Directors’ Transactions
Cases
Kerr & Ors -v- Conduit Enterprises Ltd
[2010] IEHC 300
Finlay Geoghegan J.
“46. The issue of interpretation appears to be whether the Court should construe s. 29 of the Act of 1990 from the words used as evidencing an intention by the Oireachtas to preclude a Court from applying to the express requirement for a resolution of a general meeting a principle which the Supreme Court considered in 1954 to be settled law. For the reasons already set out, I consider the principle to include the treatment of the agreement of all shareholders with a right to both attend and vote at a general meeting of the company as effective as or in the words of Buckley J. in In Re Duomatic Limited “as being tantamount to” a resolution of a general meeting of the company . I have concluded that s. 29 of the Act of 1990 does not include an intention to so preclude the Court. Further, that if the Court were to so interpret s. 29(1) it would fail to reflect the plain intention of the Oireachtas and may even, in its application to certain facts, make it absurd. Having regard, inter alia, to s. 5 of the Interpretation Act 2005, it is not an interpretation which I consider I should apply. Section 5 of the Interpretation Act 2005, insofar as relevant, provides:
“5(1) In construing a provision of any Act (other than a provision that relates to the imposition of a penal or other sanction)—
(a) that is obscure or ambiguous, or
(b) that on a literal interpretation would be absurd or would fail to reflect the plain intention of—
(i) in the case of an Act to which paragraph (a) of the definition of “Act” in section 2 (1) relates, the Oireachtas, or
(ii) in the case of an Act to which paragraph (b) of that definition relates, the parliament concerned, the provision shall be given a construction that reflects the plain intention of the Oireachtas or parliament concerned, as the case may be, where that intention can be ascertained from the Act as a whole.”
47. The fact that the Oireachtas did not specify any special requirements in relation to the holding of the general meeting or any special requirements in relation to a resolution passed for the purposes of s. 29(1), including registration in the Companies Registration Office, appears to me to demonstrate that there was no intention to interfere with the principle considered in Buchanan Ltd. v. McVey to be settled law. Insofar as the Oireachtas required approval of a majority of shareholders with a right to vote by a resolution of the company in general meeting, that is, of course, the normal way in which shareholders of a company should take formal decisions. However it does not evidence an intention to preclude the agreement of all shareholders with a right to vote being treated as effective as a resolution in general meeting in accordance with the principle determined in Buchanan Ltd. v. McVey to be settled law.
48. Counsel for the defendant sought to rely on s. 29(3) as indicting an intention by the Oireachtas to impose the mandatory procedural requirement of approval by resolution of the company in general meeting and not to permit the continued application of the principle stated in Buchanan Ltd. v. McVey to be settled law. That sub-section makes an arrangement entered into in contravention of s. 29(1) voidable at the incidence of the company unless one of three situations set out in sub-paragraphs (a), (b) and (c) of s. 29(3) exist. One of these is affirmation by the company in general meeting “within a reasonable period”. It does not appear to me that this sub-section precludes the application of the principle in Buchanan Ltd. v. McVey. It is, rather, directed to a situation where not all the shareholders were made aware of and agreed to the transaction prior to it being completed. The requirement that the affirmation be within a reasonable time appears to me to emphasize the intention of the Oireachtas by the enactment of s. 29 to protect the then shareholders of the company from transactions between the company and directors of which they might not be aware.
49. Section 29 contains no time limit on the company’s right to avoid an arrangement entered into in breach of section 29(1). On the facts herein, there have been multiple changes of ownership since the Lease in December 1997. The defendant sought to avoid the Lease approximately eleven years after its creation and when it had occupied Block V as tenant and complied with its obligations under the Lease, including a series of rent reviews.
50. The potential absurdity of an interpretation of s. 29(1) which excludes the application of the principle approved of by the Supreme Court as settled law in Buchanan Ltd. v. McVey may be demonstrated by facts which differ only slightly from the facts of the present case. Suppose the Landlords had included all four of the persons who were then the shareholders entitled to both attend and vote at a general meeting of the defendant Would the Oireachtas have intended, in the enactment of s. 29, that where a company entered into a transaction with all of its then ordinary shareholders, obviously fully aware of and consenting to the transaction, eleven years later, following many changes of ownership, the company should be entitled to avoid the transaction just because all the shareholders who entered into the transaction did not also record their approval by the passing of a resolution in general meeting. It appears to me such an interpretation would be absurd, having regard to the clear intention of the Oireachtas to protect shareholders against transactions entered into by directors with the company unless notice is given to and there is approval of shareholders representing a majority of the voting shares.
51. Hence, if, contrary to my first conclusion, s. 29 applies to the grant of the Lease, I conclude that s. 29(1) does not preclude the Court applying the principle as stated by the Supreme Court in Buchanan Ltd. v. McVey to the facts herein for the purpose of determining whether the defendant was in breach of s. 29(1) in entering into the Lease. Counsel for the defendant submitted that, even if the Court were, as a matter of principle, willing to treat the approval of all four ordinary shareholders given as directors to the company entering into the Lease as compliance with the requirement for a resolution in general meeting , that the evidence does not disclose approval of the “arrangement” whereby the defendant was to acquire the Lease sufficient to meet the requirements of section 29(1). Whilst I accept the submission of counsel that the evidence must disclose approval by all ordinary shareholders of the arrangement to enter into the Lease, on the findings of fact made I am satisfied that the plaintiffs have adduced such evidence. On the findings of fact, I am satisfied that all ordinary shareholders, prior to the approval given as directors to the defendant entering the Lease, were aware that the lessors included two directors and were aware of the key terms of the Lease. That appears sufficient approval of the arrangement for the purposes of section 29(1). A proposed resolution to approve the arrangement would not appear to require greater knowledge of the shareholders.
52. The second matter to which I wish to refer in the application of the principle as stated by the Supreme Court in Buchanan Ltd. v. McVey to the facts herein is not a matter relied upon by counsel for the defendant, correctly, in my view. The evidence is that Enterprise Ireland was, in 1997, the holder of non-voting preference shares in the defendant. In accordance with Article 2(d) of the Articles of Association, it did have a right to receive notice of and to attend but not to vote at general meetings of the Company. However, the undisputed evidence of Mr. Young, in his witness statement to the Court, was that Enterprise Ireland was also notified and approved of the move to Block V, East Point, and was directly involved in securing an Enterprise Ireland Area Certificate required by the defendant prior to the Lease being signed in 1997. In such factual circumstances, it does not appear that the existence of a preference shareholder with a right to receive notice of and attend but not vote at a meeting of the company precludes the Court, in accordance with Buchanan Ltd. v. McVey, treating the approval of all the ordinary shareholders to the arrangement to enter into the Lease as a resolution of the Company in general meeting, for the purposes of s. 29(1) of the Act of 1990.
53. Accordingly, I have concluded that even if contrary to my first conclusion that the entering into the Lease by the defendant in December 1997 was not the acquisition of a non-cash asset of the requisite value for the purposes of s. 29(1) that the defendant did not act contrary to s. 29(1) in entering into the Lease.
NBH Limited & another v Hoare & others
[2006] EWHC 73 (Ch)
Park J.
“the £4m for which the claimants contend that Mr Hoare is liable to account to HWM is indeed a ‘gain’ of the type to which the section applies. In my judgment it is not. Arithmetically it is of course true that, if Celet or a predecessor acquired the J and W assets for £400,000 in 1992 and sold them for £4.4m in 1997, there was a gain of £4m in one sense of the word. But in my judgment it is not a sense which should apply in this context. The question is whether Celet made a gain ‘by’ the transaction, and the transaction was only the sale. The question is not, for example, whether a gain of any amount accrued to Celet on an acquisition and disposal where the disposal was the sale to HWM. I agree with Mr Chivers that, on a realistic analysis, Celet suffered a loss ‘by’ the transaction. Previously it had assets worth over £5.5m. By the transaction it ceased to have those assets and had £4.4m instead. It would be unreal, and would be wholly out of line with the statutory purpose, to say that Celet made a gain of £4m by the transaction.
It is true that in re Duckwari plc [1999] Ch 253, a case where a director had sold an asset to a company at a fair value but the asset fell in value and the company sold it at a loss compared to the purchase price which it had paid, the director was held to be liable to indemnify the company under s.322(3)(b). The Court of Appeal did not agree with the judge’s analysis that, because the asset had been worth what the company paid for it at the time of the purchase, there was no ‘loss’ within the meaning of paragraph (b). Thus the court took account of movements of value after the purchase. In my view, however, it does not follow that, in a case where the company does not make a loss after the purchase, the court should take account of changes in the value of the asset in the period when it was owned by the vendor before the sale to the company. In any case it is worth noting that, whereas s.320(1)(b) applies to a gain ‘by’ the arrangement or transaction (by the sale to the company), s.322(3)(b) applies to a loss ‘resulting from’ the arrangement or transaction (resulting from the purchase by the company). The two provisions do not use matching wording, and in my judgment do not apply in the same way as each other.
If what I have said is not right the implications would be alarming. Consider the following simple and common example. A man owns a freehold farm and has owned it for many years. In pure monetary terms it is worth vastly more than he paid for it years ago. Perhaps he even inherited it and did not pay anything for it. He is advised that he should transfer his farming business to a company, in which, let it be supposed, he was not the sole shareholder (thus excluding any possible application of the Duomatic principle). He acquires a company and transfers his farm to it in exchange for shares. The shares have a market valuemuch the same as the farm had, so that in one sense he makes a large gain on the farm: he had acquired it years ago for what may have been a full value at the time but now (by reason of years of inflation) seems to be an insignificant figure, and he has exchanged it for valuable shares. Not surprisingly it does not occur to him or to his professional advisers that he ought first to have caused the company to resolve to approve the transaction in order to prevent s.320 applying. Later the company comes into different control – perhaps a receiver or a purchaser. Can the company bring proceedings against the farmer and require him to pay to it the difference between the historic cost of the farm and the value of the shares which the company issued to him in exchange for it? Surely not, but if ‘gain’ in s.322(3)(a) has the meaning which Mr Lazarus ascribes to it, it is hard to see why not.
Finally I move to the proposition that s.320(1)(a) combines with s.322(3)(a), and s.320(1)(b) combines with s.322(3)(b), but s.320(1)(b) cannot be combined with s.322(3)(a). Mr Lazarus’s argument involves the proposition that it can. I accept that a combination of s.320(1)(b) with s.322(3)(a) is not expressly ruled out by specific words in the section, but in my view it would be contrary to the whole scheme and purpose of the section for it to be made. Surely s.320(1)(a) is about cases where a director or a person connected with him purchases assets from a company at an undervalue, so that the director or connected paragraph is in a position to make a gain at the expense of the company; that is the situation in which the director is liable to account to the company under s.322(3)(a). And conversely s.320(1)(b) is about cases where a director or a person connected with him sells assets to a company at an overvalue, so that the company is exposed to a loss which ought to have fallen on the director or the connected person; that is the situation in which the director is liable to indemnify the company under s.322(3)(b).
Further, I believe that what I have said in the foregoing paragraph has effectively been said already by Nourse LJ in the Court of Appeal in re Duckwari plc (supra, at page 261):
“Thus section 322(3)(a), corresponding to section s.320(1)(a), applies to a case where a gain is made on an asset acquired from the company. Section 322(3)(b), corresponding to section 320(1)(b), applies to a case where a loss is made on an asset acquired from the company.”
I believe that my analysis of the structure of the sections is in accordance with what the learned Lord Justice said, and that Mr Lazarus’s submission is inconsistent with it. For that reason also I am unable to accept the submission.
For the reasons which I have explained I conclude that claim fails.
Ruby Property Company Ltd. v. Kilty
[1999] IEHC 50
“Finally, in the context of the possibility of the security being in breach of section 31 of the Companies Act, 1990, I am quite satisfied that even if that were the case, the Plaintiffs would not have any remedy against either of the Defendants in the present case. Section 38(1) of the Companies Act, 1990 provides that:-
“Where a company enters into a transaction or arrangement in contravention of section 31 the transaction or arrangement shall be voidable at the instance of the company unless:-
(a) restitution of any money or any other asset which is the subject matter of the arrangement or transaction is not longer possible,…or
(b) any rights acquired bona fide for value and without actual notice of the contravention by any person other than the person for whom the transaction or arrangement was made would be affected by its avoidance.”
12. Firstly, the transaction which could be said to contravene section 31 is the transaction between the company and the Bank. As I have said, the Bank is not a party to these proceedings, and they do not seek to avoid that transaction as against the Bank. Secondly, I have no doubt whatever that the Second Defendant acquired the property bona fide and for value without actual notice of any contravention of section 31, if there has been such a contravention. Therefore, any challenge to the sale on the basis of a possible contravention of section 31 must fail.”
Bank of Ireland v. Rockfield Ltd.
1979 I.R. 37
Kenny J.(S.C.)
“I come now to deal with the much more difficult question which arises under the provisions of s. 60 of the Act of 1963. In 1963 this section was new to our company law; it was enacted to prevent a limited company from purchasing its own shares or giving assistance to anyone who wanted to buy shares in it. When a company buys its own shares, it is reducing its share capital without the sanction of the court and so damnifying the position of its creditors. The introduction of the section had been recommended in the report of the Company Law Reform Committee.
