Financial Assistance
Cases
Brady v Brady
[1989] AC 755 Lord Oliver wrote
‘The matter can perhaps, most easily be tested by reference to section 153(1)(a) where the same formula is used. Here the words are ‘or the giving of the assistance for that purpose’ (i.e. the acquisition of shares) ‘is but an incidental part of some larger purpose of the company’. The words ‘larger purpose’ must here have the same meaning as the same words in subsection (2)(a). In applying subsection (1)(a) one has, therefore, to look for some larger purpose in the giving of financial assistance than the mere purpose of the acquisition of the shares and to ask whether the giving of assistance is a mere incident of that purpose. My Lords, ‘purpose’ is, in some contexts, a word of wide content but in construing it in the context of the fasciculus of sections regulating the provision of finance by a company in connection with the purchase of its own shares there has always to be borne in mind the mischief against which section 151 is aimed. In particular, if the section is not, effectively, to be deprived of any useful application, it is important to distinguish between a purpose and the reason why a purpose is formed. The ultimate reason for forming the purpose of financing an acquisition may, and in most cases probably will, be more important to those making the decision than the immediate transaction itself. But ‘larger’ is not the same thing as ‘more important’ nor is ‘reason’ the same as ‘purpose’. If one postulates the case of a bidder for control of a public company financing his bid from the company’s own funds – the obvious mischief at which the section is aimed – the immediate purpose which it is sought to achieve is that of completing the purchase and vesting control of the company in the bidder. The reasons why that course is considered desirable may be many and varied. The company may have fallen on hard times so that a change of management is considered necessary to avert disaster. It may merely be thought, and no doubt would be thought by the purchaser and the directors whom he nominates once he has control, that the business of the company will be more profitable under his management than it was heretofore. These may be excellent reasons but they cannot, in my judgment, constitute a ‘larger purpose’ of which the provision of assistance is merely an incident. The purpose and the only purpose of the financial assistance is and remains that of enabling the shares to be acquired and the financial or commercial advantages flowing from the acquisition, whilst they may form the reason for forming the purpose of providing assistance, are a by-product of it rather than an independent purpose of which the assistance can properly be considered to be an incident.’
C.H. (Ireland) Inc. (in liquidation) v. Credit Suisse Canada
[1999] 4 I.R. 556 McCracken J. wrote
“A transaction in breach of the section must be one which is in breach of sub-s. (1), which is the giving of financial assistance for the purpose of or in connection with the purchase or subscription of shares. Furthermore, it must be a transaction whereby the company gives the financial assistance. Furthermore, the use of the word “transaction” in the sub-sections dealing with the making of a declaration by the directors refers in both sub-ss. 4 and 5 to “the company having carried out the transaction whereby such assistance is to be given”. In my view the only transaction which can be attacked under sub-s. (14) is a transaction directly involving the company. In this case, the relevant transaction is the depositing of the monies by or at the direction of the company with CSZ, and the consideration for that deposit, namely the giving of the payment obligation by CSZ to the respondent. That is the transaction that assisted CHNB to acquire the shares in the applicant by assuring that the finance was being made available by the respondent. However, the making available of that finance is not, in my view, part of the transaction to which sub-s. (14) refers.
Notice
A transaction is only voidable under sub-s. (14) against any person who had notice of the facts which constitute the breach of section 60. The onus is on the liquidator to prove that the respondent had such notice. However, while the onus is undoubtedly on the liquidator, and while it has been said that this is a penal section, the fact remains that I still only have to decide this question as a matter of probability.
This whole question of notice was considered by the Supreme Court in Bank of Ireland v. Rockfield Ltd. [1979] I.R. 21. At p. 37 Kenny J. said:-
“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 theymust have inferred that part of the advance was to be applied for this purpose.”
He then applied these principles to the case before him at p. 38 where he said:-
“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.”
……..
In my view, therefore, the respondent had actual notice, in the sense that that phrase is explained in Bank of Ireland v. Rockfield Ltd. [1979] I.R. 21, that the monies it was advancing were going to be ultimately used by CHNB to acquire shares in the applicant, and that those monies were being secured by a payment obligation or guarantee by CSZ which was countersecured by the deposit of the same monies by the applicant with CSZ.
……..
Against whom is the transaction avoided?
