of director for good reason and that it would be neither in the interests of the company nor just nor equitable to wind up the company. Each of the three shareholders/directors, to whom I shall refer hereafter as Brian, Kevin and Murph, and the company’s accountant gave evidence on the hearing of the petition which was amended by consent to include a claim by Brian, the petitioner, for alternative relief under s. 205 of the 1963 Act.
*145
Prior to the formation of the company Brian worked as a computer salesman in IBM Ltd in which Kevin was also employed and they were close friends. They discussed the idea of setting up as a joint venture a snack bar business and engaging Kevin’s brother Murph, who was then not in any employment, to manage the business. After three or four months discussion, this company was incorporated following agreement that Brian and Kevin would advance £800 each as capital and that each would advance a further £400 on behalf of Murph so that all three would be equal partners. It was agreed that Murph would not be required to refund those two advances made on his behalf but would give equivalent value in his whole time attention to the business while Kevin and Brian remained in their salaried employments. Within three years Kevin also became whole-time engaged in the work of the company, but Brian retained his employment having moved from IBM Ltd to Honeywell Ltd and then to Memory Ireland Ltd with whom he was general manager at a salary of about £10,000 per annum from 1976 until he too became whole-time engaged in the company in June 1977. Up to that time neither Kevin nor Murph was in receipt of an annual income as high as that which Brian was receiving in his employment.
The business of the company had commenced as a sandwich bar at 99 Lower Baggot Street, Dublin and next a delicatessen and cold foods shop was opened in Suffolk Street, Dublin. The company opened a hot food restaurant with wine licence at Bachelor’s Walk, Dublin and later engaged in contract catering before opening a restaurant in Cork in October 1977. In 1978 premises were acquired adjoining the Baggot Street premises and the range of catering there extended. Although the registered office of the company is at Lower Baggot Street the offices used by the directors as head office are at Bachelor’s Walk. At each of the branches of the business the company employs either a manager or manageress and other necessary staff.
The business of the company of its nature involved long working hours, and in the earlier years, while expanding, the returns from the business provided Murph and later Kevin with a reasonable annual income but little profit. In 1976 after the Bachelor’s Walk branch of the business was established the company became profitable. By 1977 all aspects of the company were going well and the company became significantly profitable. The company did not hold annual meetings nor have annual accounts prepared nor were there regular or formal board meetings of directors nor minutes nor other formal company records kept. Brian, Kevin and Murph met every Monday night for management meetings and had their meals in the company premises and met regularly over lunch and the affairs of the company were conducted and the decisions taken at the Monday night meetings and the informal meetings. No dividends were paid on shares nor fees paid to directors and salaries were paid by regular drawings against estimated annual amounts finally determined at the end of the year. In addition to these, however, each of the three of them could and did take from cash at the Baggot Street premises sums up to £200 per month in respect of which no record was kept. This was described in evidence by one of the witnesses as ‘slush money’. Regular sums of money were taken out of cash of the business and paid into building society accounts in the names or variations of the names of one *146 or other of the three in different branches of building societies but these did not appear in the company’s accounts. Special care was taken to ensure that the salaries, cash receipts and the value of perquisites including the use of cars were equated so as to ensure that at all times equality was maintained as between the three of them. The services of qualified accountants, Messrs Kidney & Co., were first engaged in March 1977 but the accountants were not aware of the cash drawings or building society deposits.
The decision to open a branch of the business in Cork was taken early in 1977. According to Murph his brother Kevin tried to persuade Brian to give up his employment and to come into the company business whole-time. This Brian agreed to do in June 1977 on the basis that he would look after the Cork business and would have the same salary and drawings as each of the other two. Brian said his sole job ‘was to ensure that Cork got off the ground properly’ and the Cork branch opened on 12 October 1977. According to Murph the Cork business exceeded expectations, and within 18 months the business there was almost as good as at Bachelor’s Walk which they considered the best of the branches. The accountant said it would be difficult to say which of the two, Cork or Bachelor’s Walk, is the more profitable. In or about November 1977 the three directors contemplated investing company money in property development and through Messrs Lisney made two bids which were not accepted for the purchase of a former hotel known as Strawberry Hill on Vico Road, Dalkey. 1978 was a most significant year. In March of that year Kevin and Murph without telling Brian made a very much higher bid for Strawberry Hill than did the company the previous November and after negotiations in April and May purchased this property for themselves about the end of May. In connection with this property and its development by conversion and construction into three separate dwellings they borrowed about £190,000. One of the dwellings is occupied by the parents of Kevin and Murph, another is occupied by Murph and his wife, and the third is intended for Kevin or for resale. In connection with this development both Kevin and Murph gave a lot of time which otherwise would have been devoted to the business of the company. During the summer of 1978 an expansion of the business at 99 Lower Baggot Street under the direction of an architect was undertaken by the company which by reason of restricted working area and hours rendered the work more difficult for the contractor and more expensive for the company than had been anticipated. In the autumn of that year Brian purchased a house in Cork and in connection with it devoted time which otherwise would have been given to the business of the company. When Kevin and Murph purchased Strawberry Hill and informed Brian of their purchase it was agreed that a record of time taken away from the company business on that account should be recorded so that Brian should be allowed the equivalent time off at a future date if the occasion arose. It was later agreed that the purchase by Brian of a house in Cork gave rise to such an occasion. On 6 August 1978 Kevin drew and signed a cheque payable to himself for the sum of £15,681.02. This cheque was drawn on the company’s bank account in Cork. On 28 September Kevin signed another cheque drawn on the company’s Cork bank account payable to himself for the sum of £9,318.98. These two sums toghether make up a sum *147 of £25,000 which is an amount Kevin and Murph say Brian agreed could be borrowed by them from the company in the financing of the Strawberry Hill project. They did not tell Brian anything about the cheques at the times they were drawn nor did the cheques show for what purpose they were drawn and no explanation was given for the determination of the amount for which each or either cheque was drawn. Brian says he agreed they could borrow £10,000 from the company and pay to him the amount of interest thereon at the rate of one-third of the rate they would have had to pay to a finance company. Kevin and Murph say that Brian proposed this idea to them to reduce their liability for interest and agreed that the amount should be £25,000 at a rate of 15% for interest and Brian would be paid 5% on that. Kevin and Murph at Christmas 1978 took a three and a half week holiday in Florida which extended into January 1979.
According to Murph’s evidence he and Kevin had arrived at a decision on 2 February 1979 that they did not want Brian working in the company, and on Saturday afternoon, 3 February 1979, they handed him notice to this effect. These comprised a letter on company notepaper signed by Murph as secretary in the following terms:
Mr Brian E. Suiter
East Wing
Holyrood Castle
Dublin 4.
3 February 1979
Dear Sir,
I send you herewith a copy of a notice which has been received by Murph’s Restaurants Ltd of a resolution which, as appears from the said notice, is intended to be moved at the general meeting of the company convened for 12 March 1979.
Your attention is drawn to the provisions of s. 182 of the Companies Act, 1963.
I also enclose formal notice of the calling of the meeting referred to above.
Yours faithfully
Secretary.
The enclosure referred to therein was also on company notepaper signed by Murph as secretary and reads as follows:
The Secretary
Murph’s Restaurant Ltd
21 Bachelor’s Walk
Dublin 1.
Dear Sir,
TAKE NOTICE that we, the undersigned, being shareholders in the company, intend at the next general meeting of Murph’s Shareholders Ltd to move a resolution that Mr Brian E. Suiter a director of the said company be removed from his office of director.
Dated 2 February 1979.
G. Murph O’Driscoll
Kevin O’Driscoll
No meeting was held on 12 March 1979 nor had there been a meeting of the board or of the directors/shareholders convened or held on or prior to 3 February *148 1979 at which a decision was taken either to hold a meeting on 12 March 1979 or to propose a resolution as stated. In the course of his evidence Murph said ‘I am told I am the secretary of the company. This is a recent development. We did not keep minutes’. He described this meeting of 3 February when the notices were handed to Brian as being ‘pretty much a non-meeting’. He said ‘we handed Brian the legal documents. He studied them and asked why. We said we had been through all the specifics. The basic reason is you are not performing your job satisfactorily. I can’t remember what he said. There were long periods of silence’. The same occasion was described by Kevin in his evidence as follows:
on Saturday afternoon we handed Brian the legal documents giving notice of an extraordinary general meeting and resolution of his removal. He asked what was it all about. We said he should know. We are not going to go into detail. His questions were: Why? What is it about? Our responses were: You should know. You have been told before. We are not going over it again. We offered to purchase his shares at a valuation and to pay his salary for the next three months. I don’t remember if he said anything. We said: We are relieving you of responsibility as a working director and want you to clear out your desk. He said I will do it on Monday. (We have a policy never to let anybody work out their notice. Effectively he was given notice and his coming in on Monday caused chaos).