[The judge referred to the provisions1 of sub.ss. 1 and 14 of s. 60 of the Act of 1963 and continued.] Sub-sections 2, 12 and 13 of s. 60 have no relevance to this case and, although sub-s. 1 of s. 60 appears in the (British) Companies Act, 1948, nothing corresponding to sub-s. 14 appears in that Act. This is the first case, as far as I know, in which the meaning of sub-s. 14 of s. 60 has been considered by any court in this country. The onus of proving that the money was advanced for the purchase of shares in the defendant company lies on the person who alleges this. The plaintiffs do not have to prove that they had no notice of facts which constituted a breach of section 60. What has to be established is that the plaintiffs had notice when lending the money that it was to be used for the purchase of shares in the defendant company. The fact which constituted such breach in this case was the application of £150,000 to the purchase of the shares in the defendant company. As the purchase followed the loan, the defendants must establish that the plaintiffs knew at the time when they made the loan that it was to be applied for this purpose. If they got notice of this subsequently, that is irrelevant.
The notice referred to in sub-s. 14 of s. 60 is actual notice and not constructive notice. As there has been considerable confusion as to the meaning of the terms “actual notice” and “imputed notice” and”constructive notice””a confusion which has been pointed out by many judges and text-book writers”I wish to say that I use the term “actual notice”as meaning in this case that the plaintiff bank, or any of its officials, had been informed, either verbally or in writing, that part of the advance was to be applied in the purchase of shares in the defendant company, or that they knew facts from which they must have inferred that part of the advance was to be applied for this purpose. This difficult branch of the law is well summarised at p. 50 of the 27th edition of Snell’s Principles of Equity (of which the editors were The Hon. Sir Robert Megarry, now the Vice-Chancellor, and Professor Baker) where it is stated:”
“From this it is clear that a purchaser is affected by notice of an equity in three cases:
(1) Actual notice: where the equity is within his own knowledge;
(2) Constructive notice: where the equity would have come to his own knowledge if proper inquiries had been made; and
(3) Imputed notice: where his agent as such in the course of the transaction has actual or constructive notice of the equity.”
See also s. 3 of the Conveyancing Act, 1882. I include in “actual notice”cases where the agent gets actual notice of the equity.
There is strong authority that the doctrine of constructive notice is not to be extended to commercial transactions. In Manchester Trust v. Furness 9 Lindley J., a great authority upon company law, said at p. 545 of the report:”
“. . . as regards the extension of the equitable doctrines of constructive notice to commercial transactions, the Courts have always set their faces resolutely against it. The equitable doctrines of constructive notice are common enough in dealing with land and estates, with which the Court is familiar; but there have been repeated protests against the introduction into commercial transactions of anything like an extension of those doctrines, and the protest is founded on perfect good sense. In dealing with estates in land title is everything, and it can be leisurely investigated; in commercial transactions possession is everything, and there is no time to investigate title; and if we were to extend the doctrine of constructive notice to commercial transactions we should be doing infinite mischief and paralyzing the trade of the country.”
That passage was approved by Lopes and Rigby JJ. It was cited with approval by Scrutton L.J. in the Court of Appeal in Greer v. Downs Supply Co. 8
Section 60 of the Act of 1963 deals with financial assistance, not with mortgages. The word “mortgage” does not appear in the section and sub-s. 14 applies to all commercial transactions. The fact that there was a mortgage involved in this transaction does not mean that the sub-section is to be read in one sense for financial assistance without security and in another sense when a mortgage is involved. That would be a ludicrous interpretation. Therefore”notice of the facts which constitute such breach” means “actual notice” in the sense in which I have defined those words.
In the puzzling passage in the trial judge’s judgment, he refers to a person failing to accept information available to him or failing to make the inquiries normal in his line of business; but these are the criteria of constructive notice. What he seems to be saying is that constructive notice becomes actual notice at some undefined point. This is incorrect; it is blurring the distinction between actual notice and constructive notice. There is nothing in this case which indicates that the plaintiffs or any of their officials knew that any part of the advance was to be applied to the purchase of shares in the defendant company, and what they did know does not lead to a conclusion that they must have inferred that the money was to be applied for the purchase of shares in the defendant company.
It follows that the plaintiffs are entitled to succeed in this action. Although they had constructive notice that the defendant company was the owner of the land, the plaintiffs had not actual notice and that is the knowledge which is referred to in s. 60, sub-s. 14, of the Act of 1963.
Stafford v. Higgins & Ors
[2004] IEHC 82 (6 May 2004)
JUDGMENT of Ms. Justice Finlay Geoghegan given on the 6th day of May, 2004.
The applicant is the liquidator of Xnet Information Systems Limited (in voluntary liquidation) (“Company”), having been so appointed by resolution of the 19th July, 2002.
The respondents were all directors of the Company within 12 months of the date of commencement of the winding up. The third named respondent resigned on the 17th April, 2002 and the other respondents remained directors.
The applicant seeks a declaration of restriction of each of the respondents under s. 150(1) of the Companies Act, 1990 (as amended). The application is brought pursuant to the provisions of s. 56(2) of the Company Law Enforcement Act, 2001, the applicant not having been relieved of his obligation to bring such application by the Director of Corporate Enforcement.
It is undisputed that the Company was, at the date of commencement of the winding up, unable to pay its debts within the meaning of s. 214 of the Companies Act, 1963. Accordingly s. 150 of the Act of 1990 applies to the Company and all four respondents.
The law.
Section 150(1) of the Act of 1990 obliges the court to make the declaration of restriction sought unless it “is satisfied as to any of the matters specified in subsection (2)”. Insofar as relevant subsection (2) provides:
“(2) The matters referred to in subsection (1) are
(a) that the person concerned has acted honestly and responsibly in relation to the conduct of the affairs of the company and that there is no other reason why it would be just and equitable that he should be subject to the restrictions imposed by this section…”
The applicant having established that s.150 of the Act of 1990 applies to the Company and the respondents, the onus shifts to each of the respondents to satisfy the court that he has acted honestly and responsibly in relation to the conduct of the affairs of the company and that there is no other reason why it would be just and equitable that he should be subject to the declaration of restriction if he is to escape the mandatory declaration of restriction provided for in s. 150(1).
In this case each of the respondents, on the affidavits sworn, has satisfied me that he acted honestly in relation to the conduct of the affairs of this company and within the meaning of subsection (2) that “there is no other reason why it would be just and equitable that he should be subject to the restrictions imposed by this section.” The more difficult issue is whether each of the respondents has satisfied me that he acted responsibly in relation to the affairs of the Company and I therefore propose setting out the law in relation to the appropriate consideration by this court of such issue. The matters to be considered by this court have been set out by the Supreme Court in Re Squash (Ireland) Ltd [2001] 3 IR 35 approving those set out by Shanley J. in La Moselle Clothing Ltd (in liquidation) and Rosegem Ltd (in liquidation) v. Soualhi [1998] 2 ILRM 345.
These are:
(a) The extent to which the director has or has not complied with any obligation imposed on him by the Companies Acts 1963 – 1990.
(b) The extent to which his conduct could be regarded as so incompetent as to amount to irresponsibility.
(c) The extent of the director’s responsibility for the insolvency of the company.
(d) The extent of the director’s responsibility for the net deficiency in the assets of he company disclosed at the date of the winding up or thereafter.
(e) The extent to which the director, in his conduct of the affairs of the company, has displayed a lack of commercial probity or want of proper standards.
In addition, the Supreme Court stated that this court should look at the entire tenure of the director and not simply the few months in the run up to the liquidation.
Finally, it appears clear from the judgment of McGuinness J. (with whom the other members of the court agreed) in Re Squash Ireland Limited that in having regard to the factors identified above the court should do so in the context of the purpose of s.150 namely to protect members of the public, creditors and others from persons whose past conduct as directors of a company have shown them to be a danger.
The onus placed on directors by the express wording of s.150(2) of the Act of 1990 is wide ranging. The practice direction of the President of the High Court requires a liquidator to set out the facts which he considers should be brought to the attention of the court for the purposes of determining the matters relevant to s.150(2) of the Act of 1990. The liquidator prior to bringing an application under s.150 has normally had an opportunity of examining the affairs of the Company. Accordingly, in practice and as in this case it is in respect of those matters which the respondents must satisfy the court that they acted responsibly. Exceptionally, in the course of an application, new matters may come to light which require justification or explanation from respondents.
In this case the matters drawn to the courts attention by the liquidator primarily relate to the conduct of the respondents surrounding the move of the company to new premises in June 2001 and the financing of same.
The facts.
The Company was incorporated on the 22nd November, 1995. The first and second named defendants were the initial shareholders and initial directors and promoters of the Company. The Company specialised in the supply and installation of data storage systems and service backup. It traded from a rented property in Dun Laoghaire, Co. Dublin. The Company became successful and turnover increased rapidly. The first named respondent states that by March 2001 the Company employed 26 people and had a turnover of €4.3m. Further, the Company was in the top ten fastest growing technology companies in Ireland for two years running. It won the Deloitte and Touche Award for results achieved for the years ended March 2000 and March 2001. It also made the top 100 European technology companies and received the “Excellence Through People” award and “Investors in People” award.
It is stated, by the first named respondent, that in the financial year beginning April 2001 the Company appeared to be in a healthy financial situation. It is submitted on his behalf and on behalf of the second named respondent that this is the context in which the facts surrounding the move by the Company to the premises in Kilmacanogue must be viewed. This does not appear to be disputed by the liquidator. The significant downturn in the technology sector appears to have occurred in the late Spring and Summer of 2001. The Company had a disastrous period between June and September 2001.
The third named respondent was appointed a non-executive director and the chairman of the board on 1st June, 2000. He was appointed by reason of his prior experience and, in particular, as managing director of Cable and Wireless Ireland and a director of other companies within that group and broad management experience in the technology and communications sector. He states that over the relevant period he attended by-monthly formal board meetings each year and also attended additional meetings and provided advice and guidance as appropriate.
The fourth named respondent was employed by the Company in January 1999 as a technical consultant. In January 2000, he was promoted to technical director and became a director of the Company.
In December 2000 accordingly the first, second and fourth named respondents were executive directors of the Company and the third named respondent a non- executive director and the chairman of the board. Whilst there is some dispute between the first and second named respondents on the one hand and the third and fourth named respondents on the other as to the precise circumstances in which the property was acquired and, in particular, the knowledge of the third and fourth named respondents in relation to same, I have concluded that, as a matter of probability, the factual position in relation to the purchase of the property is as set out by the third named respondent at paragraph 7 to 11 inclusive of the first Affidavit sworn by him on the 13th October 2003. In summary, the following occurred. Between December 2000 and May 2001 the possibility of the Company moving to new premises was under consideration by the board. The board agreed that an independent advisor, Peter Cagney be appointed. He was retained and did give advice until May of 2001. He ultimately only appears to have given informal advice to the individual directors rather than any formal advice to the board of directors. His advice appears to have been that the price to be paid for the property was high by market standards but that the proposed rent to be paid by the Company for the property was fair.
I am satisfied that the first and second named respondents made the third and fourth named respondents aware that they proposed personally purchasing the property and that it would then be leased by them to the Company. This purchase was completed by the first and second named respondents in May 2001. A lease was entered into with the Company, which does not appear to have been approved by the board of directors though the Affidavits of the third and fourth named respondents make clear that they were aware from a conversation between Mr. Cagney and the third named respondent of the proposed initial rent.
The Company moved to the new premises in June 2001.
I have concluded, on the Affidavits, that the third and fourth named respondents did not become aware of the financing arrangements for the purchase of the premises and for the fit out of the premises until a board meeting of the 18th July 2001. In particular, I have concluded that they were not aware of any loan obtained by the Company in connection with the purchase nor any loan made by the Company to the first and second named respondents.
I have further concluded that the first and second named respondents, in organising the finance for the purchase of the premises at Kilmacanogue in their two names, made the following arrangements without consultation with the third and fourth named respondents, their fellow directors and without approval of the board of directors:
(i) They obtained a loan to the Company from ICC in the sum of €285,691. This was expressed to be a business development loan.
(ii) The Company made a loan to the first and second named respondent of €285,691. This appears to have been to provide the balance of the purchase monies payable by the first and second named respondents.
(iii) The Company made a loan of €177,763 to the first and second named respondents. This appears to have been for the purpose of the deposit on the premises in Kilmacanogue.
(iv) The Company made a loan of €119,355 to the first and second named respondents. This was for the stamp duty payable on the purchase of the premises.
(v) The first and second named respondents purported to sell to the Company and the Company purported to agree to purchase the fixture and fittings in the building for a sum of €152,368.
It appears that when the third and fourth named respondents became aware of the above financial transactions at the board meeting of the 18th July and objected to same, the first and second named respondents indicated that the loans were of a temporary nature only and that it was intended to remortgage the premises within a period of six months and to repay to the Company the loans made to the directors. This appears to have been confirmed in a memorandum from the second named defendant to the third named defendant dated 21st August 2001.
In August 2001 when, as is accepted by all the respondents, the Company was in very difficult financial circumstances it appears that the first and second named respondents, without seeking the approval of the board of directors of the Company, procured the increase of the rent payable to them by the Company from IR£125,000 per annum to IR£145,000. This was done following a special resolution of the Company on the 7th August 2001 and a fresh lease entered into between the Company and the first and second named respondents at this rent. This lease does not appear to have been approved by the board of directors or to have been brought prior to its execution to the attention of the third and fourth named respondents.
There is a substantial dispute on the Affidavits as to whether the loans referred to above, which were made by the Company to the first and second named respondents, did or did not contribute to the demise of the Company. The applicant takes the view that they did contribute to the demise. The third and fourth named respondents take a similar view. The first and second named respondents take the opposite view and believe that it was the increased costs associated with the move to the premises in Kilmacanogue rather than the loans made to them which contributed to the demise of the Company.
By reason of the conclusions which I have set out below, it does not appear necessary for me to reach a conclusion on this issue.
The first and second named respondents were unable to obtain refinancing of the premises. They were unable in the Autumn of 2001 to repay the loans to the Company. Cost cutting exercises took place in the Autumn of 2001. The employment of the second named respondent with the Company was terminated in December 2001 in circumstances which are a matter of dispute between him and the Company and the first, third and fourth named respondents. It also gave rise to litigation and an interlocutory application which was determined by this court (O’Sullivan J.). All parties were in agreement that the facts pertaining to that issue were not relevant to the matters which I have to consider on this application.