Under sub-s. 14 the transaction is avoided against any person who had notice of the facts which constituted a breach. However, I fully accept counsel for the respondent’s argument that I cannot make an order declaring a transaction void as against a person or body who is not a party to these proceedings. In particular, while I have no real doubt but that CSZ was aware of all the facts, I cannot make an order against it, as these proceedings have been stayed against them. I can in fact only make an order as against the respondent declaring void the transaction, which in my view is the deposit of the monies by the applicant with CSZ as security, and the consideration for that deposit, which was the giving of the payment obligation by CSZ to the respondent. Accordingly, I will make the relevant declaration as against the respondent and with regard to that transaction only. I am not sure what practical effect this will have, but that is a matter for the parties to consider, possibly elsewhere.
Ravenshaw Ltd -v- Companies Act
[2012] IEHC 37 Laffoy J. wrote
“A transaction is the action of conducting business which involves exchange or interaction between parties. The completion of the share purchase agreement, the payment of the purchase consideration, and the taking of the transfer of the shares in White Lace was carried out on the one side by Mr. Deane and Mr. Cassidy and on the other side by the Company. It was not carried out by, nor was it a transaction directly involving, White Lace. Apart from that, even if it could be proved that Mr. Deane and Mr. Cassidy, as one side of the transaction involving the transfer of the shares, had actual notice of the facts which constituted the breach of s. 60(1), as required by s. 60(14), which seems highly unlikely, it simply defies reason and common sense to suggest at this remove that any benefit could be gained by any person, natural or corporate, on Mr. Fahy’s side of the transaction by seeking to have the transfer of the shares to the Company made void, which would result in the shares reverting to Mr. Deane and Mr. Cassidy, presumably on return of the IR£3m purchase consideration by them.”
Cognotec Ltd [in recievership] -v- Companies Acts
[2010] IEHC 309 McGovern J. wrote
“9. Section 60(14) provides:
“Any transaction in breach of this section shall be voidable at the instance of the company against any person (whether a party to the transaction or not) who had notice of the facts which constitute such breach.”
There was no disagreement between the parties as to what kind of notice was required, namely, actual notice. The case of Bank of Ireland Finance Ltd. v. Rockfield Ltd. [1979] 21, involved the loan of money by the plaintiff to two individuals for the purchase of lands on the understanding that the property would be conveyed by them to a company called Rockfield Limited. Unknown to the plaintiff, the defendant company was the owner of the property and that fact was recorded on the Folio in the Register of Freeholders in County Wicklow. Prior to advancing the money, the plaintiff did not make any enquiries about the ownership of the property and had not seen either the Folio or the Certificate of Title. The two individuals concerned used the money to buy the issued shares in the defendant company and, thus, obtain control over it. It was, therefore, an act coming within the ambit of s. 60(1) of the Companies Act 1963. The bank had taken security for the loan, which, it transpired, was for the purchase of shares in the company. The Supreme Court held that “notice” within the meaning of s. 60(14) meant actual notice and not constructive notice. Kenny J. stated, at p. 36:
“This is the first case, as far as I know, in which the meaning of sub-s. 14 of s. 60 has been considered by any court in this country. The onus of proving that the money was advanced for the purchase of shares in the defendant company lies on the person who alleges this. The plaintiffs do not have to prove that they had no notice of facts which constituted a breach of section 60. What has to be established is that the plaintiffs had notice, when lending the money, that it was to be used for the purchase of shares in the defendant company. The fact which constituted such breach in this case was the application of £150,000 to the purchase of the shares in the defendant company. As the purchase followed the loan, the defendants must establish that the plaintiffs knew, at the time when they made the loan, that it was to be applied for this purpose. If they got notice of this, subsequently, that is irrelevant.
The notice referred to in sub-s. 14 of s. 60 is actual notice and not constructive notice. As there has been considerable confusion as to the meaning of the terms ‘actual notice’ and ‘imputed notice’ and ‘constructive notice’ – a confusion which has been pointed out by many judges and text-book writers – I wish to say that I use the term ‘actual notice’ as meaning, in this case, that the plaintiff bank, or any of its officials, had been informed, either verbally or in writing, that part of the advance was to be applied in the purchase of shares in the defendant company, or that they knew facts from which they must have inferred that part of the advance was to be applied for this purpose.”