The evidence given by Brian was that he had got a phone call to say they wanted to have a meeting urgently on Saturday, 3 February ‘and when we met I was handed these notices. There hadn’t been anything about this at any previous meeting. It came as a shock. I got no explanation and was advised to see a solicitor’. He denied that there was any mention of ‘unsatisfactory performance’. He said that ‘at the end I said, ‘Do you want me to resign?’ with a smile on my face as it hadn’t reached that stage’. In his evidence Murph referred to this and said it was not at this February meeting but at a meeting the previous March, 1978 when Brian asked, ‘Do you want me to resign?’ and it was said in seriousness and that he and Kevin in reply said, ‘No, we would rather see you improve in the work you are doing’. Having regard to the course of the affairs throughout 1978 involving many undertakings and continued dealings between the three which necessarily involved mutual confidence and trust I do not believe Murph is correct and I accept Brian’s evidence in relation to this meeting of 3 February 1979.
From seeing Kevin and Murph in the witness box and observing the way in which they gave their evidence I have no confidence in the reliability of their evidence. I have a strong feeling they were withholding or avoiding evidence on material matters, but I make no attempt to take into account or speculate upon what they omitted. The particular area in which this is most significant and most obvious is on all references to financial matters including the earnings and expenses of the company and their own incomes, expenses and financial arrangements.
I have no doubt that prior to 3 February 1979 Kevin and Murph had decided that they should, were entitled to, and would, dismiss Brian from the employment of the company and that in respect of his salary and term of notice he was in the position of an employee of the company whose services could be dispensed with peremptorily but legally by giving him three months salary in lieu of notice. I draw no inference from the forms of the documents presented to Brian and *149 the statements made to him as he gave in evidence (which I believe) as to whether or not Kevin and Murph had gone to the trouble of taking legal advice on this matter. It is clear from the evidence that from 3 February 1979 the previous relationship essential to the continued association between Brian on the one part and Kevin and Murph on the other had effectively come to an end. Subsequent events have made this position irretrievable.
The cause for this is attributed by Brian to an agreement on the part of Kevin and Murph to take over Brian’s interests and to exclude him completely from the company at a time when the company and Kevin and Murph had achieved considerable prosperity and great prospects for further success. The cause for this is attributed by Kevin and Murph to matters of complaint of which they gave the following evidence. Brian had been put in charge of the Cork branch which opened on 12 October 1977 and Kevin and Murph used to pay visits together to the Cork branch from time to time to get their own view of things there. By January 1978 they began to realise that the sort of problems which arose, as expected after opening the new branch, were continuing and were not being resolved, such as, quality of food, purchasing of stock, hygiene, and financial control. The policy and standards achieved in the Dublin branches were not being observed. These different matters used to be mentioned at the regular meetings in Dublin after their periodic trips.
There were three meetings held at which Kevin and Murph raised with Brian matters of complaint. Apart from the latest of these held on 3 February 1979 previous to which Kevin and Murph had agreed they wanted Brian out, as Murph put it, they held meetings in March 1978 and November 1978. They said they complained to Brian at the March meeting that the quality of food in Cork ‘was disastrous’; that he should not have left the purchase of food and cutlery to be done by the manager; that there was no proper control of cash and the paper work from Cork was unsatisfactory. They say that they told him he showed marked lack of responsibility or of co-operation and that he had deceived them. As to the former the only example given was that when they would phone the Cork branch from Dublin at lunch time Brian would not be there and he would not phone back until after 4 p.m. As to the alleged deception they gave two instances. One was that he gave a false explanation of being unable to get a flight to London as his reason for not coming over there for a meeting with them when called there by them. The other was that when asked to get an estimate for work to be done at the Cork branch he said he had had a meeting with a builder called Weldon and this was found to be untrue. In relation to the meeting in November 1978 they said they were getting pretty fed-up with things in Cork where a third manager was then starting, the first having left voluntarily and the services of the second having been dispensed with. These managers were engaged by Kevin and Brian, and presumably the third was engaged shortly after the second was dismissed. Many of the matters of complaint deposed to in the affidavit of Kevin were not substantiated in oral evidence.
Brian’s evidence about these matters was that at the various meetings it was normal and usual that they used criticise each other roundly and matters of supposed complaint would be accepted and explained. He felt that Kevin and *150 Murph used come down on the Cork branch together and go through it ‘with a fine comb’ and consequently faults were always to be found. He said he was always accessible when required and that the figures for the Cork branch showed that the performance was satisfactory.
On this last aspect it is significant that in relation to the purchase by Kevin and Murph of Strawberry Hill for which £25,000 was borrowed from the Cork branch Kevin said in his evidence that at that time ‘the Cork account was running at a surplus to that extent’ and ‘these monies were available as profits and not required for running Cork’. Contrary to what Kevin swore in his affidavit both Kevin and Murph gave evidence that when they decided to buy Strawberry Hill for themselves and negotiated the purchase they did not tell Brian. This was in the period March/April 1978, but they did tell him after they had made the contract. When they did so they discussed with him the arrangements about keeping records of their time away from the company and devoted to work at Strawberry Hill and the arrangements about making a borrowing from the company so as to save two-thirds of finance company rates of interest on loans.
It is quite clear from the evidence taken as a whole and from practically every aspect of evidence relating to the different events and the conduct of the affairs of this company that Brian, Kevin and Murph were equal partners in a joint venture, and that the company was no more than a vehicle to secure a limited liability for possible losses and to provide a means of earning and distributing profits to their best advantage with minimum disclosure. The company was never conducted in accordance with statutory requirements nor in accordance with normal regular business methods. The directors received no fees, the shareholders received no dividends, and all three directors/shareholders received by mutual agreement exactly the same income from the earnings of the company adjusted according to profitability in the form of drawings recorded as salary, drawings from cash unrecorded, credit deposits of cash in building societies’ accounts, perquisites of meals and cars, and various expenses for purely personal purposes in respect of all of which strict equality was always maintained. This was achieved, and could be achieved, only by a relationship of mutual confidence and trust and active open participation in the management and conduct of the affairs of the company particularly in the irregularity or informality of its corporate quality of existence. The co-operation of the brothers, Kevin and Murph, in a close personally related venture such as this is understanding, particularly as Murph who had been unemployed was thereby provided with employment and a career for which he has proved himself eminently suited. But the participation of Brian was achieved through his personal friendship with Kevin acquired while working in employment very different from this class of business and through the persuasion exercised by Kevin. Brian was persuaded to and did give up regular employment with what was then a very good annual salary and attendant security to take his chances in participation in a business for which he did not appear to have had any of the working skills associated with catering. So far as the company is concerned he appears to have no more than 800 shares of nominal value of £1 upon which no dividends are payable with no right to offer them to the public or to dispose of them save in accordance with the approval of one *151 or both of the other two directors. It is said that he remains a director, but without fees, and is being and will be denied any active participation in the affairs of the company. He is being and has been treated by his two co-directors as if he was an employee of theirs liable to be and purported to have been dismissed by them peremptorily and not under any colour of regular exercise by directors of their powers under the articles of asssociation of the company. The action of Kevin and Murph on 3 February 1979 was entirely irregular, and no attempt has been made to take or confirm this action in regular manner on behalf of the company. The action of Kevin and Murph on 3 February was not and could not be accepted in law as an action of the company. The action of Kevin and Murph on 3 February was a deliberate and calculated repudiation by both of them of that relationship of equality, mutuality, trust and confidence between the three of them which constituted the very essence of the existence of the company. The action of Kevin and Murph on 3 February 1979 deprived Brian of a livelihood, and not simply of an investment, which he was induced by their representations to take and in so doing to abandon to his irretrievable loss a secure means of livelihood in a career for which, judging by his progress, he must have had some considerable aptitude. The justification offered by evidence for the action of Kevin and Murph on 3 February was their dissatisfaction with his performance of duties allotted to him by them which they described as of a working director. But the evidence shows that the matters of exemplification are all within the normal range of duties of a manager, and related to a branch of the business from which two successive managers were replaced during the period to which their complaints related. Their own evidence also shows that during the same period the business of that branch had shown profitability beyond their expectations, and sufficed in a period of less than twelve months to provide a surplus income large enough to afford them a significant amount of capital on loan for a private investment. Whatever cause of complaint or fault Kevin and Murph may have found in Brian it did not relate to the talents or qualifications which he had shown, and must have been known to them to have had, at the time he was induced to join with them in a venture of strictly drawn equality.