In January 2002 definitive advice was received that the loans made to the first and second named respondents were illegal. The loans were called in February 2002 but by then each of the first and second named respondents were unable to repay the loan.
The third named respondent resigned as a director on the 17th April 2002 and it was resolved that the Company be wound up on the 19th July 2002.
Conclusions
The positions of the respondents in this application are different. On the facts it appears appropriate to consider the position of the first and second named respondents jointly and that of the third and fourth named respondents jointly.
Insofar as the first and second named respondents are concerned, it is submitted that the facts surrounding the financing of the purchase of the property in the spring of 2001 and the increase in rent in August 2001 is not such that it should preclude this court holding that they have acted responsibly in relation to the conduct of the affairs of this company. The first and second named respondents were directors from the commencement of the Company until it’s winding up. It is submitted that these are the only matters which raise issues about their responsibility.
On their behalf it is submitted that at the time the financing for the purchase of the property was arranged the prospect for the Company was good; the loans were intended as a temporary measure; it was anticipated that they could be repaid within six months. It was further submitted that the directors did not take legal advice at the time and were unaware that the making of such loans was or could be considered to be illegal.
I accept that at the time the financial arrangements were entered into that the directors may well have taken the view, based on reasonable evidence, that the Company had a good prospect of success. I also accept that they may have considered the loan arrangements to have been of a temporary nature. Notwithstanding, I have concluded that I cannot accept that directors of a company, even who do not take specific legal advice, could be regarded as acting responsibly in entering into significant financial transactions which were, in essence, financial transactions between the Company and themselves without either bringing those matters to the attention of the their fellow directors or obtaining formal board approval.
Every director must be deemed to know and appreciate the distinction between the Company as a separate legal person and themselves as individuals. Further, it appears to me that directors must be deemed to be aware of obligations which they have not only to the Company and its shareholders but also to creditors and others dealing with the Company. Further, directors must be assumed to know, at least in a general way, of their obligations under the Companies Act. Section 194 of the Companies Act, 1963 provides:
” (1) It shall be the duty of a director of a company who is in any way, whether directly or indirectly, interested in a contract or proposed contract with the company to declare the nature of his interest at a meeting of the directors of the company.”
This obligation to disclose and, thereby, bring to one’s fellow directors a potential conflict of interest may properly be regarded as principles of good governance and sound commercial probity and proper standards in commercial dealings. The board of directors of a company is responsible for managing the affairs of the company. It appears to me that, independently of any specific legislative requirement, a person who is a director of a company must be aware or ought to be aware and understand that if he or she proposes to enter into a contract with the company that that the full board of directors should be made aware of the fact that he or she, a fellow director is interested in the contract and asked to approve the contract.
On the facts of this case the first and second named respondents did not simply fail to declare to the fellow directors an interest in a contract which they proposed entering into with the Company in breach of s. 194 of the Act of 1963. Rather, they took it upon themselves to decide on behalf of the Company both that the contracts should be entered into and to actually execute and complete the contracts between the Company and themselves without seeking approval from their fellow directors. They appear to have done this both in relation to the various financial transactions outlined above (including the loan from ICC to be lent on to themselves) and the increase in rent in August 2001.
The loans also appear to have been in breach of s. 31 of the Companies Act 1990. I accept that the first and second named respondents were not aware at the time of such potential breach. It is unnecessary in the light of the conclusions I have reached to consider whether it was irresponsible not to take legal advice on the loans.
In relation to the matters which I am required to consider in accordance with the decision of the Supreme Court in Squash Ireland Limited, I have formed the view that the first and second named respondents, by entering into these transactions without consulting with their fellow directors and obtaining the full approval of the board of directors for the transactions, have both failed to comply with their obligations under the Companies Acts and have also displayed a lack of commercial probity and want of proper standards in doing this.
In reaching this conclusion I wish to make clear that I am not attributing any bad motive or dishonesty to the first and second named respondents. It is clear from their Affidavits that they were at the time the sole shareholders of the Company. Further, the purchase of the premises by them rather than by the Company appears to have been motivated by a desire to minimise the expense connected with the purchase to be incurred in the Company. Notwithstanding this, they do appear to have shown a considerable disregard for the distinction between the legal person the Company and themselves and a disregard for their obligations as two directors out of four directors of the Company.
Regretfully, it appears to me that this disregard for their obligations as directors of the Company surrounding these transactions is sufficiently serious that, notwithstanding the very considerable achievements of the Company at an earlier period and what appears to have been an otherwise responsible attitude in relation to their position as directors of the Company, I have concluded that I cannot be satisfied that they have at all times acted responsibly in relation to the conduct of the affairs of this Company. Accordingly, under the terms of s.150 of the Act of 1990 I am bound to make the declaration of restriction in respect of each of the first and second named respondents.
In relation to the third and fourth named respondents, I am satisfied that they have discharged the onus of satisfying me that they have at all times acted responsibly as directors of the Company. As already indicated, I have concluded that they were not aware of the financial transactions in the spring of 2001 or the increase in rent in August 2001. Further, I am satisfied that when they did become aware of these matters they took such steps as they could to procure the repayment of the loans and ameliorate the perceived damage caused to the Company by the making of the loans. Accordingly, I will refuse the application under s. 150 of the Act of 1990 as against the third and fourth named respondents.
Kerr & Ors -v- Conduit Enterprises Ltd
[2010] IEHC 300 (22 July 2010)
JUDGMENT of Ms. Justice Finlay Geoghegan delivered on the 22nd day of July, 2010
1. The first named plaintiff is the daughter and residual legatee of the will of Edward B. Kerr, deceased (“Mr. Kerr”). The estate of Mr. Kerr and the second, third, fourth and fifth named plaintiffs (collectively hereinafter “the Landlords”) are the owners of a property known as Block V, East Point Business Park, East Wall Road, Dublin 3 (“Block V”).
2. By lease dated 5th December, 1997, the Landlords demised Block V to the defendant for a term of 25 years at an annual rent of IR£240,785 (€305,797) payable quarterly in advance (“the Lease”). On the date of execution of the Lease, Mr. Kerr and Mr. Young were both shareholders and directors of the defendant. There were two other persons who were also both directors and shareholders, namely, Ms. Christine Donaghy and Mr. Jeremiah McCarthy.
3. The defendant went into occupation of Block V and until December 2008 occupied Block V and complied with all relevant terms of the Lease including in relation to rent reviews and payment of rent.
4. The defendant entered into a lease of Block P1 East Point on 3rd August, 2000, which it continues to occupy.
5. Between 1997 and 2008, there were multiple ownership changes of the defendant, several of which included due diligence. In May 2006, the defendant was sold to Infonxx Inc., a US registered company.
6. By letter dated 4th December, 2008, the defendant indicated that it proposed to treat the Lease as void and that it would accordingly surrender the property on 3rd January, 2009. The stated basis for the proposed avoidance was that at the time the Lease was entered into Mr. Kerr and Mr. Young were directors of the defendant and from a review of the Company’s books and records no resolution was passed either then or subsequently by the members of the defendant approving the Lease. Hence pursuant to s. 29 of the Companies Act 1990, the transaction was voidable at the instance of the defendant and the defendant was electing to treat the Lease as void.
7. By plenary summons issued on 20th April, 2009, the plaintiffs seek a declaration that the Lease of 5th December, 1997, of Block V is valid and binding on the defendant and certain consequential relief.
Issues
8. The relevant facts and submissions in the proceedings all relate to the proper construction of s. 29 of the Companies Act 1990 and its application to the facts herein. Section 29, insofar as relevant, provides:
“29(1) Subject to subsections (6), (7) and (8), a company shall not enter into an arrangement—
(a) whereby a director of the company or its holding company or a person connected with such a director acquires or is to acquire one or more non-cash assets of the requisite value from the company; or
(b) whereby the company acquires or is to acquire one or more non-cash assets of the requisite value from such a director or a person so connected;
unless the arrangement is first approved by a resolution of the company in general meeting and, if the director or connected person is a director of its holding company or a person connected with such a director, by a resolution in general meeting of the holding company.
(2) For the purposes of this section a non-cash asset is of the requisite value if at the time the arrangement in question is entered into its value is not less than €1,269.74 but, subject to that, exceeds €63,486.90 or ten per cent of the amount of the company’s relevant assets, and for those purposes the amount of a company’s relevant assets is—
(a) except in a case falling within paragraph (b), the value of its net assets determined by reference to the accounts prepared and laid in accordance with the requirements of section 148 of the Principal Act in respect of the last preceding financial year in respect of which such accounts were so laid;
(b) where no accounts have been prepared and laid under that section before that time, the amount of its called-up share capital.
(3) An arrangement entered into by a company in contravention of this section and any transaction entered into in pursuance of the arrangement (whether by the company or any other person) shall be voidable at the instance of the company unless—
(a) restitution of any money or any other asset which is the subject-matter of the arrangement or transaction is no longer possible or the company has been indemnified in pursuance of subsection (4) (b) by any other person for the loss or damage suffered by it; or
(b) any rights acquired bona fide for value and without actual notice of the contravention by any person who is not a party to the arrangement or transaction would be affected by its avoidance; or
(c) the arrangement is, within a reasonable period, affirmed by the company in general meeting and, if it is an arrangement for the transfer of an asset to or by a director of its holding company or a person who is connected with such a director, is so affirmed with the approval of the holding company given by a resolution in general meeting
. . .
(9) In this section—
(a) ‘non-cash asset’ means any property or interest in property other than cash, and for this purpose ‘cash’ includes foreign currency;
(b) any reference to the acquisition of a non-cash asset includes a reference to the creation or extinction of an estate or interest in, or a right over, any property and also a reference to the discharge of any person’s liability other than a liability for a liquidated sum; and
(c) ‘net assets’, in relation to a company, means the aggregate of the company’s assets less the aggregate of its liabilities, and for this purpose ‘liabilities’ includes any provision for liabilities or charges within paragraph 70 of the Schedule to the Companies (Amendment) Act, 1986.”
9. The defendant relied, in its submissions, on the proper interpretation of s. 29 on s. 25(4)(c) and (5) which provide:
“25(4) For the purposes of this Part, the value of a transaction or arrangement is-
. . .
(c) in the case of a transaction or arrangement, other than a loan or quasi-loan or a transaction or arrangement within paragraph (d) or (e), the price which it is reasonable to expect could be obtained for the goods, land or services to which the transaction or arrangement relates if they had been supplied at the time the transaction or arrangement is entered into in the ordinary course of business and on the same terms (apart from price) as they have been supplied or are to be supplied under the transaction or arrangement in question;
. . .
(5) For the purposes of subsection (4), the value of a transaction or arrangement which is not capable of being expressed as a specific sum of money (because the amount of any liability arising under the transaction is unascertainable, or for any other reason) shall, whether or not any liability under the transaction has been reduced, be deemed to exceed €63,486.90.”
10. The issues which require to be resolved in these proceedings are some or all of the following:
(i) whether the Lease of 5th December, 1997, was a non-cash asset of the requisite value for the purposes of s. 29 of the Companies Act 1990;
(ii) was the defendant in breach of s. 29(1) when it entered into the Lease on 5th December, 1997;
(iii) if so, was the Lease voidable at the instance of the defendant in December 2008, having regard, in particular, to s. 29(3)(b) and the rights allegedly acquired by Bank of Scotland (Ireland) Ltd. and Investec Limited.
(iv) Is the defendant now estopped from avoiding the Lease.
Applicability of s. 29 of the Act of 1990
11. The parties are agreed that the onus is on the defendant to establish that s. 29 of the Act of 1990 applied to the grant of the Lease on 5th December, 1997. Further, that this requires the defendant to establish that the Lease was then a non-cash asset of the requisite value within the meaning of section 29(2).
12. It is not in dispute that the defendant, in entering into the Lease, acquired an interest in property other than cash, and did so from two of its then directors who were two of the lessors. The issue in dispute is as to whether or not that “interest in property”, constituting the non-cash asset, was of the requisite value specified by s. 29(2) i.e. not less than €1,269.74 and exceeding either €63,486.90 or 10% of the amount of the company’s relevant assets.
13. The following are the relevant facts and expert evidence adduced upon which the Court has to determine this issue in dispute. The Landlords purchased Block V in December 1997 for approximately IR£3.2 million. The Lease demised Block V to the defendant for a term of twenty-five years. The initial rent reserved under the Lease was IR£240,785 (€305,797 approximately) per annum. The Lease contained a five-yearly upward-only rent review clause. No premium or fine was payable by the defendant to the Landlords on the grant of the Lease.
14. The expert evidence of Mr. Michael Donohoe, valuer, called by the defendant, was that the initial rent reserved under the Lease represented market rent in December 1997. The capitalised value of the Lease to a landlord in December 1997 was in his opinion €3,760,000. That sum, he explained, as being the capital value of the interest of the Landlords on an investment basis, having applied a yield appropriate to office investments of a similar nature pertaining at that period. Mr. Donohoe expressed the opinion that the assignment value of the Lease, if the defendant, as tenant, was to assign the Lease to another party, was a nil value.
15. The defendant also adduced expert evidence from Mr. Kieran Wallace, chartered accountant, and a partner in KPMG. First he reviewed the defendant’s audited financial accounts for the year ended 31st March, 1997, and concluded that an accurate valuation of the defendant’s net assets at that date was IR£102,919.