10. In Lombard and Ulster Banking Ltd. v. Bank of Ireland and Brook House School (Unreported, High Court, 2nd June, 1997), there was further judicial analysis of the meaning of s. 60(14) of the Act, by Costello J. In that case, the company sought to avail of the validation procedure under the section, but there were a number of procedural defects in the manner in which this was done. The company agreed to give the bank a guarantee and charge as security for a loan to buy shares in the company. The bank had incorrectly been told that the validation procedure had been complied with when this was not so. Costello J. stated, at p. 10 of the judgment:
“What [s. 60(14)] means is (a) that although a transaction in breach of the section is illegal, it is only ‘voidable’ not void, and (b) it is only voidable against a person who had notice of the facts which constituted the breach.
There are three issues arising on the ‘notice’ point in this case. Firstly, the liquidator has argued that the phrase ‘transaction in breach of the section’ means the carrying out of a transaction prohibited by s.(1) and that as Lombard and Ulster knew that the transaction was prohibited by sub-section (1), it had sufficient ‘notice’ for the purposes of sub-section (14) to enable the company to avoid the transaction. I do not think that that can be correct. The sub-section does not permit the avoidance of a transaction which is ‘in breach of sub-section (1) of this section’, but ‘any transaction in breach of this section’. And so, if a lender knows that an attempt to validate a prohibited transaction and avoid breaching the section by adopting the procedures set out in sub-sections (2), (3) and (4) is to be made, I do not think that he has notice of any breach within the meaning of the sub-section unless it can be shown (a) that there was, in fact, non-compliance with the sub-sections and (b) that he knew of the facts which resulted in non-compliance.
Secondly, as to the onus of proof, if, as has happened in this case, a defendant puts in issue the validity of a transaction prohibited by s. 60, the onus is on the plaintiff to establish his case. However, if he fails to establish the validity of a transaction, it does not follow that his claim on foot of a Deed which is part of the transaction and is otherwise valid, fails – the transaction is merely a voidable one. And it seems to me that the onus is then on the company which seeks to avoid it to show that the plaintiff had ‘notice’ as required by sub-section (14). This means that in this case, the liquidator must establish, as a matter of probability, that Lombard and Ulster had ‘notice’ that there was non-compliance with the provisions of sub-sections (2), (3) and (4). If he cannot do so, the deed of charge is enforceable.
Thirdly, as to the nature of the ‘notice’, it is not sufficient for the liquidator to show that if Lombard and Ulster had made proper enquiries, that they would have ascertained that the company had failed to comply with the sub-section. It must be shown that Lombard and Ulster had ‘actual notice’ of the facts which constituted the breach, that is, (a) that they or their officials actually knew that the required procedures were not adopted, or that they knew facts from which they must have inferred that the company had failed to adopt the required procedures, or (b) that an agent of theirs actually knew of the failure or knew facts from which he must have inferred that a failure had occurred (see; Bank of Ireland v. Rockfield Ltd. [1979] I.R. 21, 37). ‘Constructive notice’ of the failure is not sufficient for sub-section (14).”
11. The Lombard and Ulster case has a direct relevance to the issues before me because it is quite clear that all the parties to the agreement to provide financial assistance knew that it was for the purchase of shares in the Company and therefore, prima facie, unlawful, unless a permitted validation under the section could be effected.
12. A significant plank in the Company’s submission in seeking to void the transaction is that the Bank knew that the provision of finance was an illegal transaction as it was to enable the Company to purchase its own shares. I do not accept that submission because the test is not whether the Bank knew the transaction was in breach of s. 60(1), but whether it was a transaction in breach of the entire section. A similar argument was made in the Lombard and Ulster case and was rejected by Costello J. who stated that sub-section 14 referred to “ . . . any transaction in breach of this section . . .” and not the voidance of a transaction which is “in breach of sub-section (1)”. There is no ambiguity in the words of the section and I entirely agree with the views expressed by Costello J. and would adopt them. In the case of Bank of Ireland v. Rockfield Ltd., the issue was whether or not the bank knew that the transaction was one involving s. 60(1), but that is not the issue here.
13. From the decisions referred to above, three principles emerge:-
(i) The onus of establishing that a person is on notice of a breach of s. 60 lies on the person asserting it.
(ii) The notice required to be established is actual notice not constructive notice.
(iii) The party asserting that a person is affected by actual notice must establish that they had such notice (of the relevant breach) prior to or simultaneously with the transaction sought to be impugned – and not thereafter.