In his petition Brian asks that the company be wound up under paragraphs (f) and (g) of s. 213 of the Companies Act, 1963. In reply Kevin and Murph on behalf of the company submit that Brian has been deprived of his directorship for good reason and as a shareholder can be afforded sufficient relief under s. 205 of the Act by allowing them to purchase his shares at a valuation. It is also submitted that it would not be in the best interests of the company to have it wound up, because, in the course of compulsorily winding up, the assets of the company would not meet the liabilities and Brian could gain nothing from it, and because his interest as a shareholder has not been affected he is not entitled to an order under s. 213. As to the matter of his removal from directorship I am satisfied from the evidence that the reasons advanced are neither good nor sufficient and are wholly inadequate to justify that action. But the evidence further discloses that the purported removal was irregular and ineffective in law. Furthermore it is clear from the evidence that in the conduct of the affairs of the company the directors did not exercise their powers in a regular manner so *152 far as the company is concerned, and the purported exclusion of Brian by Kevin and Murph in an irregular and arrogant manner is undoubtedly oppressive. As to the matter of what would be the best interests of the company and the consequences of an order for winding up, evidence was given on behalf of the company by Mr Kidney who is the accountant for the company. He was first engaged by the company about March 1977. On instructions he prepared a draft balance sheet for the company as of 3 February 1979 from information obtained from the books of the company and given to him by Kevin and Murph. He estimated the assets (including the presumed repayment of the £25,000 loan) to be £189,672 and the liabilities to be £185,829. He expressed the opinion that in a winding up of the company under court order the apparent net balance could not be achieved because all assets would not realise the estimated values and consequently there would be no surplus or dividend for shareholders. He had not included monies in building societies’ accounts and he was not aware of the ‘siphoning off of funds’. From my observation and assessment of the evidence of Kevin and Murph I believe they would not be as truthful and forthcoming when instructing the accountant as the court would require them to be in order to be in a position to place reliance on the opinion of the accountant founded on their information to him.
It is clear from the evidence that there is no form of order of the nature indicated in s. 205 (3) which could bring to an end the matters complained of by Brian in the proceedings or which could regulate the affairs of the company for the future. It appears to me that the circumstances in which by order under s. 205 the court may direct the purchase of the shares of a member by other members or by the company are circumstances in which the court would do so ‘with a view to bringing to an end the matters complained of’ by the person applying to the court. It is my opinion that in this case with the fundamental relationship between Brian, Kevin and Murph sundered that proceedings under s. 205 would not in any circumstances be appropriate.
In the course of argument and submissions I was referred to the judgment of the House of Lords in England in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 in support of the claim of the petitioner Brian to have the company wound up on the grounds that such order would be just and equitable. It was relied upon also in answer to the contentions of the company, per Kevin and Murph, that Brian is not entitled to such an order on the grounds that there was no disregard of his interests as a member, that he had nothing to gain as a contributory, that there was no lack of probity or unfair dealing on their part, that their conduct was based on their concern for the welfare of the company and to ensure that business would prosper, and that it would not be in the best interests of the company, its staff, customers or creditors that it be wound up.
The claim before the House of Lords was by one of three directors/shareholders of a limited company for an order to have the company wound up pursuant to s. 222 (f) of the English Companies Act, 1948, the wording of which corrresponds exactly with s. 213 (f) of the Companies Act, 1963. I find the opinions delivered in the course of this judgment in the House of Lords very helpful because of the statements of principle the application of which depends upon the facts under *153 consideration. I have accordingly set out first the facts in the case before me from which it can be seen where they may be distinguishable from those in the case to which the House of Lords judgment relates. But that judgment reminds us that the principles of equity which are applicable in every court of law are the same and should be given application in the like manner in cases affecting the commercial relations of companies, in which rules of law tend to be technical and rigid, as much as in cases of personal relations between private individuals.
Having regard to the contentions advanced on behalf of Kevin and Murph I think it appropriate to quote the following passage from the report of the speech of Lord Wilberforce in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360:
For some 50 years, following a pronouncement by Lord Cottenham LC [Spackman, ex parte (1849) 1 Mac and G 170, 174] in 1849, the words ‘just and equitable’ were interpreted so as only to include matters ejusdem generis as the preceding clauses of the section, but there is now ample authority for discarding this limitation. There are two other restrictive interpretations which I mention to reject. First, there has been a tendency to create categories or headings under which cases must be brought if the clause is to apply. This is wrong. Illustrations may be used, but general words should remain general and not be reduced to the sum of particular instances. Secondly, it has been suggested, and urged upon us, that (assuming the petitioner is a shareholder and not a creditor) the words must be confined to such circumstances as to affect him in his capacity as shareholder. I see no warrant for this either. No doubt, in order to present a petition, he must qualify as a shareholder, but I see no reason for preventing him from relying upon any circumstances of justice or equity which affect him in his relations with the company, or, in a case such as the present, with the other shareholders.
One other signpost is significant. The same words ‘just and equitable’ appear in the Partnership Act, 1892 s. 25, as a ground for dissolution of a partnership and no doubt the considerations which they reflect formed part of the common law of partnership before its codification. The importance of this is to provide a bridge between cases under s. 222 (f) of the Act of 1948 and the principles of equity developed in relation to partnerships (at p. 374).
Before proceeding further with consideration of the speech of Lord Wilberforce it would be helpful to refer at this stage to what was said by Lord Cross of Chelsea:
In some of the reported cases in which winding up orders have been made those who opposed the petition have been held by the court to have been guilty of a ‘lack of probity’ in their dealings with the petitioners (at p. 383).
He then cites two examples and then goes on to say:
but it is not a condition precedent to the making of an order under the subsection that the conduct of those who oppose its making should have been unjust or inequitable. This was made clear as early as 1905 by Lord M’Laren in his judgment in Symington v Symington’s Quarries Ltd (1905) 8 F 121, 130. To the same effect is the judgment of Lord Cozens-Hardy MR in Yenidje Tobacco Co Ltd, In re [1916] 2 Ch 426, 431–432. It is sometimes said that the order in that case was made on the ground of ‘deadlock’. That is not so.
Having explained why he takes that view he goes on to say:
People do not become partners unless they have confidence in one another and it is of the essence of the relationship that mutual confidence is maintained. If neither has any longer confidence in the other so that they cannot work together in the way originally contemplated then the relationship should be ended — unless, indeed, the party who wishes to end it has been solely responsible for the situation which has arisen. The relationship between Mr Rothman and Mr Weinberg [the names of parties in the case under his then consideration] was not, of course, in form that of partners; they were equal shareholders in a limited company. But the court considered that it would be unduly fettered by matters of form if it did not deal with the situation as it would have dealt with it had the parties been partners in form as well as in substance.
*154
Turning again to the speech of Lord Wilberforce I draw attention to the nature of the submissions made to the court in that case as summarised in the speech of Lord Wilberforce and the manner in which he expressed his opinion on these matters following examination of a number of cases dealing with the partnership features of companies. He then says:
My Lords, in my opinion these authorities represent a sound and rational development of the law which should be endorsed. The foundation of it all lies in the words ‘just and equitable’ and, if there is any respect in which some of the cases may be open to criticism, it is that the courts may sometimes have been too timorous in giving them full force. The words are a recognition of the fact that a limited company is more then a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The ‘just and equitable’ provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust or inequitable, to insist on legal rights, or to exercise them in a particular way (at p. 379).
Lord Wilberforce then gives examples of circumstances in which relations of a special personal character may be essential to the members of a company with particular reference to mutual confidence. He goes on to say:
My Lords, this is an expulsion case, and I must briefly justify the application in such cases of the just and equitable clause. The question is, as always, whether it is equitable to allow one (or two) to make use of his legal rights to the prejudice of his associate(s). The law of companies recognises the right, in many ways, to remove a director from the board. S. 184 of the Companies Act 1948 confers this right upon the company in general meeting whatever the articles may say. Some articles may prescribe other methods: for example, a governing director may have the power to remove (compare in Wondoflex Textiles Pty. Ltd, In re [1951] VLR 458). And quite apart from removal powers, there are normally provisions for retirement of directors by rotation so that their re-election can be opposed and defeated by a majority, or even by a casting vote. In all these ways a particular director-member may find himself no longer a director, through removal, or non-re-election: this situation he must normally accept, unless he undertakes the burden of proving fraud or mala fides. The just and equitable provision nevertheless comes to his assistance if he can point to, and prove, some special underlying obligation of his fellow member(s) in good faith, or confidence, that so long as the business continues he shall be entitled to management participation, an obligation so basic that, if broken, the conclusion must be that the association must be dissolved. And the principles on which he may do so are those worked out by the courts in partnership cases where there has been exclusion from management (see Const v Harris [1824] Tur. and Rus. 496, 525) even where under the partnership agreement there is a power of expulsion (see Blisset v Daniel (1853) 10 Hare 493; Lindley on Partnership 13th ed. (1971) pp. 331, 595) (at p. 380).