16. Mr Wallace did not review the subsequent financial statements of the defendant. However, in his report to the Court, which constituted his evidence by consent (he was not presented to give oral evidence and not required by the plaintiffs to attend for cross-examination), in the context of referring to the value of the “transaction” for the purposes of s. 25(4)(c) of the Act of 1990, states, at paragraph 2.4.3:
“In respect of the lease, and on the basis that the lease/rental charge paid was the market rate, I would expect the Company to have accounted for that rent as an annual expense in its profit and loss account and that no asset value relating to the lease would be accounted for on the Company’s balance sheet. The value of the transaction to the Company is the annual rental charge under the contract and recording the expenses would be consistent with S. 25(4)(c) of the Companies Act 1990.”
17. The agreed documents produced in evidence included the abridged financial statements for the year ended 31st March, 1998. It is commoncase, as expected by Mr Wallace that the defendant did not include, in its balance sheet, an asset value in relation to the Lease and that the rent payable was treated as an expense in the accounts.
18. On the above facts and undisputed evidence, the relevant figure for determining ten per cent. of the amount of the company’s relevant assets is the defendant’s net assets as disclosed in its abridged financial statements for the period ended 31st March, 1997, being IR£102,919. Ten per cent. of same is IR£10,292 (€13,068). As this is less than €63,486.90 it is the relevant figure.
19. Counsel for the defendant makes a number of alternative submissions as to why the acquisition by the defendant of the lessee’s interest under the Lease in December 1997 was the acquisition of a non-cash asset with a value greater than IR£10,292.
20. First, counsel draws attention to and relies upon the definition of the value of “a transaction or arrangement” for the purposes of Part III of the Act of 1990, in section 25(4)(c). Section 29 of the Act of 1990 is within Part III. However, whilst s. 29(1) prohibits a company from entering into “an arrangement” whereby the company acquires one or more non-cash assets of the requisite value, it is not the value of the arrangement which is relevant, but rather, the value of the non-cash asset, for the purposes of the application of section 29. Considering Part III of the Act of 1990, there is, in my view, a clear distinction made by the Oireachtas in the words used in ss. 25 and 29 between, on the one hand, the value of “a transaction or arrangement”, as defined in s. 25(4), and the value of “a non-cash asset” for the purposes of section 29. Section 25 does not address the valuation of a non-cash asset for the purposes of s. 29, and, accordingly, I have formed the view that it is not applicable to the valuation of the non-cash asset acquired by the defendant in entering into the Lease in December 1997. It appears appropriate to note that a lease may constitute a credit transaction for the purposes of Part III of the Act of 1990 by reason of the definition of credit transaction in s. 25(3)(b) as a transaction under which one party “leases . . the use of land . . in return for periodical payments”. However, s. 29 does not, of course, apply to a “credit transaction” as defined, but rather, to the acquisition of a “non-cash asset”. Other sections in part III of the 1990 Act do apply to credit transactions.
21. It follows from this conclusion that insofar as Mr. Wallace has expressed an expert view to the Court that the value “of the transaction to the company” is the annual rental charge under the contract, having regard to the definition in s. 25(4)(c), such value is not a relevant value for the purposes of the Court determining the value of the Lease as a “non-cash asset” for the purposes of section 29.
22. Counsel for the defendant also drew attention to s. 25(5) of the Act of 1990, and, if necessary, sought to rely on same. As it also applies to the value of a “transaction or arrangement”, for the same reasons in my view, the sub-section does not apply to the valuation of a non-cash asset allegedly acquired in breach of section 29.
23. The primary submission of counsel for the defendant was that the appropriate value of the non-cash asset for the purposes of s. 29 is the capital value of the non-cash asset. In support of that proposition, he referred the Court to a judgment of the English High Court, Lewison J. in Ultraframe (U.K.) Limited v. Fielding [2005] EWHC 1638 (Ch), [2006] F.S.R. 17. That judgment primarily concerns the application of s. 320 of the UK Companies Act 1985, (which is, for this purpose, in similar terms to s. 29 of the Act of 1990) to licences of intellectual property rights. However, in the course of the judgment, Lewison J. considered the application of s. 320 of the 1985 Act, to the grant of a lease. At issue appear to have been leases at rack rents by the directors, Mr. and Mrs. Fielding, to a company Sequest.
24. At para. 1369, Lewison J., having referred to reservations expressed by counsel as to the application of s. 320 to the grant of leases, stated:
“. . . in my judgment, it plainly does. If, say, a director grants a long lease to a company at a substantial premium, I can see no policy reason for holding that the literal words of section 320 do not apply to such a transaction.”
25. Lewison J. then went on to consider whether or not the leases are non-cash assets of the “requisite value”. In considering that issue, he stated as follows:
“1371 The essential question, therefore, is how to characterise the asset acquired by the company. Is it the lease; or is it the right to possession granted by the lease? First, on the face of it, the comparators are all capital sums, especially the company’s net asset value, and its called up share capital. In any comparison one would expect to compare like with like. That would indicate that one is looking for a capital value on the other side of the comparison. Second, a non-cash asset is described in terms of property or an interest in property. The property interest created by a lease is the lease itself. Third, a lease may be granted for an indeterminate period (e.g. an annual tenancy). If one is required to assess the aggregate of the rental payments that will fall due during the term of the lease, the practical problems will be acute. If, on the other hand, one is expected to undertake a discounted cash flow or a capitalisation of the rent at an appropriate rate, there would seem to be a lot of room for argument about value, which is unlikely to have been Parliament’s intention. And if a lease is granted for a long fixed term at a modest rent, an assessment of the aggregate rental payments which will fall due during the term might bring the transaction within the scope of section 320. Since the purpose of the section is to deal with ‘substantial’ property transactions, this would be surprising. Fourth, Hodgson J. held in Niltan Carson Ltd v. Nelson [1988] BCLC 298 that the periodic rent would appear in the company’s accounts as a debit item and could not, therefore, represent its value for the purposes of the section. Fifth, contracts with directors require the director’s interest to be disclosed either under the articles or under section 317 of the Companies Act or both; and consequently there is some control over a company entering into rack rent leases with a director.
1372 I conclude, therefore, that the asset is properly characterised as the lease rather than the periodic value of the right to occupy; that the relevant value is its capital value.”
26. I respectfully agree with Lewison J. that where a company enters into a lease, as lessee, then, for the purposes of s. 29 of the Act of 1990, what it acquires, as the non-cash asset, is the lessee’s interest in the property granted by the lease or as is sometimes shortly put, “the lease”. Further, that having regard to the comparators in s. 29(2), that the value of the non-cash asset is the capital value of the lease.
27. There is one further refinement which may be implicit in the judgment of Lewison J. but if not, is, in any event, a view which I have formed on the proper interpretation of s. 29 of the Act of 1990. When, as on the facts herein, a company is acquiring the non-cash asset from the directors, what the defendant has acquired is the lessee’s interest in the property under the Lease. It is therefore the capital value of the lessee’s interest under the Lease or the capital value of the Lease to the defendant/lessee which is the relevant value for the purposes of section 29(2).
28. The expert evidence of Mr. Donohoe gives the Court two capital values. First, the capital value of the lease to a landlord and, secondly, the assignment value of the lease if the lease were to be assigned by the tenant i.e. the defendant. The landlord’s interest under a lease is quite different to that of the tenant. The landlord has the right to receive the rent and the benefit of other covenants. It is clear that the capital value opined by Mr. Donohoe is the right of the landlord to receive rent on an investment basis applying appropriate yields. That is not the interest which has been transferred to the defendant, as tenant. The defendant as tenant has an estate or interest in the property which gives it a right to exclusive possession and, inter alia, a right to assign its interest under the Lease, subject to consent of the landlord.
29. In my view, the assignment value of the Lease is similar to the capital value of the lessee’s interest. If the defendant, as lessee, had, shortly after the grant of the Lease, sought to realise the capital value of the Lease granted to it, it could have done so by assigning, in accordance with clause 5.30 of the Lease, with the consent of the landlord. Mr. Donohoe’s view is that there was no capital value to the defendant on such an assignment. The further relevant evidence of the nil capital value is the absence of the payment by the defendant of any premium or fine on the granting of the Lease. Consistent with the nil capital value, the Lease is not represented in the balance sheet of the defendant as an asset with a value.
30. Accordingly, I have concluded that the defendant has failed to establish, as a matter of probability, that the value of the non-cash asset acquired by the defendant from two of its directors and others i.e. the Lease or the lessee’s interest under the Lease, was, in December 1997, in excess of IR£10,292. Hence, whilst the defendant did acquire a non-cash asset from two directors, it has failed to establish that it acquired a non-cash asset of the requisite value within the meaning of s. 29 of the Act of 1990.
31. Whist this conclusion is sufficient to dispose of the proceedings in favour of the plaintiffs, I have decided that, having regard to the absence of prior authority in this jurisdiction, and that the subsequent issues are, in part, dependent on findings of fact on the evidence I heard, that I should also consider the next issue if s. 29 were held to apply to the grant of the Lease contrary to the conclusion I have formed.
Breach of Section 29(1)
32. The next issue identified is whether the defendant was in breach of s. 29 of the Act of 1990 when it entered into the Lease on 5th December, 1997. Section 29(1) in its express terms prohibits the company from acquiring a non-cash asset (including a lease) of the requisite value from its directors unless the arrangement is first approved by a resolution of the company in general meeting.
33. Evidence was given by the three surviving directors/shareholders from 1997 and the surviving Landlords. All appeared truthful and I accept their evidence. Whilst much evidence was given in relation to the start-up and development of the defendant, the need to acquire new premises in 1997, the discussions leading up to the decision to enter into the Lease and to the keeping of minutes of the meetings of the board of directors and the company and failure to produce same, it is sufficient to make the following findings of fact, many of which were not in dispute:
(i) In 1997, there were four persons who were both all the directors and all the shareholders of the defendant. They were the late Mr. Kerr, Mr. Young, Ms. Christine Donaghy and Mr. Jeremiah McCarthy. The latter three were the first directors and shareholders in early 1996 and Mr. Kerr became a shareholder and director a few months later.
(ii) The defendant operated initially out of 11/12, Warrington Place. In November 1996, it entered into a one year lease of an office premises at Clanwilliam House, Lower Mount Street. Its business expanded rapidly and, in particular, in February 1997, it obtained a contract from Esat Digfone which had recently been awarded Ireland’s second mobile licence.
(iii) In the summer of 1997, the search for new and bigger premises became acute. Ultimately, Block V, East Point Business Park, was identified.
(iv) In 1997, it was the practice to hold regular board meetings of the defendant. Mr. Kerr was chairman and conducted procedurally correct directors’ meetings, giving each director an opportunity to consider and have their say on the issues involved. Minutes of Board meetings were kept and signed by Mr Kerr. The files with those minutes appear to have been mislaid prior to the commencement of these proceedings.
(v) Whilst the defendant was expanding rapidly, it had no financial track record and it was not feasible for it to obtain finance to purchase Block V. A group of investors was identified including two of the directors/shareholders to acquire Block V. It was proposed that the defendant enter into a Lease with the investors.
(vi) At several of the directors’ meetings in the autumn of 1997, the move to Block V and the proposed Lease were discussed. At one such meeting, prior to execution of the Lease it was expressly resolved by the directors that the defendant enter into the Lease of Block V. It was known to all four directors/shareholders that the investors acquiring Block V and intended lessors included two of the directors/shareholders. The principal terms, such as rent and reviews, were also known to all the directors/shareholders.
(vii) No general meeting of the defendant was held at which there was a resolution passed by the shareholders authorising the defendant to enter into the Lease. Nevertheless, all four shareholders with an entitlement to attend and vote at a general meeting of the company, had agreed, at a meeting of the Board of Directors, that the defendant should enter into the Lease. Enterprise Ireland then held non-voting preference shares. It had a right to receive notice of, attend, but not vote at, general meetings of the defendant.
(viii) The arrangement whereby the defendant entered into the Lease was honest and intra vires the defendant.
(ix) The defendant’s abridged financial statements for the year ended 31st March, 1998, in their notes under a heading ‘Related Party Transactions’ states “the company leases its premises from a consortium of owners, two of whose participants are directors of Conduit Enterprises Limited. Details of their interest in the premises are as follows:
%
Edward Kerr 15
Liam Young 10
25
Total rent payable by the company to the consortium amounted to IR£78,259 for the year ended 31 March 1998 (1997: IR£Nil).”
These financial statements were approved in July 1998 and put before the Annual General Meeting and subsequently filed in the company’s office.
(x) The fact that the Lease was a “related party transaction” was regularly disclosed in subsequent accounts and in the due diligence conducted prior to the acquisition in 2006.
34. On the above findings of fact, I find that all the shareholders with a right to both attend and vote at a general meeting of the defendant (“the ordinary shareholders”) had, albeit at a meeting of a board of directors of the defendant, agreed to and authorised the defendant to enter into the Lease of 5th December, 1997 prior to its execution.
35. Counsel for the plaintiffs submits that on those facts the Court should treat the agreement of all the ordinary shareholders to the defendant entering into the Lease as satisfying the requirement of s. 29(1), that the arrangement whereby the company was to enter into the Lease be first approved by a resolution of the company in general meeting. He does so in reliance upon the purpose of the section and the mischief sought to be prevented thereby, Buchanan Ltd. v. McVey [1954] I.R. 89 certain other Irish authorities and also a significant line of English authority which has become known as the “Duomatic principle”.
36. Counsel for the defendant submits that the Court should not follow the English line of authority in the application of the Duomatic principle. He submits that to do so would do violence to the clear intention of the Oireachtas expressed in the words used by it in s. 29(1) of the Act of 1990. He submits that s. 29(3) sets out the exclusive circumstances in which the Oireachtas intended that an arrangement entered into without prior approval by resolution of the company in a general meeting would not be subsequently voidable at the instance of the company. Counsel for the defendant also submits that whilst it is accepted that the evidence is that all four shareholders, in their capacity as directors, approved the defendant entering into the Lease, there is no evidence of their specific agreement to the precise terms of the Lease.