Quinn -v- Irish Bank Resolution Corporation Limited (In Special Liquidation) & ors
[2015] IESC 29 Clarke J. wrote
“10. Section 60
10.1 It seems to me that the section 60 question can be quite easily answered. Section 60 is, in material part, in the following terms:-
“(1) Subject to subsections (2), (12) and (13), it shall not be lawful for a company to give, whether directly or indirectly, and whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of or in connection with a purchase or subscription made or to be made by any person of or for any shares in the company, or, where the company is a subsidiary company, in its holding company.
[…]
(14) Any transaction in breach of this section shall be voidable at the instance of the company against any person (whether a party to the transaction or not) who had notice of the facts which constitute such breach.”
10.2 It is true that subsection (1) of section 60 describes relevant lending as being unlawful. However, subsection (14) enables a company to have a relevant transaction treated as void “against any person (whether a party to the transaction or not) who had notice of the facts which constitute such breach”.
10.3 Section 60 (including subsection (14)) was considered in CH (Ireland) Inc. v. Credit Suisse Canada [1999] 4 IR 542. The issues which arose in that case were quite different to those with which this Court is now faced. However, McCracken J., at p.556, emphasised that subsection (14) only renders an affected transaction voidable. It would seem clearly implicit that McCracken J. did not consider that the section rendered any such transactions void.
10.4 It is true, as counsel for the Quinns pointed out, that subsection (14) does not render any such transaction lawful and does not, therefore, purport to reverse the effect of subsection (1). Nonetheless it seems to me that the section properly recognises the distinction between a transaction being unlawful, on the one hand, and being necessarily unenforceable, on the other. For the reasons already analysed in some detail, it does not necessarily follow that because activity is, under statute, unlawful, all contracts which form part of the illegality are always to be treated as enforceable. The criteria for determining whether such contracts are or are not unenforceable have already been addressed.
10.5 It is true that lending to purchase shares in the lender itself might be said to involve a contract to do the very thing which the statute renders unlawful. However, in the context of the issues which arise under this heading, it is important to make reference to the second criterion already identified. Is there anything in the statute itself which suggests that the legislative intent was that contracts, even though illegal, were nonetheless to be enforceable?
10.6 Subsection (14) would be entirely redundant if every contract caught by section 60 was to be regarded as unenforceable by reason of the fact that it is described as being unlawful in subsection (1). For, if every such contract were unenforceable because it was unlawful, then it would follow that a company would not need to elect to treat it as void but could simply proceed on the basis that it could never be enforced. On the other hand, it is clearly and necessarily implied by subsection (14) that a company can elect not to treat a relevant transaction as void. To take any other view would be to entirely disregard the clear language of the subsection.
10.7 The clear statutory policy must be, therefore, that a company which has been in breach of subsection (1) by giving, for example, a loan to support a purchase of its own shares, can still elect to treat the loan contract as enforceable and get its money back, together with whatever interest might apply. Indeed, there might be other terms in the contract which the company may regard as beneficial and which it may wish to enforce. In those circumstances, it does not seem to me that there is any basis for suggesting that a company who wishes to recover monies lent in breach of section 60 is precluded from so doing on the basis that the transaction was illegal or, in the words of section 60(1) “not … lawful”. To take a contrary view would be in direct contradiction of the clear intent to be found in the legislation which is that the consequences for the company (or more accurately those within the company who are involved in the unlawful transaction) are that they are exposed to a criminal penalty but that the balance between enforcing an unlawful contract, on the one hand, and the potential injustice of allowing the consequences of that unlawful contract to lie where they fell (meaning, in many cases, that the company whose officers had abused its position will be even worse off to the detriment of its shareholders) lies squarely, in the context of this piece of legislation, against treating the contract as void or unenforceable UNLESS the company exercises the election which the statute confers on it under subsection (14).
10.8 In the light of that analysis, it does not seem to me that any of the other possible criteria identified could alter the ultimate determination. Given that analysis of subsection (14), how could it be said that the Oireachtas did not intend that the criminal penalties imposed were not to be sufficient to meet the statutory purpose of discouraging companies providing assistance for the purchase of their own shares. Likewise, the lending of money for the purchase of shares is not, in itself, unlawful. It is only where the money is lent for the purposes of purchasing the shares of the lender that there is a difficulty. It is true, as already noted, that the lending of money for the purchase of its own shares is, in one sense, a contract designed to carry out the very act which the relevant legislation is designed to prevent. However, in the circumstances of section 60, the weight to be attached to that aspect of the criteria is entirely displaced by the statutory language itself. While it may not always be the case that one of the relevant criteria will be determinative, or almost determinative, of the answer as to the true statutory policy, the clear language of section 60(14) makes the task much easier in this case.