I make one final quotation from this speech which concludes as follows:
I must deal with one final point which was much relied on by the Court of Appeal. It was said that the removal was, according to the evidence of Mr Nazar, bona fide in the interests of the company; that Mr Ebrahimi had not shown the contrary; that he ought to do so or to demonstrate that no reasonable man could think that his removal was in the company’s interest. This formula ‘bona fide in the interests of the company’ is one that is relevant in certain contexts of company law and I do not doubt that in many cases decisions have to be left to majorities or directors *155 to take which the courts must assume had this basis. It may, on the other hand, become little more than an alibi for a refusal to consider the merits of the case, and in a situation such as this it seems to have little meaning other than ‘in the interests of the majority’. Mr Nazar may well have persuaded himself, quite genuinely, that the company would be better off without Mr Ebrahimi, but if Mr Ebrahimi disputed this, or thought the same with reference to Mr Nazar, what prevails is simply the majority view. To confine the application of the just and equitable clause to proved cases of mala fides would be to negative the generality of the words. It is because I do not accept this that I feel myself obliged to differ from the Court of Appeal (at p. 381).
I accept the statements of principles given in the Lords’ speeches in that case as the correct guidance for my consideration of the questions before me on this petition.
Reverting now to the facts: there is only one answer to the question: Was Brian lawfully removed from the office of director of this company? Was this not a business in which all three engaged on the basis that all should participate in its direction and management? Was it an abuse of wrongfully or mistakenly arrogated power and a breach of the good faith which these three partners owed to each other to exclude him from all participation in the business of the company? To these questions there can be only an affirmative answer. Even if the intended resolution for his removal had been proposed in a regular manner, and even if the resolution had been considered at a regularly convened meeting what justification could have been offered to support it? The only matters of complaint of their nature were such that they probably could have been resolved by a temporary spell of personal attention by one of the other directors more experienced in that area of work. But the facts belie the complaints. The business at the Cork branch was exceeding expectations and seemed likely to outstrip the business of the best branch in Dublin and provided support for private investment for the partners making the complaints. The action of Kevin and Murph on 3 February 1979 was wholly unjustified as well as being irregular. But by that action, and in their evidence relating to it, they made it clear that they did not regard Brian as a partner but simply as an employee. Their refusal to recognise any status of equality amounted to a repudiation of their relationship on which the existence of the company was founded. By ceasing to be a director Brian would lose not director’s fees for there were none, nor dividends on his shares for there were none, but his very livelihood consisting of an equal share of all capital and profits and active participation in direction and management of the company.
I am satisfied that the petitioner has made out a case for a winding up order, and has shown that proceedings under s. 205 would not be appropriate. A liquidator will be appointed and notice of the presentation of the petition and the making of the winding up order will be advertised. The petitioner will have his costs of the hearing to be borne by Kevin and Murph and the company will bear such of its own costs as are not related to those of Kevin and Murph.
O’Connor -v- Atlantis Seafood Wexford Ltd & Ors
[2017] IEHC 589 (12 October 2017)
JUDGMENT of Mr. Justice Keane delivered on the 12th October 2017
Introduction
1. The respondents move to strike out certain pleadings in the petitioner’s points of claim in these proceedings, in which the petitioner (‘Mrs O’Connor’) seeks a declaration, pursuant to s. 205 of the Companies Act 1963 (since replaced by s. 212 of the Companies Act 2014), that the affairs of the first respondent, Atlantis Seafood Wexford Limited (‘the company’), are being conducted by the second and third respondents (‘Mr Kenny’ and ‘Mr O’Connor’), as its directors and majority shareholders, in a manner oppressive to her as a shareholder, or member, of the company.
Procedural history
2. Mrs O’Connor first presented her petition on 3 November 2014, and issued a motion seeking directions on the same date. The petition is grounded on an affidavit that Mrs O’Connor swore on 24 October 2014. Mr O’Connor, who is her son, swore a replying affidavit on 9 December 2014 on behalf of all three respondents. Mrs O’Connor swore a further affidavit in response on 18 February 2015.
3. While I have not been shown any directions order, the following additional papers are before the court: (i) Mrs O’Connor’s points of claim, dated 13 March 2015; (ii) the respondents’ notice for particulars, dated 18 March 2015; (iii) Mrs O’Connor’s reply to that notice, dated 30 March 2015; (iv) the respondents’ points of defence, dated 14 April 2015; (v) and a notice of change of solicitors on behalf of the respondents, dated 9 June 2015.
Background
4. From the pleadings exchanged between the parties, the following facts are not in dispute. The company was incorporated on 27 January 1993 to engage in the processing, distribution and sale of fish based products. Its original equal shareholders and directors were James Doyle, Vincent Doyle and John O’Connor (‘Mr O’Connor Senior’), who is the husband of Mrs O’Connor and the father of Mr O’Connor.
5. In 1997, the Doyles relinquished their interest in the company and Mr Kenny commenced employment with it, becoming a director and 40% shareholder, with Mr O’Connor Senior holding the remaining 60% of its shares. Mr Kenny is the brother-in-law of the petitioner and Mr O’Connor Senior. In the same year, the company moved to larger premises.
6. The company expanded in subsequent years. Mrs O’Connor had various roles with the company in administration, operations and sales. Her son, Mr O’Connor joined the company as a full-time employee in 2001, becoming a director in 2002.
7. An audit of the company by the Revenue Commissioners led to a settlement in 2005 in the amount of €462,000.
8. The company re-financed in 2006 by entering into a sale and leaseback of its premises to a partnership or consortium comprising in equal shares its three directors; Mr O’Connor Senior, Mr Kenny and Mr O’Connor or, according to the respondents, through the outright sale of those premises to that consortium. The partnership or consortium obtained a ‘pension-backed’ loan facility from which it drew down funds of €1.2 million to finance the transaction, secured against certain pension arrangements. The company applied those funds to repay borrowings and as working capital.
9. In 2006, Mr O’Connor Senior ceased working for the company on a day-to-day basis, although he remained a director and shareholder until, in February 2007, he transferred one-third of his 60% shareholding in the company to his wife, Mrs O’Connor, and two-thirds of that shareholding to his son, Mr O’Connor. From that point onwards, the shareholders in the company have been Mr Kenny (40%), Mr O’Connor (40%) and Mrs O’Connor (20%). The petitioner resigned her position as credit controller with the company in 2011. It would appear that Mr O’Connor Senior was dismissed as a director of the company in February 2011. Although that claim is formally denied by the respondents in their points of defence, they seem to have accepted it – at least, for the purpose of the present application.
The oppression alleged
10. In her points of claim, Mrs O’Connor alleges that Mr Kenny and her son Mr O’Connor, are exercising their powers as directors, or conducting the affairs of the company, oppressively or in disregard of her interests in the following five adumbrated circumstances:
‘(A) There has been a lack of information provided to the petitioner as a member of the company by the second and third named respondents;
(B) The pension contributions made by the company in respect of the petitioner have been suspended by the second and third named respondents;
(C) There has been a cessation by the second and third named respondents of payments and benefits, including health insurance in respect of the petitioner and [Mr O’Connor Senior], made by the company to the petitioner’s husband [Mr O’Connor Senior];
(D) The second and third named respondents have established a competing business to the company unbeknownst to the petitioner;
(E) The second and third named respondents have rewarded themselves with excessive remuneration packages in recent years.’
11. The respondents deny each of these claims.
The present application
12. The respondents have brought the present motion by notice dated 1 July 2015. In it, they seek orders, pursuant to O. 19, r. 27 of the Rules of the Superior Courts (‘the RSC’) or the inherent jurisdiction of the court, striking out those paragraphs of the petitioner’s points of claim that address grounds of alleged oppression at (B) and (C) as just described, on the basis that they comprise material that is unnecessary or scandalous or which may tend to prejudice, embarrass or delay the fair trial of the action. In the alternative, the respondents seek an order, pursuant to O. 19, r. 28 of the RSC or the inherent jurisdiction of the court, striking out the petitioner’s claim as frivolous or vexatious, in the accepted sense of one that is bound to fail, or as disclosing no reasonable cause of action, or as an abuse of process. In the course of the hearing before me, the respondents acknowledged (correctly, in my view) that the arguments they advance engage rule 27, rather than rule 28, under Order 19 of the RSC.