37. In this jurisdiction, since the decisions of the High Court and Supreme Court in Buchanan Ltd. v. McVey [1954] I.R. 89, it appears settled law that the informal agreement of all the shareholders to do something which is honest and intra vires the company is to be regarded as an act of the company and does not require a formal resolution of the company in general meeting. That case concerned a claim by a liquidator for monies due to the company by the defendant as director, trustee and agent. Amongst the defences raised was that the defendant had received the sums alleged, not in his capacity as director, but as a shareholder in pursuance of an agreement between all the corporators and that, accordingly, an action for account did not lie against him at the suit of the company. In the High Court, Kingsmill Moore J., at p. 96, stated:
“There was no formal meeting of the Company to authorise the disposal of its property to the defendant, no resolution, however informal, to that effect. It is now settled law that neither meeting nor resolution is necessary. If all the corporators agree to a certain course then, however informal the manner of their agreement, it is an act of the company and binds the company subject only to two pre-requisites: In re Express Engineering Works Ltd (1); Parker and Cooper Ltd v. Reading (2).
The two necessary pre-requisites are 1, that the transaction to which the corporators agree should be intra vires the Company; 2, that the transaction should be honest: Parker and Cooper Ltd v. Reading (1), per Astbury J. at pp. 984, 985.
38. In the Supreme Court, Maguire C.J., at p. 118, without reference to authority, stated in shorter form the same principle:
“It is admitted that there was no formal meeting of the Company to authorise the disposal of its property to the defendant and no formal resolution to that effect. It is however settled law that no meeting and no formal resolution is necessary. It is necessary however that an agreement of this kind to be valid must both be intra vires the Company and must be honest. The trial Judge held that neither of these requisite conditions was fulfilled.”
39. Whilst the principle, as stated in Buchanan Ltd. v. McVey has subsequently been cited with approval by the Supreme Court and High Court (see In Re Greendale Developments (In Liquidation) (No. 2) [1998] 1 I.R. 8, Keane J. at p. 21 and In Re P.M.P.A. Garages Ltd. [1992] I.R. 315, Murphy J., at p. 326), it does not appear to have been considered in relation to the type of statutory requirement specified in s. 29(1) of the Act of 1990. However, what appears to be the same principle has been so applied in England and is known as the Duomatic principle.
40. The Duomatic principle applied by the English Courts, inter alia, to s. 320 of the Companies Act 1985, derives from a decision of Buckley J. in Re Duomatic Limited [1969] 2 Ch. 365. On the facts of that case, Schedule 1, Table A, Part 1, Art. 76, applied to the company which provided “the remuneration of the directors shall from time to time be determined by the company in general meeting”. The liquidators sought repayment of sums paid to two directors, Mr. Elvins and Mr. Hanly, as salaries on the grounds that such sums had never been voted in general meeting. On the facts, it was held that no formal resolution was passed but the remuneration had been approved of by the shareholders with a right to attend and vote at a general meeting. It appears from the judgment of Buckley J. that the two cases relied upon by counsel for the directors in that case were the same two cases cited by Kingsmill Moore J. in Buchanan Ltd. v. McVey as authority for the proposition that he then considered to be settled law, namely, In Re Express Engineering Works Ltd. [1920] 1 Ch. 466, and Parker and Cooper Ltd. v. Reading [1926] Ch. 975. At p. 371, Buckley J. quoted from Lord Sterndale M.R., Warrington L.J. and Younger L.J. in In Re Express Engineering Works Ltd. as follows:
Lord Sterndale M.R. at p. 470:
“In the present case these five persons were all the corporators of the company and they did all meet, and did all agree that these debentures should be issued. Therefore it seems that the case came within the meaning of what was said by Lord Davey in Salomon v. Salomon & Co. Ltd. [1897] AC 22 …. It is true that a different question was there under discussion, but I am of opinion that this case falls within what Lord Davey said. It was said here that the meeting was a directors’ meeting, but it might well be considered a general meeting of the company, for although it was referred to in the minutes as a board meeting, yet if the five persons present had said ‘We will now constitute this a general meeting,’ it would have been within their powers to do so, and it appears to me that this was in fact what they did.”
Warrington L.J. said at p. 470:
“‘It was competent to them’ – that is, the five corporators of the company – ‘to waive all formalities as regards notice of meetings, etc., and to resolve themselves into a meeting of shareholders and unanimously pass the resolution in question. Inasmuch as they could not in one capacity effectually do what was required but could do it in another, it is to be assumed that as business men they would act in the capacity in which they had power to act. In my judgment they must be held to have acted as shareholders and not as directors, and the transaction must be treated as good as if every formality had been carried out.’”
Younger L.J. said, at p. 471:
“I agree with the view that when all the shareholders of a company are present at a meeting that becomes a general meeting and there is no necessity for any further formality to be observed to make it so. In my opinion the true view is that if you have all the shareholders present, then all the requirements in connection with a meeting of the company are observed, and every competent resolution passed for which no further formality is required by statute becomes binding on the company.”
41. Buckley J. then considered what was stated by Astbury J. in Parker and Cooper Ltd. v. Reading, where he, in turn, considered In re Express Engineering Works Ltd. and an earlier decision of In re George Newman & Company Ltd. [1895] 1 Ch. 674 (which had been considered by the Court of Appeal In re Express Engineering Works Ltd.), and then stated at p. 984:
“Now, the view I take of both these decisions is that where the transaction is intra vires and honest, and especially if it is for the benefit of the company, it cannot be upset if the assent of all the corporators is given to it. I do not think it matters in the least whether that assent is given at different times or simultaneously.”
Buckley J. then stated at p. 372:
“Thus, the effect of his judgment was to carry the position a little further than it had been carried in In re Express Engineering Works Ltd. [1920] 1 Ch. 466, for Astbury J. expressed the view that it was immaterial that the assent of the corporators was obtained at different times, and that it was not necessary that there should be a meeting of them all at which they gave their consent to the particular transaction sought to be upheld.”
42. Having further considered submissions on the facts of re Duomatic Ltd. at p. 373, Buckley J. stated:
“The fact that they did not take that formal step but that they nevertheless did apply their minds to the question of whether the drawings by Mr. Elvins and Mr. Hanly should be approved as being on account of remuneration payable to them as directors, seems to lead to the conclusion that I ought to regard their consent as being tantamount to a resolution of a general meeting of the company. In other words, I proceed upon the basis that where it can be shown that all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be. The preference shareholder, having shares which conferred upon him no right to receive notice of or to attend and vote at a general meeting of the company, could be in no worse position if the matter were dealt with informally by agreement between all the shareholders having voting rights than the would be if the shareholders met together in a duly constituted general meeting.”
43. Whilst the principle, as stated by Buckley J. In re Duomatic Ltd. is expressed in slightly different terms to its expression by Kingsmill Moore J. in the High Court and Maguire C.J. in the Supreme Court in Buchanan Ltd. v. McVey, it is, in substance, the same principle. Insofar as the Irish decision refers to “all the corporators”, that must be a reference to all shareholders with a right to both attend and vote at a general meeting of the company, and it appears to me that it follows that if, in accordance with Buchanan Ltd. v. McVey, the agreement of all the corporators is to be treated as an act of the company, then it must also be treated as binding as a resolution in general meeting, which is the normal way in which shareholders would act.
44. Whilst In Re Duomatic Limited did not concern a statutory requirement, subsequent decisions in England and Wales have applied the same principles to the requirement in s. 320 of the 1985 Act, which is in similar terms to s. 29 of the 1990 Act. In NBH Limited v. Hoare [2006] EWHC 73 (Ch), Park J., who had previously expressed doubt as to the application of the Duomatic principle to a statutory requirement for a resolution in Demite Ltd. v. Protec [1998] B.C.C. 638, formed the view that it did apply. Those judgments are only of persuasive authority, whereas Buchanan Ltd. v. McVey both states the law in Ireland and is binding on me.
45. I now turn to the intention of the Oireachtas in enacting s. 29 of the Act of 1990 and its purpose. The purpose of s. 29 of the Act of 1990 is to protect the shareholders of a company against directors entering into certain transactions with the company in which they have a personal interest, without the approval of at least those shareholders holding a simple majority of the voting shares. Section 29(1) only requires an ordinary resolution. The mischief sought to be avoided appears confined to the protection of shareholders with a right to vote. It does not have any wider ambit. Notice is not required to be given to any other person of the proposed transaction and the resolution of the shareholders is not one which requires to be filed in the Companies Registration Office. Section 29 does not no so require and it does not come within the types of resolution specified in s. 143 of the Act of 1963, which require filing in the Companies Registration Office.
46. The issue of interpretation appears to be whether the Court should construe s. 29 of the Act of 1990 from the words used as evidencing an intention by the Oireachtas to preclude a Court from applying to the express requirement for a resolution of a general meeting a principle which the Supreme Court considered in 1954 to be settled law. For the reasons already set out, I consider the principle to include the treatment of the agreement of all shareholders with a right to both attend and vote at a general meeting of the company as effective as or in the words of Buckley J. in In Re Duomatic Limited “as being tantamount to” a resolution of a general meeting of the company . I have concluded that s. 29 of the Act of 1990 does not include an intention to so preclude the Court. Further, that if the Court were to so interpret s. 29(1) it would fail to reflect the plain intention of the Oireachtas and may even, in its application to certain facts, make it absurd. Having regard, inter alia, to s. 5 of the Interpretation Act 2005, it is not an interpretation which I consider I should apply. Section 5 of the Interpretation Act 2005, insofar as relevant, provides:
“5(1) In construing a provision of any Act (other than a provision that relates to the imposition of a penal or other sanction)—
(a) that is obscure or ambiguous, or
(b) that on a literal interpretation would be absurd or would fail to reflect the plain intention of—
(i) in the case of an Act to which paragraph (a) of the definition of “Act” in section 2 (1) relates, the Oireachtas, or
(ii) in the case of an Act to which paragraph (b) of that definition relates, the parliament concerned,
the provision shall be given a construction that reflects the plain intention of the Oireachtas or parliament concerned, as the case may be, where that intention can be ascertained from the Act as a whole.”
47. The fact that the Oireachtas did not specify any special requirements in relation to the holding of the general meeting or any special requirements in relation to a resolution passed for the purposes of s. 29(1), including registration in the Companies Registration Office, appears to me to demonstrate that there was no intention to interfere with the principle considered in Buchanan Ltd. v. McVey to be settled law. Insofar as the Oireachtas required approval of a majority of shareholders with a right to vote by a resolution of the company in general meeting, that is, of course, the normal way in which shareholders of a company should take formal decisions. However it does not evidence an intention to preclude the agreement of all shareholders with a right to vote being treated as effective as a resolution in general meeting in accordance with the principle determined in Buchanan Ltd. v. McVey to be settled law.
48. Counsel for the defendant sought to rely on s. 29(3) as indicting an intention by the Oireachtas to impose the mandatory procedural requirement of approval by resolution of the company in general meeting and not to permit the continued application of the principle stated in Buchanan Ltd. v. McVey to be settled law. That sub-section makes an arrangement entered into in contravention of s. 29(1) voidable at the incidence of the company unless one of three situations set out in sub-paragraphs (a), (b) and (c) of s. 29(3) exist. One of these is affirmation by the company in general meeting “within a reasonable period”. It does not appear to me that this sub-section precludes the application of the principle in Buchanan Ltd. v. McVey. It is, rather, directed to a situation where not all the shareholders were made aware of and agreed to the transaction prior to it being completed. The requirement that the affirmation be within a reasonable time appears to me to emphasize the intention of the Oireachtas by the enactment of s. 29 to protect the then shareholders of the company from transactions between the company and directors of which they might not be aware.
49. Section 29 contains no time limit on the company’s right to avoid an arrangement entered into in breach of section 29(1). On the facts herein, there have been multiple changes of ownership since the Lease in December 1997. The defendant sought to avoid the Lease approximately eleven years after its creation and when it had occupied Block V as tenant and complied with its obligations under the Lease, including a series of rent reviews.
50. The potential absurdity of an interpretation of s. 29(1) which excludes the application of the principle approved of by the Supreme Court as settled law in Buchanan Ltd. v. McVey may be demonstrated by facts which differ only slightly from the facts of the present case. Suppose the Landlords had included all four of the persons who were then the shareholders entitled to both attend and vote at a general meeting of the defendant Would the Oireachtas have intended, in the enactment of s. 29, that where a company entered into a transaction with all of its then ordinary shareholders, obviously fully aware of and consenting to the transaction, eleven years later, following many changes of ownership, the company should be entitled to avoid the transaction just because all the shareholders who entered into the transaction did not also record their approval by the passing of a resolution in general meeting. It appears to me such an interpretation would be absurd, having regard to the clear intention of the Oireachtas to protect shareholders against transactions entered into by directors with the company unless notice is given to and there is approval of shareholders representing a majority of the voting shares.
51. Hence, if, contrary to my first conclusion, s. 29 applies to the grant of the Lease, I conclude that s. 29(1) does not preclude the Court applying the principle as stated by the Supreme Court in Buchanan Ltd. v. McVey to the facts herein for the purpose of determining whether the defendant was in breach of s. 29(1) in entering into the Lease. Counsel for the defendant submitted that, even if the Court were, as a matter of principle, willing to treat the approval of all four ordinary shareholders given as directors to the company entering into the Lease as compliance with the requirement for a resolution in general meeting , that the evidence does not disclose approval of the “arrangement” whereby the defendant was to acquire the Lease sufficient to meet the requirements of section 29(1). Whilst I accept the submission of counsel that the evidence must disclose approval by all ordinary shareholders of the arrangement to enter into the Lease, on the findings of fact made I am satisfied that the plaintiffs have adduced such evidence. On the findings of fact, I am satisfied that all ordinary shareholders, prior to the approval given as directors to the defendant entering the Lease, were aware that the lessors included two directors and were aware of the key terms of the Lease. That appears sufficient approval of the arrangement for the purposes of section 29(1). A proposed resolution to approve the arrangement would not appear to require greater knowledge of the shareholders.