10.9 The proper application of the criteria already identified seems to me to clearly lead to the conclusion that the statutory intent is that contracts which breach section 60 are, nonetheless, potentially enforceable (unless subsection (14) is invoked) and that the adverse consequences for those within a company who are found to have acted in breach of section 60 are as specified in the section itself. I am, therefore, satisfied that, so far as section 60 is concerned, it is clear that the lending contracts between Anglo and various Quinn Group entities are enforceable against those Quinn Group entities even if Anglo is established to have acted in breach of section 60 in making the loans concerned.”
Cognotec Ltd (in recievership) -v- Companies Acts
[2010] IEHC 309 (30 July 2010)
JUDGMENT of Mr. Justice Brian J. McGovern delivered on the 30th day of July, 2010
1. This is an application for direction on foot of s. 316 of the Companies Act 1963 (“the Act”). The application is brought on behalf of Kieran Wallace, the receiver of Cognotec Ltd. (“the Company”) for:
(a) Directions as to the validity of a debenture dated 7th March, 2006, created by the Company, in favour of Barclays Bank Ireland plc. (“the Bank”);
(b) directions as to the validity of Kieran Wallace’s appointment as receiver of the Company, pursuant to the debenture;
(c) a direction that the debenture, the appointment of Kieran Wallace as receiver of the Company, and the Bank’s interest, as mortgagee and chargee of any property comprised in the debenture, are not invalidated by any breach of s. 60 of the Companies Act 1963;
(d) a direction that the Company is estopped from voiding the debenture, pursuant to s. 60(10) of the Companies Act 1963, or otherwise;
(e) a direction that Kieran Wallace, as receiver of the Company, is entitled to pay to the Bank, the proceeds of the sale of any property sold or otherwise realised by him on foot of and in accordance with the debenture.
The plaintiff seeks other consequential relief, including an order, if necessary, pursuant to s. 316(3) of the Companies Act 1963, that he be relieved wholly, or to such extent as the court thinks fit, from personal liability in respect of anything done or omitted by him in relation to any property purporting to be compromised in the debenture.
2. The Company is in receivership and has ceased trading. It designed and produced computer software used by banks and other financial institutions to assist them in trading in foreign exchange and other financial instruments. Mr. Kieran Wallace was appointed receiver and manager by the Bank on foot of a debenture executed by the Company on 7th March, 2006. The debenture secured a loan of US$12,500,000. The Bank loaned this money in two tranches to the Company. On 7th March, 2006, a sum of US$10 million was lent and on 18th July, 2006, a further sum of US$2,500,000 was drawn down. It was accepted by the parties that this latter sum was not to facilitate the purchase of the Company’s shares, but was for the purpose of repaying a loan.
3. Of the monies lent by the Bank to the Company, US$10m was provided for the purpose of financial assistance in connection with the purchase or acquisition of its own shares. A reorganisation of the Company involved one of its shareholders (Softbank AM Corporation) selling its shares to the remaining shareholders. The shares were to be held by Cognotec Ireland Ltd. (“Ireland”) which, in turn, would be controlled by Cognotec Holdings Ltd. (“Holdings”). The funds were borrowed by Holdings, as borrower, and both Ireland and the Company provided a guarantee to the Bank in respect of the borrowings. Holdings was to lend the funds to Ireland for the purchase of the shares and following the reorganisation of the Company, Holdings would become the holding company of Ireland, and Ireland would, in turn, become the immediate holding company of the Company.
4. The Company executed a debenture comprising a fixed and floating charge over its assets (including its Intellectual Property) as security for these borrowings.
5. Because the loan was for the purpose of providing financial assistance in connection with the purchase or acquisition of the Company’s own shares, s. 60 of the Companies Act 1963, applies. The following are the relevant provisions of s. 60:
“60(1) Subject to sub-sections (2), (12) and (13), it shall not be lawful for a company to give, whether directly or indirectly, and whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of or in connection with a purchase or subscription made or to be made by any person of or for any shares in the company, or, where the company is a subsidiary company in its holdings company.