Other interlocutory reliefs sought
13. The petitioner brought a motion by notice, dated 26 June 2015, seeking an order for discovery of various categories of documentation against the respondents. The parties agree that the discovery application should abide the outcome of this one, since the respondents’ principal objection to discovery is that they should not have to discover any documentation relevant only to a ground of alleged oppression not properly before the court.
14. The respondents’ strike out motion seeks, in addition or as an alternative, an order staying the proceedings to allow the appointment of an independent third party expert to value the petitioner’s shareholding in the company. However, acknowledging that the petitioner cannot be compelled to accept any such valuation and that the court cannot be satisfied at this stage in the proceedings that the remedy offered (the purchase of the petitioner’s shareholding at a fair value) is the appropriate relief for the oppression claimed (see Horgan v Murray [1997] 3 IR 23 at 40; In re Martialone Ltd; Hennessy v Griffin [2009] IEHC 570 (Unreported, Laffoy J, 23 December 2009)), counsel for the respondents indicated that, sensibly, they are no longer pursuing that relief.
The pleadings objected to
15. The first portion of the petition to which the respondents object is that found under the heading ‘(C) Cessation of payments and benefits, including health insurance in respect of the petitioner and [Mr O’Connor Senior], made by the company to [Mr O’Connor Senior]’. It reads as follows:
‘44. Subsequent to an unsuccessful settlement meeting on 15 February 2012 between the petitioner and [Mr O’Connor Senior] on one hand, and [the second and third named respondents] on the other hand, [the second and third named respondents] ceased payments and benefits, including health insurance in respect of the petitioner and [Mr O’Connor Senior], made by the company to [Mr O’Connor Senior] unlawfully and without any notice and in contravention of a previous agreement between [Mr O’Connor Senior] and [the second and third named respondents] in connection [with] the transfer of 14,400 ordinary shares in the company by [Mr O’Connor Senior] to [Mr O’Connor] on or about 27 February 2007.
45. The said cessation of such payments and benefits was oppressive to the petitioner and in disregard of her interests in circumstances where the petitioner and her husband were reliant on the receipt of such funds in order to exist and on the continuation of the appropriate health insurance and in circumstances where the company has declared no dividends in respect of the ordinary shareholders of the company, including the petitioner. Despite repeated requests, the payments have not been resumed and this is a matter involving separate legal proceedings between [Mr O’Connor Senior] and the company, [Mr Kenny] and [Mr O’Connor], namely: John O’Connor v Atlantis Seafood Wexford Limited, John Kenny and Mark O’Connor – The High Court [2015 No. 1904P].’
16. The second portion of the petition to which the respondents object is that comprising paragraphs 46 to 55, under the heading: ‘(D) Establishment of a competing business to the company by [Mr Kenny] and [Mr O’Connor]. Rather than set out those paragraphs in full here, it will suffice to summarise their contents. The petitioner pleads that, on or about 8 May 2012 and unbeknownst to her, Mr Kenny and Mr O’Connor set up another company named Kilmore Quay Fine Foods Limited (‘Kilmore Quay’), which shortly afterwards began to trade in the same products as the company from the same premises as the company, using fish sourced by the company; and processing that fish – and marketing, selling and delivering the resulting product – using the company’s staff (including directors), premises, equipment and vehicles and benefitting from the company’s expenditure on research and development and from its customer accreditation. The petitioner further pleads that Mr Kenny and Mr O’Connor are operating Kilmore Quay to the detriment of the company’s own business, including its reputation and goodwill, and, hence, that they are operating that company ‘ultimately to the detriment of the [p]etitioner.’
17. For convenience, I will refer to the two portions of the petition just described as the ‘cessation of payments’ and ‘competing business’ pleas, respectively.
18. Though not strictly relevant in the context of the present application, it is fair to note that each of these two grounds of oppression is denied by the respondents (along with all of the others). On the cessation of payments plea, the respondents admit that the company stopped making payments to Mr O’Connor Senior but deny that this was done either unlawfully, without notice, or in breach of any agreement. On the competing business plea, the respondents admit that they established Kilmore Quay but plead that they did so to sell ‘value added’ seafood to large retailers, whereas the company sells fresh fish to the food service sector, so that there is no overlap between the two businesses; the company is fully and properly remunerated for the services that it provides to Kilmore Quay; and, overall, the former is benefitting, rather than suffering, financially from the existence and operations of the latter.
19. The respondents’ points of defence commence with three separate preliminary objections. The first is that the proceedings should be struck out as bound to fail, in particular because the respondents have made an open offer, which the petitioner has rebuffed, to purchase her shareholding at market value. That is not a plea that the respondents have pursued in the context of the present application. However, the second and third preliminary objections advanced by the respondents are those now squarely at issue – i.e. that the cessation of payments and competing business pleas are unnecessary, scandalous or prejudicial and, accordingly, should be struck out.
The relevant test
20. The respondents move under both rule 27 and rule 28 of Order 19 of the RSC. In Delany and McGrath, Civil Procedure in the Superior Courts (3rd edn, Round Hall, 2012 at para 5-232), citing the decision of Finlay Geoghegan J in Keaney v Sullivan [2007] IEHC 8 (Unreported, High Court, 16 January 2007) as an example, the authors note that, in many of the cases, applications to strike out have been brought on the basis of both rules, so that there is an overlap in the approach that the courts take to them.
21. The power conferred by rule 28 is that of striking out a pleading in its entirety; Aer Rianta cpt v Ryanair Ltd [2004] 1 IR 506. The rule is thus a blunt instrument, to be used with caution. Rule 27, in contrast, is a precision instrument, permitting the court, where appropriate, to direct the excision or alteration of those parts of any pleading that are unnecessary, scandalous or prejudicial to a fair trial.
22. In Doherty v Minister for Justice [2009] IEHC 246 (Unreported, High Court, 15 May 2009) McGovern J explained that there are instances where the extent of the scandalous or vexatious material in a pleading is sufficiently gross or offensive to warrant striking out that pleading in its entirety, without sifting through it to see if any claim in proper form can be identified and maintained. However, I am satisfied that, this cannot be considered such a case on any view. In her points of claim, the petitioner advances five separate grounds of alleged oppression and, though each is denied, only two have been impugned as comprising unnecessary, scandalous or prejudicial material. In essence, the objection in each case is that the pleadings concerned are unnecessary, in that they comprise grounds of complaint that the petitioner has no standing to advance within the rubric of her oppression claim, so that those grounds are irrelevant to that claim and, accordingly, the pleadings containing them should be struck out. In that sense, the application is properly, narrowly focussed on the excision of the relevant paragraphs from the petitioner’s points of claim.
23. The test for the application of rule 27 to unnecessary or scandalous pleadings finds its most authoritative recent restatement in Ryanair Ltd v Bravofly [2009] IEHC 41 (Unreported, High Court, 29 January 2009) where Clarke J stated (at para. 4.5):
‘The primary test used in judging whether a pleading contains unnecessary or scandalous matters is the relevancy of the matter pleaded to the proceedings between the parties; whether the pleadings concerned seek to introduce extraneous matters for purposes and motives unconnected with the subject matter of the dispute between the parties. Allegations are not scandalous where they would be admissible in evidence to show the truth of any allegation in the pleadings which is material to the relief claimed.’
And later (at para. 5.2):
‘A court should not lightly exclude matters from pleadings where there is at least some reasonable possibility that the material pleaded could be relevant. Matters should only be excluded where it is clear that such pleading is irrelevant.’
24. The respondents acknowledge, correctly I believe, that in considering whether to strike out part of a pleading in an application under s. 205 of the 1963 Act (or s. 212 of the 2014 Act), either under o. 19, r. 27 of the RSC or in exercise of the court’s inherent jurisdiction the test to be applied is that identified by Keane CJ in Re Via Net Works (Ireland) Ltd [2002] 2 IR 47 (at 52) in the separate but related context of an application to strike out a petition for relief under s. 205 of the 1963 Act as an abuse of process, namely, whether, assuming the petitioner were to succeed at trial in establishing the particular facts pleaded, those findings would entitle her (or contribute to her entitlement) to relief under s. 205 of the 1963 Act (or s. 212 of the 2014 Act, as the case may be).