52. The second matter to which I wish to refer in the application of the principle as stated by the Supreme Court in Buchanan Ltd. v. McVey to the facts herein is not a matter relied upon by counsel for the defendant, correctly, in my view. The evidence is that Enterprise Ireland was, in 1997, the holder of non-voting preference shares in the defendant. In accordance with Article 2(d) of the Articles of Association, it did have a right to receive notice of and to attend but not to vote at general meetings of the Company. However, the undisputed evidence of Mr. Young, in his witness statement to the Court, was that Enterprise Ireland was also notified and approved of the move to Block V, East Point, and was directly involved in securing an Enterprise Ireland Area Certificate required by the defendant prior to the Lease being signed in 1997. In such factual circumstances, it does not appear that the existence of a preference shareholder with a right to receive notice of and attend but not vote at a meeting of the company precludes the Court, in accordance with Buchanan Ltd. v. McVey, treating the approval of all the ordinary shareholders to the arrangement to enter into the Lease as a resolution of the Company in general meeting, for the purposes of s. 29(1) of the Act of 1990.
53. Accordingly, I have concluded that even if contrary to my first conclusion that the entering into the Lease by the defendant in December 1997 was not the acquisition of a non-cash asset of the requisite value for the purposes of s. 29(1) that the defendant did not act contrary to s. 29(1) in entering into the Lease.
54. In the circumstances, it does not appear to me necessary to consider the further issues in the proceedings. It follows from the conclusions reached that the defendant was not entitled to treat the Lease as void as stated in its letter of 4th December, 2008.
Reliefs
55. The plaintiffs are entitled to the declaration sought at paragraph one of the plenary summons i.e.
“1. A Declaration that the Lease of the 5th day of December, 1997 made between Edward B. Kerr, Deceased, Liam Young, Michael Tunney, Liam Lenehan and Laurence K. Shields of the First Part and the Defendant of the Second Park, to hold the property known as ALL THAT AND THOSE the lands, hereditaments and premises comprising Block V, East Point Business Park, East Wall Road in the City of Dublin for the term of twenty-five years from and including the 4th day of December, 1997 (hereinafter “the Lease”), is valid and binding upon the Defendant.”
56. The parties did not address the further consequential reliefs sought. I will hear the parties as to the entitlement and/or necessity for any further orders arising out of the findings and conclusion in this judgment.
.
Kerr & Ors -v- Conduit Enterprises Ltd
[2010] IEHC 300 (22 July 2010)
JUDGMENT of Ms. Justice Finlay Geoghegan delivered on the 22nd day of July, 2010
1. The first named plaintiff is the daughter and residual legatee of the will of Edward B. Kerr, deceased (“Mr. Kerr”). The estate of Mr. Kerr and the second, third, fourth and fifth named plaintiffs (collectively hereinafter “the Landlords”) are the owners of a property known as Block V, East Point Business Park, East Wall Road, Dublin 3 (“Block V”).
2. By lease dated 5th December, 1997, the Landlords demised Block V to the defendant for a term of 25 years at an annual rent of IR£240,785 (€305,797) payable quarterly in advance (“the Lease”). On the date of execution of the Lease, Mr. Kerr and Mr. Young were both shareholders and directors of the defendant. There were two other persons who were also both directors and shareholders, namely, Ms. Christine Donaghy and Mr. Jeremiah McCarthy.
3. The defendant went into occupation of Block V and until December 2008 occupied Block V and complied with all relevant terms of the Lease including in relation to rent reviews and payment of rent.
4. The defendant entered into a lease of Block P1 East Point on 3rd August, 2000, which it continues to occupy.
5. Between 1997 and 2008, there were multiple ownership changes of the defendant, several of which included due diligence. In May 2006, the defendant was sold to Infonxx Inc., a US registered company.
6. By letter dated 4th December, 2008, the defendant indicated that it proposed to treat the Lease as void and that it would accordingly surrender the property on 3rd January, 2009. The stated basis for the proposed avoidance was that at the time the Lease was entered into Mr. Kerr and Mr. Young were directors of the defendant and from a review of the Company’s books and records no resolution was passed either then or subsequently by the members of the defendant approving the Lease. Hence pursuant to s. 29 of the Companies Act 1990, the transaction was voidable at the instance of the defendant and the defendant was electing to treat the Lease as void.
7. By plenary summons issued on 20th April, 2009, the plaintiffs seek a declaration that the Lease of 5th December, 1997, of Block V is valid and binding on the defendant and certain consequential relief.
Issues
8. The relevant facts and submissions in the proceedings all relate to the proper construction of s. 29 of the Companies Act 1990 and its application to the facts herein. Section 29, insofar as relevant, provides:
“29(1) Subject to subsections (6), (7) and (8), a company shall not enter into an arrangement—
(a) whereby a director of the company or its holding company or a person connected with such a director acquires or is to acquire one or more non-cash assets of the requisite value from the company; or
(b) whereby the company acquires or is to acquire one or more non-cash assets of the requisite value from such a director or a person so connected;
unless the arrangement is first approved by a resolution of the company in general meeting and, if the director or connected person is a director of its holding company or a person connected with such a director, by a resolution in general meeting of the holding company.
(2) For the purposes of this section a non-cash asset is of the requisite value if at the time the arrangement in question is entered into its value is not less than €1,269.74 but, subject to that, exceeds €63,486.90 or ten per cent of the amount of the company’s relevant assets, and for those purposes the amount of a company’s relevant assets is—
(a) except in a case falling within paragraph (b), the value of its net assets determined by reference to the accounts prepared and laid in accordance with the requirements of section 148 of the Principal Act in respect of the last preceding financial year in respect of which such accounts were so laid;
(b) where no accounts have been prepared and laid under that section before that time, the amount of its called-up share capital.
(3) An arrangement entered into by a company in contravention of this section and any transaction entered into in pursuance of the arrangement (whether by the company or any other person) shall be voidable at the instance of the company unless—
(a) restitution of any money or any other asset which is the subject-matter of the arrangement or transaction is no longer possible or the company has been indemnified in pursuance of subsection (4) (b) by any other person for the loss or damage suffered by it; or
(b) any rights acquired bona fide for value and without actual notice of the contravention by any person who is not a party to the arrangement or transaction would be affected by its avoidance; or
(c) the arrangement is, within a reasonable period, affirmed by the company in general meeting and, if it is an arrangement for the transfer of an asset to or by a director of its holding company or a person who is connected with such a director, is so affirmed with the approval of the holding company given by a resolution in general meeting
. . .
(9) In this section—
(a) ‘non-cash asset’ means any property or interest in property other than cash, and for this purpose ‘cash’ includes foreign currency;
(b) any reference to the acquisition of a non-cash asset includes a reference to the creation or extinction of an estate or interest in, or a right over, any property and also a reference to the discharge of any person’s liability other than a liability for a liquidated sum; and
(c) ‘net assets’, in relation to a company, means the aggregate of the company’s assets less the aggregate of its liabilities, and for this purpose ‘liabilities’ includes any provision for liabilities or charges within paragraph 70 of the Schedule to the Companies (Amendment) Act, 1986.”
9. The defendant relied, in its submissions, on the proper interpretation of s. 29 on s. 25(4)(c) and (5) which provide:
“25(4) For the purposes of this Part, the value of a transaction or arrangement is-
. . .
(c) in the case of a transaction or arrangement, other than a loan or quasi-loan or a transaction or arrangement within paragraph (d) or (e), the price which it is reasonable to expect could be obtained for the goods, land or services to which the transaction or arrangement relates if they had been supplied at the time the transaction or arrangement is entered into in the ordinary course of business and on the same terms (apart from price) as they have been supplied or are to be supplied under the transaction or arrangement in question;
. . .
(5) For the purposes of subsection (4), the value of a transaction or arrangement which is not capable of being expressed as a specific sum of money (because the amount of any liability arising under the transaction is unascertainable, or for any other reason) shall, whether or not any liability under the transaction has been reduced, be deemed to exceed €63,486.90.”
10. The issues which require to be resolved in these proceedings are some or all of the following:
(i) whether the Lease of 5th December, 1997, was a non-cash asset of the requisite value for the purposes of s. 29 of the Companies Act 1990;
(ii) was the defendant in breach of s. 29(1) when it entered into the Lease on 5th December, 1997;
(iii) if so, was the Lease voidable at the instance of the defendant in December 2008, having regard, in particular, to s. 29(3)(b) and the rights allegedly acquired by Bank of Scotland (Ireland) Ltd. and Investec Limited.
(iv) Is the defendant now estopped from avoiding the Lease.
Applicability of s. 29 of the Act of 1990
11. The parties are agreed that the onus is on the defendant to establish that s. 29 of the Act of 1990 applied to the grant of the Lease on 5th December, 1997. Further, that this requires the defendant to establish that the Lease was then a non-cash asset of the requisite value within the meaning of section 29(2).
12. It is not in dispute that the defendant, in entering into the Lease, acquired an interest in property other than cash, and did so from two of its then directors who were two of the lessors. The issue in dispute is as to whether or not that “interest in property”, constituting the non-cash asset, was of the requisite value specified by s. 29(2) i.e. not less than €1,269.74 and exceeding either €63,486.90 or 10% of the amount of the company’s relevant assets.
13. The following are the relevant facts and expert evidence adduced upon which the Court has to determine this issue in dispute. The Landlords purchased Block V in December 1997 for approximately IR£3.2 million. The Lease demised Block V to the defendant for a term of twenty-five years. The initial rent reserved under the Lease was IR£240,785 (€305,797 approximately) per annum. The Lease contained a five-yearly upward-only rent review clause. No premium or fine was payable by the defendant to the Landlords on the grant of the Lease.
14. The expert evidence of Mr. Michael Donohoe, valuer, called by the defendant, was that the initial rent reserved under the Lease represented market rent in December 1997. The capitalised value of the Lease to a landlord in December 1997 was in his opinion €3,760,000. That sum, he explained, as being the capital value of the interest of the Landlords on an investment basis, having applied a yield appropriate to office investments of a similar nature pertaining at that period. Mr. Donohoe expressed the opinion that the assignment value of the Lease, if the defendant, as tenant, was to assign the Lease to another party, was a nil value.
15. The defendant also adduced expert evidence from Mr. Kieran Wallace, chartered accountant, and a partner in KPMG. First he reviewed the defendant’s audited financial accounts for the year ended 31st March, 1997, and concluded that an accurate valuation of the defendant’s net assets at that date was IR£102,919.
16. Mr Wallace did not review the subsequent financial statements of the defendant. However, in his report to the Court, which constituted his evidence by consent (he was not presented to give oral evidence and not required by the plaintiffs to attend for cross-examination), in the context of referring to the value of the “transaction” for the purposes of s. 25(4)(c) of the Act of 1990, states, at paragraph 2.4.3:
“In respect of the lease, and on the basis that the lease/rental charge paid was the market rate, I would expect the Company to have accounted for that rent as an annual expense in its profit and loss account and that no asset value relating to the lease would be accounted for on the Company’s balance sheet. The value of the transaction to the Company is the annual rental charge under the contract and recording the expenses would be consistent with S. 25(4)(c) of the Companies Act 1990.”
17. The agreed documents produced in evidence included the abridged financial statements for the year ended 31st March, 1998. It is commoncase, as expected by Mr Wallace that the defendant did not include, in its balance sheet, an asset value in relation to the Lease and that the rent payable was treated as an expense in the accounts.
18. On the above facts and undisputed evidence, the relevant figure for determining ten per cent. of the amount of the company’s relevant assets is the defendant’s net assets as disclosed in its abridged financial statements for the period ended 31st March, 1997, being IR£102,919. Ten per cent. of same is IR£10,292 (€13,068). As this is less than €63,486.90 it is the relevant figure.
19. Counsel for the defendant makes a number of alternative submissions as to why the acquisition by the defendant of the lessee’s interest under the Lease in December 1997 was the acquisition of a non-cash asset with a value greater than IR£10,292.
20. First, counsel draws attention to and relies upon the definition of the value of “a transaction or arrangement” for the purposes of Part III of the Act of 1990, in section 25(4)(c). Section 29 of the Act of 1990 is within Part III. However, whilst s. 29(1) prohibits a company from entering into “an arrangement” whereby the company acquires one or more non-cash assets of the requisite value, it is not the value of the arrangement which is relevant, but rather, the value of the non-cash asset, for the purposes of the application of section 29. Considering Part III of the Act of 1990, there is, in my view, a clear distinction made by the Oireachtas in the words used in ss. 25 and 29 between, on the one hand, the value of “a transaction or arrangement”, as defined in s. 25(4), and the value of “a non-cash asset” for the purposes of section 29. Section 25 does not address the valuation of a non-cash asset for the purposes of s. 29, and, accordingly, I have formed the view that it is not applicable to the valuation of the non-cash asset acquired by the defendant in entering into the Lease in December 1997. It appears appropriate to note that a lease may constitute a credit transaction for the purposes of Part III of the Act of 1990 by reason of the definition of credit transaction in s. 25(3)(b) as a transaction under which one party “leases . . the use of land . . in return for periodical payments”. However, s. 29 does not, of course, apply to a “credit transaction” as defined, but rather, to the acquisition of a “non-cash asset”. Other sections in part III of the 1990 Act do apply to credit transactions.