(2) Sub-section (1) shall not apply to the giving of financial assistance by a company if-
(a) such financial assistance is given under the authority of a special resolution of the company passed not more than twelve months previously; and
(b) the company has forwarded with each notice of the meeting at which the special resolution is to be considered . . . a copy of a statutory declaration which complies with sub-sections (3) and (4)
and also delivers, within 21 days, after the date on which the financial assistance was given, a copy of the declaration to the Registrar of Companies for Registration.
(3) The statutory declaration shall be made at a meeting of the directors held not more than 24 days before the said meeting, and shall be made by the directors or, in the case of a company having more than two directors, by a majority of the directors.
(4) The statutory declaration shall state-
(a) the form which such assistance is to take;
(b) the persons to whom such assistance is to be given;
(c) the purpose for which the company intends those persons to use such assistance;
(d) that the declarants have made a full enquiry into the affairs of the company and that, having done so, they have formed the opinion that the company, having carried out the transaction whereby such assistance is to be given, will be able to pay its debts in full as they become due.”
The section provides that, if a director makes a statutory declaration without having reasonable grounds for his opinion that the company will be able to pay its debts in full as they fall due, shall be guilty of an offence and liable to a fine and/or imprisonment or both.
6. Sub-section 14 states:
“Any transaction in breach of this section shall be voidable at the incidence of the company against the person (whether a party to the transaction or not) who had notice of the facts which constitute such breach.”
7. As can be seen from the text of the Act, a copy of the statutory declaration which has to comply with sub-sections (3) and (4) has to be delivered to the Registrar of Companies for Registration within twenty-one days after the date on which the financial assistance was given. That was not done in this case. The Bank maintains that it was not aware of this at the time. It had instructed Messrs. Matheson Ormsby & Prentice, solicitors, to act for them in the transaction. McCann Fitzgerald, solicitors, were acting for the Company, Holdings and the other group company involved. McCann Fitzgerald undertook to deliver the statutory declaration to the Companies Registration Office. For reasons which are unexplained, they did not do so within the relevant period and the Bank only became aware of this default in October 2007.
8. Mr. Cregan S.C. for the Company accepted that all necessary steps in the statutory validation procedure were completed except for the delivery a copy of the statutory declaration of the directors to the Registrar of Companies for Registration within twenty-one days after the date on which the financial assistance was given. Therefore, what the court has to consider, in this case, is what was the effect of that failure.
The law
9. Section 60(14) provides:
“Any transaction in breach of this section shall be voidable at the instance of the company against any person (whether a party to the transaction or not) who had notice of the facts which constitute such breach.”
There was no disagreement between the parties as to what kind of notice was required, namely, actual notice. The case of Bank of Ireland Finance Ltd. v. Rockfield Ltd. [1979] 21, involved the loan of money by the plaintiff to two individuals for the purchase of lands on the understanding that the property would be conveyed by them to a company called Rockfield Limited. Unknown to the plaintiff, the defendant company was the owner of the property and that fact was recorded on the Folio in the Register of Freeholders in County Wicklow. Prior to advancing the money, the plaintiff did not make any enquiries about the ownership of the property and had not seen either the Folio or the Certificate of Title. The two individuals concerned used the money to buy the issued shares in the defendant company and, thus, obtain control over it. It was, therefore, an act coming within the ambit of s. 60(1) of the Companies Act 1963. The bank had taken security for the loan, which, it transpired, was for the purchase of shares in the company. The Supreme Court held that “notice” within the meaning of s. 60(14) meant actual notice and not constructive notice. Kenny J. stated, at p. 36:
“This is the first case, as far as I know, in which the meaning of sub-s. 14 of s. 60 has been considered by any court in this country. The onus of proving that the money was advanced for the purchase of shares in the defendant company lies on the person who alleges this. The plaintiffs do not have to prove that they had no notice of facts which constituted a breach of section 60. What has to be established is that the plaintiffs had notice, when lending the money, that it was to be used for the purchase of shares in the defendant company. The fact which constituted such breach in this case was the application of £150,000 to the purchase of the shares in the defendant company. As the purchase followed the loan, the defendants must establish that the plaintiffs knew, at the time when they made the loan, that it was to be applied for this purpose. If they got notice of this, subsequently, that is irrelevant.
The notice referred to in sub-s. 14 of s. 60 is actual notice and not constructive notice. As there has been considerable confusion as to the meaning of the terms ‘actual notice’ and ‘imputed notice’ and ‘constructive notice’ – a confusion which has been pointed out by many judges and text-book writers – I wish to say that I use the term ‘actual notice’ as meaning, in this case, that the plaintiff bank, or any of its officials, had been informed, either verbally or in writing, that part of the advance was to be applied in the purchase of shares in the defendant company, or that they knew facts from which they must have inferred that part of the advance was to be applied for this purpose.”