The arguments
25. On the cessation of payments plea, the respondents advance the following arguments. First, they submit that the petitioner does not have standing to raise issues on behalf of her husband. Second, they point to the text of s. 205 of the 1963 Act which confers standing to apply on a member only where the affairs of the company are being conducted, or the powers of its directors exercised, in a manner oppressive to, or in disregard of the interests of, any of its members. In that regard they argue that, while standing may extend beyond a member claiming oppression or breach of any member’s interests qua member to one claiming oppression qua director (Re Murph’s Restaurants Ltd [1979] ILRM 141), it extends no further; see, e.g., Courtney, The Law of Companies 4th edn (Dublin, 2016) at [11-033].
26. The respondents’ argument on the competing business plea is that it amounts to a claim against them by the petitioner that they have damaged the company’s interests, which claim is not actionable at the suit of the petitioner as an individual shareholder but only at the suit of the company itself. They point out that it has been the law since the establishment of the rule in Foss v Harbottle [1847] 2 Hare 461, which stipulates that, where the company has been wronged, the company, and not any of its shareholders, is the proper person to institute proceedings.
27. The respondents argue that the said plea amounts to an allegation of the kind at issue before the Supreme Court in Re Via Net Works Ireland Ltd [2002] I.R. 47 and which Keane CJ dealt with in the following way (at 56)
‘In any event, it is difficult to see how the allegations made by the petitioners, even if they were established, could constitute a case of oppression or disregard of their interests within the meaning of s. 205(1). They are, in the main, claims that the respondents are running the company in a manner which is damaging to the interests of the shareholders. It has been the law, however, since the venerable decision in Foss v. Harbottle (1843) 2 Hare 461 that only the company can maintain proceedings in relation to wrongs done to it and that neither the individual shareholder nor any group of shareholders has any right of action in such circumstances. That rule was emphatically re-affirmed by the decisions of both the High Court and Supreme Court in O’Neill v. Ryan (No. 3) [1992] 1 I.R. 166. There are undoubtedly well established exceptions to the rule, but it is clear that this case does not come within the meaning of any of them.’
28. The dictum just cited was subsequently applied by the High Court in Flanagan v Kelly [1999] IEHC 116 (Unreported, O’Sullivan J, 26 February 1999) and Re Martialone Ltd; Hennessy v Griffin, already cited.
29. While the respondents acknowledge that there are exceptions to the rule in Foss v Harbottle, such as the entitlement of a member to bring an action to vindicate his or her personal rights (subject to the rule against claims for reflective loss) or, in appropriate circumstances, to bring a derivative action, they submit that no such exception arises here. Thus, the respondents contend, the plea concerned relates to a cause of action that the petitioner cannot bring and, as such, is one that should be struck out as unnecessary – that is to say, irrelevant – to the determination of the petition, or one that it would be an abuse of process to permit the petitioner to maintain.
A Quasi-partnership company?
30. In response to these arguments, the petitioner asserts that the company is, in reality, a quasi-partnership to which different principles must apply. A quasi-partnership may be found to exist where a relationship of equality, mutuality, trust and confidence, based on a personal relationship, subsists in a private company; Re Murph’s Restaurants Ltd [1979] ILRM 141 (per Gannon J at 150).
31. As Courtney explains, in his text already cited (at para. [11-040]), in a quasi-partnership private company, each quasi-partner member is entitled to: (a) participate in its management (Re Murph’s Restaurants Ltd); (b) expect his or her fellow quasi-partner members to act in good faith (Irish Press plc v Ingersoll Irish Publications Ltd (Unreported, High Court, Barron J, 15 December 1993); and (c) object to any fundamental change in the direction of the company’s business activities (Re Tivoli Freeholds [1972] VR 445). A breach of any of these possible entitlements can result in either a petition to wind up the company on the just and equitable ground or an oppression petition. In Courtney’s words:
‘[s]uch a finding may result in members and directors being found to be restrained on equitable grounds from enforcing rights found in the “black letter of the law”. In such companies, acts or omissions may be found to amount to oppression or disregard of members’ interests, by reasons of equitable considerations; formal rights may be forced to give way to equitable principles implied from the law of partnership.’
32. The respondents counter that the petitioner had neither pleaded nor directly averred that the company is a quasi-partnership until that argument was canvassed for the first time in her written and oral submissions on the present application. They point out that they do not accept that it is and add that, even if it were, that would not negative the application of the rule in Foss v Harbottle.
Conclusion
33. The petition contains no express plea that the company is a quasi-partnership, although it might be said that this is an argument of law, which does not require to be pleaded, rather than a material fact, which does. At paragraph 15 of the petition, the petitioner pleads that company was run as a family business and that a relationship of trust and confidence existed between the relevant family members in that regard. The petitioner’s grounding affidavit contains an averment to the same effect at paragraph 22. Paragraph 31 of the petitioner’s points of claim, delivered on 13 March 2015, contains essentially the same plea, couched in the present tense. The assertion of such a relationship might otherwise arise as an inference from the material circumstances that are pleaded and averred to (i.e. the role of the petitioner’s husband as a founder of the company, and the status of the second and third named respondents as the petitioner’s brother-in-law and son, respectively etc.). I do not purport to rule on any such argument. I merely acknowledge that it is, in my view, at least a tenable one.
34. That being so, then it is equally tenable that both the ‘cessation of payments’ and the ‘competing business’ pleas may speak to issues of exclusion from participation in the company’s management; bad faith on the part of the company’s directors; or non-consultation on a fundamental change in the direction of the company’s business activities. Again, I do not purport to adjudicate on the existence, much less the merits, of any such issue. I simply acknowledge that there is a tenable argument that one or more of them does arise.
35. Contrary to the respondents’ submission, it does not seem to me to be a question of whether the principles applicable to a quasi-partnership company represent a newly proposed derogation from (or the negation of) the rule in Foss v Harbottle. In my view, those principles and that rule address two different things. The former relate to the circumstances in which formal rights may be forced to give way to equitable principles implied from the law of partnership where oppression or disregard of members’ interests is alleged. The latter identifies the company, rather than any of its shareholders, as the proper person to institute proceedings where a wrong has been done to it. Hence, the former principles operate independently of, rather than as a qualification upon, the latter rule.
36. Applying the test identified by Clarke J in Ryanair Ltd v Bravofly, already cited, since the allegations concerned could, therefore, be material to the relief claimed, and since there is at least some reasonable possibility that the material pleaded could be relevant to those issues, the pleas at issue are not clearly irrelevant and, having met that relatively low bar, cannot be excluded.
37. In the course of the hearing of the motion, I asked the parties to address me on the implications of the apparent overlap between the petitioner’s ‘cessation of payments’ plea and the acknowledged existence of separate proceedings in which it appears – although I have not seen the papers – that the petitioner’s husband seeks damages for breach of contract arising out of substantially the same facts. I was concerned about the extent to which it might be suggested that an adjudication upon the same facts in two separate sets of proceedings could give rise to irreconcilable judgments or, as a slightly different matter, the extent to which the proceedings tried second in time might perhaps be viewed as amounting to an impermissible collateral attack upon the relevant finding of fact in the proceedings determined first. While I am grateful for the parties’ very helpful submissions on the point, on reflection it seems to me that this is first a question of case management and, second, a matter for legal argument at the appropriate stage should any such issue actually arise. I therefore conclude that the question is irrelevant to the determination of the present motion and to the conclusion I have reached upon it.
38. For these reasons, the respondents’ application to strike out the relevant parts of the petition is refused. I will hear the parties on the appropriate consequential orders.
Heaphy v. Heaphy
[2004] IEHC 5 (15 January 2004)
Judgment of Mr Justice Michael Peart delivered the 15th day of January 2004:
The Plaintiff and the Defendant are brothers. The Plaintiff has sued the defendant for damages for fraud, breach of contract, misrepresentation and breach of fiduciary duty. The Defendant has brought an application to this court by way of Notice of Motion dated 28th July 2003 for an order dismissing the Plaintiff’s claim on the grounds that it discloses no cause of action, or, in the alternative, an order dismissing the Plaintiff’s claim as being an abuse of process and as being frivolous and vexatious, and also seeks an order striking out so much of the plaintiff’s statement of claim as asserts rights on behalf of a company known as Springmound (Holdings) Ltd (hereinafter referred as “the company” or as “Springmound”)
It is necessary at the outset to describe the historical facts which form the background to the dispute between these two brothers, and which has led to the institution of these proceedings. These facts are set out clearly in the Statement of Claim delivered by the Plaintiff on 16th October 2002 and can be summarised as follows:
In 1974 Plaintiff incorporated the company, and was the majority shareholder. Subsequently the company purchased two hotels in Dublin namely the Glencourt Hotel and the Elmar Hotel, both in Lower Gardner Street. It would appear that a sum of IR£100,000 was borrowed from Bank of Ireland in order to purchase these premises, and that this borrowing was the subject of a charge in favour of Bank of Ireland against the company.