21. It follows from this conclusion that insofar as Mr. Wallace has expressed an expert view to the Court that the value “of the transaction to the company” is the annual rental charge under the contract, having regard to the definition in s. 25(4)(c), such value is not a relevant value for the purposes of the Court determining the value of the Lease as a “non-cash asset” for the purposes of section 29.
22. Counsel for the defendant also drew attention to s. 25(5) of the Act of 1990, and, if necessary, sought to rely on same. As it also applies to the value of a “transaction or arrangement”, for the same reasons in my view, the sub-section does not apply to the valuation of a non-cash asset allegedly acquired in breach of section 29.
23. The primary submission of counsel for the defendant was that the appropriate value of the non-cash asset for the purposes of s. 29 is the capital value of the non-cash asset. In support of that proposition, he referred the Court to a judgment of the English High Court, Lewison J. in Ultraframe (U.K.) Limited v. Fielding [2005] EWHC 1638 (Ch), [2006] F.S.R. 17. That judgment primarily concerns the application of s. 320 of the UK Companies Act 1985, (which is, for this purpose, in similar terms to s. 29 of the Act of 1990) to licences of intellectual property rights. However, in the course of the judgment, Lewison J. considered the application of s. 320 of the 1985 Act, to the grant of a lease. At issue appear to have been leases at rack rents by the directors, Mr. and Mrs. Fielding, to a company Sequest.
24. At para. 1369, Lewison J., having referred to reservations expressed by counsel as to the application of s. 320 to the grant of leases, stated:
“. . . in my judgment, it plainly does. If, say, a director grants a long lease to a company at a substantial premium, I can see no policy reason for holding that the literal words of section 320 do not apply to such a transaction.”
25. Lewison J. then went on to consider whether or not the leases are non-cash assets of the “requisite value”. In considering that issue, he stated as follows:
“1371 The essential question, therefore, is how to characterise the asset acquired by the company. Is it the lease; or is it the right to possession granted by the lease? First, on the face of it, the comparators are all capital sums, especially the company’s net asset value, and its called up share capital. In any comparison one would expect to compare like with like. That would indicate that one is looking for a capital value on the other side of the comparison. Second, a non-cash asset is described in terms of property or an interest in property. The property interest created by a lease is the lease itself. Third, a lease may be granted for an indeterminate period (e.g. an annual tenancy). If one is required to assess the aggregate of the rental payments that will fall due during the term of the lease, the practical problems will be acute. If, on the other hand, one is expected to undertake a discounted cash flow or a capitalisation of the rent at an appropriate rate, there would seem to be a lot of room for argument about value, which is unlikely to have been Parliament’s intention. And if a lease is granted for a long fixed term at a modest rent, an assessment of the aggregate rental payments which will fall due during the term might bring the transaction within the scope of section 320. Since the purpose of the section is to deal with ‘substantial’ property transactions, this would be surprising. Fourth, Hodgson J. held in Niltan Carson Ltd v. Nelson [1988] BCLC 298 that the periodic rent would appear in the company’s accounts as a debit item and could not, therefore, represent its value for the purposes of the section. Fifth, contracts with directors require the director’s interest to be disclosed either under the articles or under section 317 of the Companies Act or both; and consequently there is some control over a company entering into rack rent leases with a director.
1372 I conclude, therefore, that the asset is properly characterised as the lease rather than the periodic value of the right to occupy; that the relevant value is its capital value.”
26. I respectfully agree with Lewison J. that where a company enters into a lease, as lessee, then, for the purposes of s. 29 of the Act of 1990, what it acquires, as the non-cash asset, is the lessee’s interest in the property granted by the lease or as is sometimes shortly put, “the lease”. Further, that having regard to the comparators in s. 29(2), that the value of the non-cash asset is the capital value of the lease.
27. There is one further refinement which may be implicit in the judgment of Lewison J. but if not, is, in any event, a view which I have formed on the proper interpretation of s. 29 of the Act of 1990. When, as on the facts herein, a company is acquiring the non-cash asset from the directors, what the defendant has acquired is the lessee’s interest in the property under the Lease. It is therefore the capital value of the lessee’s interest under the Lease or the capital value of the Lease to the defendant/lessee which is the relevant value for the purposes of section 29(2).
28. The expert evidence of Mr. Donohoe gives the Court two capital values. First, the capital value of the lease to a landlord and, secondly, the assignment value of the lease if the lease were to be assigned by the tenant i.e. the defendant. The landlord’s interest under a lease is quite different to that of the tenant. The landlord has the right to receive the rent and the benefit of other covenants. It is clear that the capital value opined by Mr. Donohoe is the right of the landlord to receive rent on an investment basis applying appropriate yields. That is not the interest which has been transferred to the defendant, as tenant. The defendant as tenant has an estate or interest in the property which gives it a right to exclusive possession and, inter alia, a right to assign its interest under the Lease, subject to consent of the landlord.
29. In my view, the assignment value of the Lease is similar to the capital value of the lessee’s interest. If the defendant, as lessee, had, shortly after the grant of the Lease, sought to realise the capital value of the Lease granted to it, it could have done so by assigning, in accordance with clause 5.30 of the Lease, with the consent of the landlord. Mr. Donohoe’s view is that there was no capital value to the defendant on such an assignment. The further relevant evidence of the nil capital value is the absence of the payment by the defendant of any premium or fine on the granting of the Lease. Consistent with the nil capital value, the Lease is not represented in the balance sheet of the defendant as an asset with a value.
30. Accordingly, I have concluded that the defendant has failed to establish, as a matter of probability, that the value of the non-cash asset acquired by the defendant from two of its directors and others i.e. the Lease or the lessee’s interest under the Lease, was, in December 1997, in excess of IR£10,292. Hence, whilst the defendant did acquire a non-cash asset from two directors, it has failed to establish that it acquired a non-cash asset of the requisite value within the meaning of s. 29 of the Act of 1990.
31. Whist this conclusion is sufficient to dispose of the proceedings in favour of the plaintiffs, I have decided that, having regard to the absence of prior authority in this jurisdiction, and that the subsequent issues are, in part, dependent on findings of fact on the evidence I heard, that I should also consider the next issue if s. 29 were held to apply to the grant of the Lease contrary to the conclusion I have formed.
Breach of Section 29(1)
32. The next issue identified is whether the defendant was in breach of s. 29 of the Act of 1990 when it entered into the Lease on 5th December, 1997. Section 29(1) in its express terms prohibits the company from acquiring a non-cash asset (including a lease) of the requisite value from its directors unless the arrangement is first approved by a resolution of the company in general meeting.
33. Evidence was given by the three surviving directors/shareholders from 1997 and the surviving Landlords. All appeared truthful and I accept their evidence. Whilst much evidence was given in relation to the start-up and development of the defendant, the need to acquire new premises in 1997, the discussions leading up to the decision to enter into the Lease and to the keeping of minutes of the meetings of the board of directors and the company and failure to produce same, it is sufficient to make the following findings of fact, many of which were not in dispute:
(i) In 1997, there were four persons who were both all the directors and all the shareholders of the defendant. They were the late Mr. Kerr, Mr. Young, Ms. Christine Donaghy and Mr. Jeremiah McCarthy. The latter three were the first directors and shareholders in early 1996 and Mr. Kerr became a shareholder and director a few months later.
(ii) The defendant operated initially out of 11/12, Warrington Place. In November 1996, it entered into a one year lease of an office premises at Clanwilliam House, Lower Mount Street. Its business expanded rapidly and, in particular, in February 1997, it obtained a contract from Esat Digfone which had recently been awarded Ireland’s second mobile licence.
(iii) In the summer of 1997, the search for new and bigger premises became acute. Ultimately, Block V, East Point Business Park, was identified.
(iv) In 1997, it was the practice to hold regular board meetings of the defendant. Mr. Kerr was chairman and conducted procedurally correct directors’ meetings, giving each director an opportunity to consider and have their say on the issues involved. Minutes of Board meetings were kept and signed by Mr Kerr. The files with those minutes appear to have been mislaid prior to the commencement of these proceedings.
(v) Whilst the defendant was expanding rapidly, it had no financial track record and it was not feasible for it to obtain finance to purchase Block V. A group of investors was identified including two of the directors/shareholders to acquire Block V. It was proposed that the defendant enter into a Lease with the investors.
(vi) At several of the directors’ meetings in the autumn of 1997, the move to Block V and the proposed Lease were discussed. At one such meeting, prior to execution of the Lease it was expressly resolved by the directors that the defendant enter into the Lease of Block V. It was known to all four directors/shareholders that the investors acquiring Block V and intended lessors included two of the directors/shareholders. The principal terms, such as rent and reviews, were also known to all the directors/shareholders.
(vii) No general meeting of the defendant was held at which there was a resolution passed by the shareholders authorising the defendant to enter into the Lease. Nevertheless, all four shareholders with an entitlement to attend and vote at a general meeting of the company, had agreed, at a meeting of the Board of Directors, that the defendant should enter into the Lease. Enterprise Ireland then held non-voting preference shares. It had a right to receive notice of, attend, but not vote at, general meetings of the defendant.
(viii) The arrangement whereby the defendant entered into the Lease was honest and intra vires the defendant.
(ix) The defendant’s abridged financial statements for the year ended 31st March, 1998, in their notes under a heading ‘Related Party Transactions’ states “the company leases its premises from a consortium of owners, two of whose participants are directors of Conduit Enterprises Limited. Details of their interest in the premises are as follows:
%
Edward Kerr 15
Liam Young 10
25
Total rent payable by the company to the consortium amounted to IR£78,259 for the year ended 31 March 1998 (1997: IR£Nil).”
These financial statements were approved in July 1998 and put before the Annual General Meeting and subsequently filed in the company’s office.
(x) The fact that the Lease was a “related party transaction” was regularly disclosed in subsequent accounts and in the due diligence conducted prior to the acquisition in 2006.
34. On the above findings of fact, I find that all the shareholders with a right to both attend and vote at a general meeting of the defendant (“the ordinary shareholders”) had, albeit at a meeting of a board of directors of the defendant, agreed to and authorised the defendant to enter into the Lease of 5th December, 1997 prior to its execution.
35. Counsel for the plaintiffs submits that on those facts the Court should treat the agreement of all the ordinary shareholders to the defendant entering into the Lease as satisfying the requirement of s. 29(1), that the arrangement whereby the company was to enter into the Lease be first approved by a resolution of the company in general meeting. He does so in reliance upon the purpose of the section and the mischief sought to be prevented thereby, Buchanan Ltd. v. McVey [1954] I.R. 89 certain other Irish authorities and also a significant line of English authority which has become known as the “Duomatic principle”.
36. Counsel for the defendant submits that the Court should not follow the English line of authority in the application of the Duomatic principle. He submits that to do so would do violence to the clear intention of the Oireachtas expressed in the words used by it in s. 29(1) of the Act of 1990. He submits that s. 29(3) sets out the exclusive circumstances in which the Oireachtas intended that an arrangement entered into without prior approval by resolution of the company in a general meeting would not be subsequently voidable at the instance of the company. Counsel for the defendant also submits that whilst it is accepted that the evidence is that all four shareholders, in their capacity as directors, approved the defendant entering into the Lease, there is no evidence of their specific agreement to the precise terms of the Lease.
37. In this jurisdiction, since the decisions of the High Court and Supreme Court in Buchanan Ltd. v. McVey [1954] I.R. 89, it appears settled law that the informal agreement of all the shareholders to do something which is honest and intra vires the company is to be regarded as an act of the company and does not require a formal resolution of the company in general meeting. That case concerned a claim by a liquidator for monies due to the company by the defendant as director, trustee and agent. Amongst the defences raised was that the defendant had received the sums alleged, not in his capacity as director, but as a shareholder in pursuance of an agreement between all the corporators and that, accordingly, an action for account did not lie against him at the suit of the company. In the High Court, Kingsmill Moore J., at p. 96, stated:
“There was no formal meeting of the Company to authorise the disposal of its property to the defendant, no resolution, however informal, to that effect. It is now settled law that neither meeting nor resolution is necessary. If all the corporators agree to a certain course then, however informal the manner of their agreement, it is an act of the company and binds the company subject only to two pre-requisites: In re Express Engineering Works Ltd (1); Parker and Cooper Ltd v. Reading (2).
The two necessary pre-requisites are 1, that the transaction to which the corporators agree should be intra vires the Company; 2, that the transaction should be honest: Parker and Cooper Ltd v. Reading (1), per Astbury J. at pp. 984, 985.
38. In the Supreme Court, Maguire C.J., at p. 118, without reference to authority, stated in shorter form the same principle:
“It is admitted that there was no formal meeting of the Company to authorise the disposal of its property to the defendant and no formal resolution to that effect. It is however settled law that no meeting and no formal resolution is necessary. It is necessary however that an agreement of this kind to be valid must both be intra vires the Company and must be honest. The trial Judge held that neither of these requisite conditions was fulfilled.”
39. Whilst the principle, as stated in Buchanan Ltd. v. McVey has subsequently been cited with approval by the Supreme Court and High Court (see In Re Greendale Developments (In Liquidation) (No. 2) [1998] 1 I.R. 8, Keane J. at p. 21 and In Re P.M.P.A. Garages Ltd. [1992] I.R. 315, Murphy J., at p. 326), it does not appear to have been considered in relation to the type of statutory requirement specified in s. 29(1) of the Act of 1990. However, what appears to be the same principle has been so applied in England and is known as the Duomatic principle.