10. In Lombard and Ulster Banking Ltd. v. Bank of Ireland and Brook House School (Unreported, High Court, 2nd June, 1997), there was further judicial analysis of the meaning of s. 60(14) of the Act, by Costello J. In that case, the company sought to avail of the validation procedure under the section, but there were a number of procedural defects in the manner in which this was done. The company agreed to give the bank a guarantee and charge as security for a loan to buy shares in the company. The bank had incorrectly been told that the validation procedure had been complied with when this was not so. Costello J. stated, at p. 10 of the judgment:
“What [s. 60(14)] means is (a) that although a transaction in breach of the section is illegal, it is only ‘voidable’ not void, and (b) it is only voidable against a person who had notice of the facts which constituted the breach.
There are three issues arising on the ‘notice’ point in this case. Firstly, the liquidator has argued that the phrase ‘transaction in breach of the section’ means the carrying out of a transaction prohibited by s.(1) and that as Lombard and Ulster knew that the transaction was prohibited by sub-section (1), it had sufficient ‘notice’ for the purposes of sub-section (14) to enable the company to avoid the transaction. I do not think that that can be correct. The sub-section does not permit the avoidance of a transaction which is ‘in breach of sub-section (1) of this section’, but ‘any transaction in breach of this section’. And so, if a lender knows that an attempt to validate a prohibited transaction and avoid breaching the section by adopting the procedures set out in sub-sections (2), (3) and (4) is to be made, I do not think that he has notice of any breach within the meaning of the sub-section unless it can be shown (a) that there was, in fact, non-compliance with the sub-sections and (b) that he knew of the facts which resulted in non-compliance.
Secondly, as to the onus of proof, if, as has happened in this case, a defendant puts in issue the validity of a transaction prohibited by s. 60, the onus is on the plaintiff to establish his case. However, if he fails to establish the validity of a transaction, it does not follow that his claim on foot of a Deed which is part of the transaction and is otherwise valid, fails – the transaction is merely a voidable one. And it seems to me that the onus is then on the company which seeks to avoid it to show that the plaintiff had ‘notice’ as required by sub-section (14). This means that in this case, the liquidator must establish, as a matter of probability, that Lombard and Ulster had ‘notice’ that there was non-compliance with the provisions of sub-sections (2), (3) and (4). If he cannot do so, the deed of charge is enforceable.
Thirdly, as to the nature of the ‘notice’, it is not sufficient for the liquidator to show that if Lombard and Ulster had made proper enquiries, that they would have ascertained that the company had failed to comply with the sub-section. It must be shown that Lombard and Ulster had ‘actual notice’ of the facts which constituted the breach, that is, (a) that they or their officials actually knew that the required procedures were not adopted, or that they knew facts from which they must have inferred that the company had failed to adopt the required procedures, or (b) that an agent of theirs actually knew of the failure or knew facts from which he must have inferred that a failure had occurred (see; Bank of Ireland v. Rockfield Ltd. [1979] I.R. 21, 37). ‘Constructive notice’ of the failure is not sufficient for sub-section (14).”
11. The Lombard and Ulster case has a direct relevance to the issues before me because it is quite clear that all the parties to the agreement to provide financial assistance knew that it was for the purchase of shares in the Company and therefore, prima facie, unlawful, unless a permitted validation under the section could be effected.
12. A significant plank in the Company’s submission in seeking to void the transaction is that the Bank knew that the provision of finance was an illegal transaction as it was to enable the Company to purchase its own shares. I do not accept that submission because the test is not whether the Bank knew the transaction was in breach of s. 60(1), but whether it was a transaction in breach of the entire section. A similar argument was made in the Lombard and Ulster case and was rejected by Costello J. who stated that sub-section 14 referred to “ . . . any transaction in breach of this section . . .” and not the voidance of a transaction which is “in breach of sub-section (1)”. There is no ambiguity in the words of the section and I entirely agree with the views expressed by Costello J. and would adopt them. In the case of Bank of Ireland v. Rockfield Ltd., the issue was whether or not the bank knew that the transaction was one involving s. 60(1), but that is not the issue here.
13. From the decisions referred to above, three principles emerge:-
(i) The onus of establishing that a person is on notice of a breach of s. 60 lies on the person asserting it.