About 12 years later, in 1986, the plaintiff left Ireland in order to pursue business interests abroad. He alleges that before he left he entered into an oral agreement with his brother, the Defendant, whereby the Defendant would run the bed and breakfast business being conducted at each hotel. The Defendant was to use two trading companies for the purpose of running those bed and breakfast businesses, namely Gembridge Taverns Limited (hereinafter referred to as “Gembridge”) in respect of the business of the Glencourt Hotel, and Laurello Limited (hereinafter referred to as “Laurello”) in respect of the business of the Elmar Hotel.
The plaintiff alleges that it was an express or an implied term of his oral agreement with his brother, and/or that his brother warranted and represented to him that: –
(a) the defendant would draw down a loan on behalf of Springmound in the sum of £100,000 from Hill Samuel Bank;
(b) the said loan would be secured on the Glencourt and the Elmar;
(c) the said loan would be repayable over a term of 14 years;
(d) the proceeds of the said loan would be used to satisfy in full spring mounds liability to the Bank of Ireland;
(e) the defendant would procure the release of the Bank of Ireland charge over the two hotels;
(f) the defendant would carry on the bed and breakfast business at the Glen Court and the Elmar for the said period of 14 years;
(g) defendant would repay the loan to Hill Samuel Bank over a 14 year period using the income from the two hotels;
(h) in return for his management and control of the bed and breakfast businesses, the defendant would be entitled to keep the profits thereby generated, after deduction of the loan repayment to Hill Samuel Bank, expenses incurred in the upkeep of the properties, and any other incidental expenses incurred by Springmound;
(i) after the expiry of the 14 year period, the plaintiff would return to Ireland and would take over control of the two hotels, whereupon the defendant’s involvement with the hotels would cease; and,
(j) Springmound would continue to be the owner of the two hotels.
The plaintiff also says that it was an implied term of the said agreement that the defendant would serve him honestly and in good faith during this period of 14 years, and that the defendant would not receive or retain any secret profit or commission in respect of, or arising out of, his management and control of the two hotels, whether paid by a third party or otherwise, for which he did not account to the Plaintiff.
Paragraph 8 of the statement of claim then alleges that on or about 18th June 1986 the Defendant wrongfully and fraudulently caused the company to sell the Elmar to Gembridge for the sum of £50,000, and on the same day to sell the Glencourt to Laurello for the sum of £50,000, and that these sales were made without the knowledge, authority or consent of the Plaintiff, were a fraud on the Plaintiff, a fraud on Springmound, were in breach of defendant’s agreement with, and representations and warranties to the Plaintiff, were in breach of the fiduciary duty owed by the defendant to the plaintiff, were ultra vires the capacity of Springmound, and that they were sold at a gross undervalue.
According to the Statement of Claim, the plaintiff returned to Ireland and discovered that the Defendant had caused Springmound to sell the two hotels as already described, and that he immediately began investigating what had happened, but that the Defendant has failed refused and neglected to explain his actions to the plaintiff, or to account for same.
It appears also from the Statement of Claim that it was the plaintiff’s intention to use the two hotels to support him in his retirement. The plaintiff also states that his investigations have revealed that Gembridge sold the Elmar Hotel to a Patrick Beggan on the 20th of October 2000 and that Laurello sold the Glencourt Hotel to the Northern Area Health Board on the 20th December 2000. The plaintiff also states that until he gets discovery of documents in these proceedings, he is not aware as to whether the present owners of the two hotels were bona fide purchasers for value, but fears that he may no longer be able to recover ownership of the two hotels. He also states that the Defendant caused Gembridge and Lorello to be liquidated and that the two companies were dissolved on the 15th November 2001 and 21st January 2002 respectively. The plaintiff states that until he gets discovery of documents he cannot quantify his loss.
The defendant in his replying affidavit makes the point that the plaintiff’s claim in reality, is a claim, which if the facts are proven, is a claim which could be brought only by the company, now in liquidation, because the damage suffered is in fact damage suffered by the company, i.e. by the fraudulent sale of two of its assets, namely the hotels. He also contends in his affidavit that such a claim to damages by the company cannot, by law, give rise to a personal claim by a shareholder of the company, arising from any diminution in the value of his shares by reason of any such fraudulent sale of the company’s assets. The liquidator might be able to pursue the matter in the interests of the shareholders, but in his replies to particulars the plaintiff has stated that it is not being alleged that he brings these proceedings with the authority of the liquidator of Springmound.
However, the defendant goes on in his affidavit to state that he is not simply relying on this technical objection to the plaintiff’s claim. Even though he is maintaining that it is a claim which cannot by law succeed, he also disputes factual matters and says that in any event the plaintiff’s claim cannot succeed on the merits either. As an example, he states that the Contract for Sale of each of the hotels in 1986 was in fact signed by the plaintiff. He exhibits one of those contracts, which certainly bears a signature which purports to be that of the plaintiff, but although I am not a handwriting expert, it seems to bear no resemblance to the signature of the plaintiff on his replying affidavit in this motion, or to his signature on a number of letters which have been exhibited by him in that replying affidavit. The defendant of course denies that he executed this contract in the name of the plaintiff, if such is the suggestion being made in these proceedings.
The defendant also refers to the fact that in the sale of the hotels a firm of solicitors represented the company in the sale, and another solicitor represented the purchasers. The defendant also disputes in his affidavit that it was part of any arrangement with the plaintiff that he would arrange for a loan from Hill Samuel which was to be used to pay off the indebtedness to Bank of Ireland as pleaded in the Statement of Claim. He exhibits some correspondence from Bank of Ireland in this regard. The defendant also points to the fact that the plaintiff has stated that he learned of this sale of the properties back in the year 2000, and yet did nothing to prevent the defendant from selling the properties on to two third parties later.
The defendant makes the point also that defending these proceedings is not something he should have to do, given that they must inevitably fail, and deal with matters going back over 16 years.
In his replying affidavit the plaintiff says that after he entered into his agreement with his brother, the defendant, he left him in charge of managing all his affairs and those of the company, including dealing with the property portfolio, banking duties, legal matters and soforth, and including the running of the bed and breakfast business. He says that the only reason 16 years elapsed before doing anything about these matters is that he trusted that his brother would run his affairs in a responsible and trustworthy manner, and that he had no reason to suspect that the hotels had been sold by his brother, and that his brother should not now be permitted to rely on his concealment of what he had done in order to defeat this claim.
He also makes the point to which I have already referred namely that the signature on the contract for sale exhibited by the defendant is not his signature, and that it is not a valid contract. He says that without discovery of documents he cannot say who did in fact sign these documents.
He also states that he never engaged solicitors in relation to the sale of the two hotels as alleged by the defendant, and that he never wrote a letter to Bank of Ireland dated the 9th May 1986 which the defendant has exhibited, and states that same is a forgery. He also denies as alleged by the defendant that he is in bad financial circumstances. He accepts that he has a severe problem now in relation to his retirement since the hotels have been sold, but denies that these proceedings have been commenced out of some financial desperation.
The plaintiff concludes his affidavit by saying that the defendant carried out the transactions involving the sale of the hotels without his knowledge or consent, and that it has been difficult for him to piece together exactly how the defendant perpetrated what he describes as the fraud, since the defendant was in charge of all his affairs during those years, and because of the length of time which has elapsed it is difficult to get the information from any third parties.
Legal Submissions:
Mr Paul Fogarty BL on behalf of the defendant has submitted that the plaintiff has no personal claim against the defendant in respect of a claim which, if there is any merit in it, is a claim to be brought on behalf of the company which is the only entity which can have suffered a loss by reason of the sale of the hotels, if sold at undervalue. He has referred the court to the well-known principles emerging from Foss v. Harbottle (1843) 2 Hare 461, one of which is that only the company can bring proceedings to recover in respect of damage done to the company, and that an individual shareholder had no such right to bring proceedings in respect of loss or damage done to the company. There are of course the four exceptions to the rule in Foss v. Harbottle, and without going into each of those individually, it is clear that none of them apply in these proceedings.