40. The Duomatic principle applied by the English Courts, inter alia, to s. 320 of the Companies Act 1985, derives from a decision of Buckley J. in Re Duomatic Limited [1969] 2 Ch. 365. On the facts of that case, Schedule 1, Table A, Part 1, Art. 76, applied to the company which provided “the remuneration of the directors shall from time to time be determined by the company in general meeting”. The liquidators sought repayment of sums paid to two directors, Mr. Elvins and Mr. Hanly, as salaries on the grounds that such sums had never been voted in general meeting. On the facts, it was held that no formal resolution was passed but the remuneration had been approved of by the shareholders with a right to attend and vote at a general meeting. It appears from the judgment of Buckley J. that the two cases relied upon by counsel for the directors in that case were the same two cases cited by Kingsmill Moore J. in Buchanan Ltd. v. McVey as authority for the proposition that he then considered to be settled law, namely, In Re Express Engineering Works Ltd. [1920] 1 Ch. 466, and Parker and Cooper Ltd. v. Reading [1926] Ch. 975. At p. 371, Buckley J. quoted from Lord Sterndale M.R., Warrington L.J. and Younger L.J. in In Re Express Engineering Works Ltd. as follows:
Lord Sterndale M.R. at p. 470:
“In the present case these five persons were all the corporators of the company and they did all meet, and did all agree that these debentures should be issued. Therefore it seems that the case came within the meaning of what was said by Lord Davey in Salomon v. Salomon & Co. Ltd. [1897] AC 22 …. It is true that a different question was there under discussion, but I am of opinion that this case falls within what Lord Davey said. It was said here that the meeting was a directors’ meeting, but it might well be considered a general meeting of the company, for although it was referred to in the minutes as a board meeting, yet if the five persons present had said ‘We will now constitute this a general meeting,’ it would have been within their powers to do so, and it appears to me that this was in fact what they did.”
Warrington L.J. said at p. 470:
“‘It was competent to them’ – that is, the five corporators of the company – ‘to waive all formalities as regards notice of meetings, etc., and to resolve themselves into a meeting of shareholders and unanimously pass the resolution in question. Inasmuch as they could not in one capacity effectually do what was required but could do it in another, it is to be assumed that as business men they would act in the capacity in which they had power to act. In my judgment they must be held to have acted as shareholders and not as directors, and the transaction must be treated as good as if every formality had been carried out.’”
Younger L.J. said, at p. 471:
“I agree with the view that when all the shareholders of a company are present at a meeting that becomes a general meeting and there is no necessity for any further formality to be observed to make it so. In my opinion the true view is that if you have all the shareholders present, then all the requirements in connection with a meeting of the company are observed, and every competent resolution passed for which no further formality is required by statute becomes binding on the company.”
41. Buckley J. then considered what was stated by Astbury J. in Parker and Cooper Ltd. v. Reading, where he, in turn, considered In re Express Engineering Works Ltd. and an earlier decision of In re George Newman & Company Ltd. [1895] 1 Ch. 674 (which had been considered by the Court of Appeal In re Express Engineering Works Ltd.), and then stated at p. 984:
“Now, the view I take of both these decisions is that where the transaction is intra vires and honest, and especially if it is for the benefit of the company, it cannot be upset if the assent of all the corporators is given to it. I do not think it matters in the least whether that assent is given at different times or simultaneously.”
Buckley J. then stated at p. 372:
“Thus, the effect of his judgment was to carry the position a little further than it had been carried in In re Express Engineering Works Ltd. [1920] 1 Ch. 466, for Astbury J. expressed the view that it was immaterial that the assent of the corporators was obtained at different times, and that it was not necessary that there should be a meeting of them all at which they gave their consent to the particular transaction sought to be upheld.”
42. Having further considered submissions on the facts of re Duomatic Ltd. at p. 373, Buckley J. stated:
“The fact that they did not take that formal step but that they nevertheless did apply their minds to the question of whether the drawings by Mr. Elvins and Mr. Hanly should be approved as being on account of remuneration payable to them as directors, seems to lead to the conclusion that I ought to regard their consent as being tantamount to a resolution of a general meeting of the company. In other words, I proceed upon the basis that where it can be shown that all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be. The preference shareholder, having shares which conferred upon him no right to receive notice of or to attend and vote at a general meeting of the company, could be in no worse position if the matter were dealt with informally by agreement between all the shareholders having voting rights than the would be if the shareholders met together in a duly constituted general meeting.”
43. Whilst the principle, as stated by Buckley J. In re Duomatic Ltd. is expressed in slightly different terms to its expression by Kingsmill Moore J. in the High Court and Maguire C.J. in the Supreme Court in Buchanan Ltd. v. McVey, it is, in substance, the same principle. Insofar as the Irish decision refers to “all the corporators”, that must be a reference to all shareholders with a right to both attend and vote at a general meeting of the company, and it appears to me that it follows that if, in accordance with Buchanan Ltd. v. McVey, the agreement of all the corporators is to be treated as an act of the company, then it must also be treated as binding as a resolution in general meeting, which is the normal way in which shareholders would act.
44. Whilst In Re Duomatic Limited did not concern a statutory requirement, subsequent decisions in England and Wales have applied the same principles to the requirement in s. 320 of the 1985 Act, which is in similar terms to s. 29 of the 1990 Act. In NBH Limited v. Hoare [2006] EWHC 73 (Ch), Park J., who had previously expressed doubt as to the application of the Duomatic principle to a statutory requirement for a resolution in Demite Ltd. v. Protec [1998] B.C.C. 638, formed the view that it did apply. Those judgments are only of persuasive authority, whereas Buchanan Ltd. v. McVey both states the law in Ireland and is binding on me.
45. I now turn to the intention of the Oireachtas in enacting s. 29 of the Act of 1990 and its purpose. The purpose of s. 29 of the Act of 1990 is to protect the shareholders of a company against directors entering into certain transactions with the company in which they have a personal interest, without the approval of at least those shareholders holding a simple majority of the voting shares. Section 29(1) only requires an ordinary resolution. The mischief sought to be avoided appears confined to the protection of shareholders with a right to vote. It does not have any wider ambit. Notice is not required to be given to any other person of the proposed transaction and the resolution of the shareholders is not one which requires to be filed in the Companies Registration Office. Section 29 does not no so require and it does not come within the types of resolution specified in s. 143 of the Act of 1963, which require filing in the Companies Registration Office.
46. The issue of interpretation appears to be whether the Court should construe s. 29 of the Act of 1990 from the words used as evidencing an intention by the Oireachtas to preclude a Court from applying to the express requirement for a resolution of a general meeting a principle which the Supreme Court considered in 1954 to be settled law. For the reasons already set out, I consider the principle to include the treatment of the agreement of all shareholders with a right to both attend and vote at a general meeting of the company as effective as or in the words of Buckley J. in In Re Duomatic Limited “as being tantamount to” a resolution of a general meeting of the company . I have concluded that s. 29 of the Act of 1990 does not include an intention to so preclude the Court. Further, that if the Court were to so interpret s. 29(1) it would fail to reflect the plain intention of the Oireachtas and may even, in its application to certain facts, make it absurd. Having regard, inter alia, to s. 5 of the Interpretation Act 2005, it is not an interpretation which I consider I should apply. Section 5 of the Interpretation Act 2005, insofar as relevant, provides:
“5(1) In construing a provision of any Act (other than a provision that relates to the imposition of a penal or other sanction)—
(a) that is obscure or ambiguous, or
(b) that on a literal interpretation would be absurd or would fail to reflect the plain intention of—
(i) in the case of an Act to which paragraph (a) of the definition of “Act” in section 2 (1) relates, the Oireachtas, or
(ii) in the case of an Act to which paragraph (b) of that definition relates, the parliament concerned,
the provision shall be given a construction that reflects the plain intention of the Oireachtas or parliament concerned, as the case may be, where that intention can be ascertained from the Act as a whole.”
47. The fact that the Oireachtas did not specify any special requirements in relation to the holding of the general meeting or any special requirements in relation to a resolution passed for the purposes of s. 29(1), including registration in the Companies Registration Office, appears to me to demonstrate that there was no intention to interfere with the principle considered in Buchanan Ltd. v. McVey to be settled law. Insofar as the Oireachtas required approval of a majority of shareholders with a right to vote by a resolution of the company in general meeting, that is, of course, the normal way in which shareholders of a company should take formal decisions. However it does not evidence an intention to preclude the agreement of all shareholders with a right to vote being treated as effective as a resolution in general meeting in accordance with the principle determined in Buchanan Ltd. v. McVey to be settled law.
48. Counsel for the defendant sought to rely on s. 29(3) as indicting an intention by the Oireachtas to impose the mandatory procedural requirement of approval by resolution of the company in general meeting and not to permit the continued application of the principle stated in Buchanan Ltd. v. McVey to be settled law. That sub-section makes an arrangement entered into in contravention of s. 29(1) voidable at the incidence of the company unless one of three situations set out in sub-paragraphs (a), (b) and (c) of s. 29(3) exist. One of these is affirmation by the company in general meeting “within a reasonable period”. It does not appear to me that this sub-section precludes the application of the principle in Buchanan Ltd. v. McVey. It is, rather, directed to a situation where not all the shareholders were made aware of and agreed to the transaction prior to it being completed. The requirement that the affirmation be within a reasonable time appears to me to emphasize the intention of the Oireachtas by the enactment of s. 29 to protect the then shareholders of the company from transactions between the company and directors of which they might not be aware.
49. Section 29 contains no time limit on the company’s right to avoid an arrangement entered into in breach of section 29(1). On the facts herein, there have been multiple changes of ownership since the Lease in December 1997. The defendant sought to avoid the Lease approximately eleven years after its creation and when it had occupied Block V as tenant and complied with its obligations under the Lease, including a series of rent reviews.
50. The potential absurdity of an interpretation of s. 29(1) which excludes the application of the principle approved of by the Supreme Court as settled law in Buchanan Ltd. v. McVey may be demonstrated by facts which differ only slightly from the facts of the present case. Suppose the Landlords had included all four of the persons who were then the shareholders entitled to both attend and vote at a general meeting of the defendant Would the Oireachtas have intended, in the enactment of s. 29, that where a company entered into a transaction with all of its then ordinary shareholders, obviously fully aware of and consenting to the transaction, eleven years later, following many changes of ownership, the company should be entitled to avoid the transaction just because all the shareholders who entered into the transaction did not also record their approval by the passing of a resolution in general meeting. It appears to me such an interpretation would be absurd, having regard to the clear intention of the Oireachtas to protect shareholders against transactions entered into by directors with the company unless notice is given to and there is approval of shareholders representing a majority of the voting shares.
51. Hence, if, contrary to my first conclusion, s. 29 applies to the grant of the Lease, I conclude that s. 29(1) does not preclude the Court applying the principle as stated by the Supreme Court in Buchanan Ltd. v. McVey to the facts herein for the purpose of determining whether the defendant was in breach of s. 29(1) in entering into the Lease. Counsel for the defendant submitted that, even if the Court were, as a matter of principle, willing to treat the approval of all four ordinary shareholders given as directors to the company entering into the Lease as compliance with the requirement for a resolution in general meeting , that the evidence does not disclose approval of the “arrangement” whereby the defendant was to acquire the Lease sufficient to meet the requirements of section 29(1). Whilst I accept the submission of counsel that the evidence must disclose approval by all ordinary shareholders of the arrangement to enter into the Lease, on the findings of fact made I am satisfied that the plaintiffs have adduced such evidence. On the findings of fact, I am satisfied that all ordinary shareholders, prior to the approval given as directors to the defendant entering the Lease, were aware that the lessors included two directors and were aware of the key terms of the Lease. That appears sufficient approval of the arrangement for the purposes of section 29(1). A proposed resolution to approve the arrangement would not appear to require greater knowledge of the shareholders.
52. The second matter to which I wish to refer in the application of the principle as stated by the Supreme Court in Buchanan Ltd. v. McVey to the facts herein is not a matter relied upon by counsel for the defendant, correctly, in my view. The evidence is that Enterprise Ireland was, in 1997, the holder of non-voting preference shares in the defendant. In accordance with Article 2(d) of the Articles of Association, it did have a right to receive notice of and to attend but not to vote at general meetings of the Company. However, the undisputed evidence of Mr. Young, in his witness statement to the Court, was that Enterprise Ireland was also notified and approved of the move to Block V, East Point, and was directly involved in securing an Enterprise Ireland Area Certificate required by the defendant prior to the Lease being signed in 1997. In such factual circumstances, it does not appear that the existence of a preference shareholder with a right to receive notice of and attend but not vote at a meeting of the company precludes the Court, in accordance with Buchanan Ltd. v. McVey, treating the approval of all the ordinary shareholders to the arrangement to enter into the Lease as a resolution of the Company in general meeting, for the purposes of s. 29(1) of the Act of 1990.
53. Accordingly, I have concluded that even if contrary to my first conclusion that the entering into the Lease by the defendant in December 1997 was not the acquisition of a non-cash asset of the requisite value for the purposes of s. 29(1) that the defendant did not act contrary to s. 29(1) in entering into the Lease.
54. In the circumstances, it does not appear to me necessary to consider the further issues in the proceedings. It follows from the conclusions reached that the defendant was not entitled to treat the Lease as void as stated in its letter of 4th December, 2008.
Reliefs
55. The plaintiffs are entitled to the declaration sought at paragraph one of the plenary summons i.e.
“1. A Declaration that the Lease of the 5th day of December, 1997 made between Edward B. Kerr, Deceased, Liam Young, Michael Tunney, Liam Lenehan and Laurence K. Shields of the First Part and the Defendant of the Second Park, to hold the property known as ALL THAT AND THOSE the lands, hereditaments and premises comprising Block V, East Point Business Park, East Wall Road in the City of Dublin for the term of twenty-five years from and including the 4th day of December, 1997 (hereinafter “the Lease”), is valid and binding upon the Defendant.”
56. The parties did not address the further consequential reliefs sought. I will hear the parties as to the entitlement and/or necessity for any further orders arising out of the findings and conclusion in this judgment.
.