The court has also been referred to the judgments in O’Neill v. Ryan and others (1990) ILRM 140. That decision arose out of a motion brought on behalf of four defendants to dismiss or stay the plaintiff’s action against them, on the basis that it disclosed no reasonable cause of action, because damage alleged to have been caused was damage to a company, which itself was one of the defendants, and not to the plaintiff personally, who claimed that the value of his personal shareholding in that company had been reduced. The court was particularly referred to a passage from the judgment of Blayney J in the Supreme Court at page 569 where that learned judge stated as follows:
“Counsel further submitted that even though the damage was primarily to RyanAir, the plaintiff nonetheless was entitled to sue, but he was unable to point to any authority for this proposition. I am satisfied that there is none. What was being submitted was that a shareholder in a company has a personal action in respect of the reduction in value of his shareholding resulting from damage to the company, against the party who caused such damage. Such a proposition was firmly rejected by the Court of Appeal in England in the Prudential Assurance Company Ltd case to which I have referred earlier.”
Blayney J. went on to quote at some length from that judgment in the Prudential Assurance case, including from page 224 of that judgment as follows:
“A personal action would subvert the rule in Foss v Harbottle and that rule is not merely a tiresome procedural obstacle placed in the path of a shareholder by a legalistic judiciary. The rule is the consequence of the fact that a corporation is a separate legal entity. Other consequences are limited liability and limited rights. The company is liable for its contracts and torts; the shareholder has no such liability The company acquires causes of action for breaches of contract and for torts which damage the company. No cause of action vests in the shareholder. When the shareholder acquires a share he accepts the fact that the value of his investment follows the fortunes of the company, and that he can only exercise his influence over the fortunes of the company by the exercise of his voting rights in general meeting. The law confers on him the right to ensure that the company observes the limitations of its memorandum of association and the right to ensure that other shareholders observe the rule, imposed upon them by the articles of association.”
Blayney J. expressed his opinion that this is a correct statement of the law regarding the status of a shareholder in a company.
Mr Fogarty also submits that the loss if any in this case is the company’s loss, and that it is open to the company to do something about that loss, if it so chooses. He points to the fact that the plaintiff is and was at all times the majority shareholder, but that the liquidator could even now investigate matters if an asset has been fraudulently removed from the company. He submits that the plaintiff could bring this matter to the attention of the liquidator. In addition to these submissions, Mr Fogarty has pointed to the fact that the plaintiff has not in any way attempted to quantify his losses for the purposes of this claim.
Mr Padraic O’Higgins SC, on behalf of the plaintiff, has submitted that one of the bases for the plaintiff’s claim is that a fraud has been committed by the defendant and from which the plaintiff has suffered a loss which is not yet quantified. If the plaintiff is right in what he is alleging, then the defendant has been guilty of a fraud. He referred to the fact that the plaintiff went to England leaving the defendant in charge of his affairs in relation to the two hotels, and when he came back to this country, he discovered that both hotels had been sold without his knowledge or consent. He stated that the plaintiff was trying to launch an investigation into how this came about, and in a situation where the plaintiff, the majority shareholder and director of the company, signed nothing in relation to the sales of the hotels. Mr O’Higgins agrees that this case cannot be within one of the exceptions to the rule in Foss v. Harbottle.
Conclusion:
For what I am sure were at the time god commercial reasons the plaintiff, in 1974, decided to operate his hotel/bed and breakfast business by means of a limited liability company in which he is and was the majority shareholder. Again, for what I am sure seemed good reasons at the time in 1986, the plaintiff entered into an oral agreement with his brother, the defendant, in relation to the running of those hotels during his absence from the country. Nothing was committed to writing.
The fact is that a dispute has now arisen between the parties as to how it has come about that the company has sold two major assets, namely the two hotels, in circumstances where the plaintiff did not know about the sales. The defendant says that he knew all about the sales, and even says that the plaintiff himself signed the contracts for sale. What is clear beyond any doubt in the papers before me is that the plaintiff is alleging that the defendant sold the hotels, and either himself or through somebody else, had contracts for sale of the hotels signed, and conveyances eventually registered.
I cannot decide the factual merits of this claim on this motion, and nor do I have to, in the sense of determining any issue raised in the proceedings themselves. What I have to decide is whether, even if the plaintiff can prove everything he alleges, the plaintiff has any entitlement to recover any loss from the defendant, given that the loss if any which has been suffered, has been suffered by the company, and not by any individual shareholder, such as the plaintiff. Indeed, it could be said that even the company is at a loss only if the assets of the company were sold at undervalue, or if the proceeds of sale of the hotels were not lodged to the company’s bank account.
What is at issue on this application is whether this is an action which is bound to fail. In my view it is such an action, not because I am satisfied that the plaintiff could not under any circumstances prove that something irregular occurred by which the hotels in question were sold without his knowledge, consent or agreement, but because, even if he did succeed in proving everything which he alleges against the defendant, the law, as it stands, and as is well settled by now, does not provide him in his personal capacity as a shareholder with a remedy against the defendant in civil proceedings.
When the plaintiff decided to purchase and operate the hotels through the mechanism of a limited liability company, he ceased to have the same control over his affairs as he would have had if he had dealt with these matters personally. Perhaps that was a deliberate ploy on his behalf. Certainly, if what he has pleaded in relation to the alleged oral agreement with his brother is true, the arrangement has a certain logic and plan to it, and may well have been facilitated by the fact that the hotels were owned by a limited company. But that is neither here nor there as things have turned out. The hotels are no longer in the ownership of the company. It is possible that the company has suffered a loss as a result, but not necessarily so. The company is in liquidation. I am told that it was a court liquidation, and in those circumstances, it should be possible for the plaintiff to make appropriate enquiries of the liquidator if he is still in situ. That liquidator will have operated as an officer of the court, and would have responsibilities to ensure that the assets of the company are ascertained and realised for the benefit of the creditors and shareholders of the company. I would have thought that the liquidator would be very concerned to know if assets of the company had been fraudulently disposed of prior to the liquidation, and would be under an obligation to investigate such a matter if there was thought to be substance to the allegation. He would be fully empowered to launch any necessary investigation in that regard, and if necessary to seek the directions of the court in relation to the examination of any director, shareholder or office holder of the company, or indeed any other person such as a solicitor who handled the sales of the hotels, in order to establish exactly what happened. The plaintiff may have already gone down that route. I do not know, but I suspect that he has not.
The plaintiff’s principal allegation is that his signature to two contracts for sale has been forged, and that his name has been put to those contracts fraudulently. That, if true, would be a criminal offence, which the Fraud Investigation Branch of An Garda Siochana ought to have an interest in investigating. I am told that solicitors represented the Vendor company. That firm presumably was under the impression that it was receiving instructions from a person entitled to speak on behalf of the company and to execute any necessary documents. It is easy enough to appreciate that the firm in question would have assumed that the person who gave instructions to that firm was the person he said he was, and that he was entitled to bind the company in the sale of the hotels. But one’s experience of life tells one that such strange things do happen where things are not necessarily as they might appear to be.
What all this amounts to is that the plaintiff is alleging a fraud against the company. This fraud would of necessity have had to be complex and involving other parties. It is natural that the plaintiff would be concerned about the matter, because inspite of the fact that from a legal standpoint the loss, if any, is a loss to the company and not to any individual shareholder, the plaintiff as he sees it has been done out of assets which he believed would secure his retirement. The loss therefore feels very personal to the plaintiff and he wants to do something about it, even at this late stage.
No matter how much sympathy the court may feel for the plaintiff in the predicament in which he now finds himself, the law on the point at issue on this motion is beyond any dispute. While there is ample authority that the court should exercise sparingly and with great caution its power to strike out a claim or to stay a claim indefinitely on the basis that it discloses no reasonable cause of action, there are times when it must, as in this case, where even if every fact is proven, the law clearly prevents the court from making any award or finding in favour of the plaintiff. The plaintiff as shareholder has no claim in respect of the loss, if any, to the company, and that is an end of the matter. The plaintiff’s investigations will have to take another form.
I do not regard the plaintiff’s claim as frivolous or vexatious, or even an abuse of process in any culpable sense of that word, and I will therefore not make the order in terms of paragraphs 2. Neither will I make the order as sought in paragraph 1 of the Notice of Motion, lest there remain within the Statement of Claim some headings of claim which can be made by the plaintiff personally against the defendant, and which do not involve the assertion of rights that belong to the company.
I will therefore make the order sought in paragraph 3 of the Notice of Motion dated 28th July 2003 striking out so much of the plaintiff’s Statement of Claim delivered the 15th October 2002 as asserts rights on behalf of Springmound (Holdings) Limited.