(ii) The notice required to be established is actual notice not constructive notice.
(iii) The party asserting that a person is affected by actual notice must establish that they had such notice (of the relevant breach) prior to or simultaneously with the transaction sought to be impugned – and not thereafter.
14. On 7th March, 2006, US$10m was drawn down and the debenture was created on the same date. On this date, the directors also swore the necessary statutory declaration. The balance of the facility which was US$2,500,000 was drawn down on 18th July, 2006. As I have already stated, this was not for the purchase of the Company’s shares. A copy of the statutory declaration should have been furnished to the Registrar of Companies for Registration within twenty-one days from the date on which financial assistance was given (7th March, 2006). This was to comply with s. 60, sub-section (2)(b). Messrs. McCann Fitzgerald, solicitors for the Company, had undertaken to deliver the statutory declaration to the Companies Registration Office but for reasons which are unexplained, this was not done in time. The Bank only became aware of the late filing of the statutory declaration in October 2007 when conducting a review of its security.
15. On 19th March, 2010, the directors of the Company purported to hold a board meeting in Jerusalem, Israel, to void the security in accordance with the provisions of section 60(14). The circumstances surrounding the meeting were unusual. There were three directors of the Company, namely, Mr. Brian MacCaba, Mr. John Byrne and Ms. Hilary Guiney. Evidence was given on affidavit that Ms. Guiney and Mr. MacCaba attended the meeting at Mr. MacCaba’s home in Jerusalem and that the third named director, Mr. Byrne, joined the meeting by telephone from London. The evidence concerning the meeting was, to say the least, unsatisfactory and incomplete.
16. The question of an alleged breach of the statutory validation procedures under s. 60 was first raised by Syndicated Investments (“Syndicated”) which is a shareholder in the Company and was one of the purchasing shareholders of its Softbank shares. Subsequent to the appointment of the receiver, Syndicated made a number of claims in respect of the Company. It alleged that it had a first fixed charge over the Company’s Intellectual Property in priority to that of the Bank. Secondly, it alleged that it was the owner of the Company’s Intellectual Property. In order to deal with these assertions, the receiver instituted proceedings against Syndicated [2010 No. 1125 P] and also against the directors of the Company [2010 No. 73 COS]. A default judgment was entered in the proceedings against Syndicated. In the course of the hearing of this present application, counsel for the receiver sought to impugn the motives of the directors of the Company and Syndicated in seeking to void the transaction which is the subject matter of this dispute. They raised issues which would be of serious concern if they were established in evidence. Issues concerning the validity of the board meeting in Jerusalem were also raised. Mr. Sreenan S.C. for the receiver, relied on the case of United Dominions Trust (Ireland) Ltd. [1993] I.R. 412. In that case, Keane J. stated at p. 416:
“It is clear that when a receiver is appointed by a debenture holder under the powers in that behalf in the debenture, the powers vested by law in the directors of the company are not thereby terminated. They may not, however, be exercised in such a manner as to inhibit the receiver in dealing with and disposing of the assets charged by the debenture or in a manner which would adversely affect the position of the debenture holder by threatening or imperilling the assets which are subject to the charge. Subject to that important qualification, the powers vested in law in the directors remain exercisable by them and include the power to maintain and institute proceedings in the name of the company where, so to do, would be in the interests of the company or its creditors.”
Counsel for the receiver argued that the directors did not have the power to convene a board meeting to void the security, having regard to the fact that they had already taken the necessary steps to validate the procedure at an earlier date, and that there was no evidence that they could show that the interests of the Company or its creditors would be served by such action. In fact, he pointed out that they might be liable for criminal sanctions under the terms of the section, if they were to void the security, because they would then be acting in breach of the provisions of s. 60 as provided for in sub-section 15.
17. Before adjudicating on these matters, it is necessary to determine whether or not the Bank had actual notice of the fact which constituted a breach of s. 60 in this case, which was the late delivery of a copy of the statutory declaration to the Registrar of Companies for Registration. If the Company did not have notice of that breach, then the transaction was not voidable at the incidence of the Company and any purported decision made at the board meeting in Jerusalem on 19th March, 2010, would have no effect in that regard.
Conclusions
18. I accept the evidence offered on behalf of the Bank in this case that they did not have actual notice of the breach. Any failure to deliver the statutory declaration for registration within the time allowed only taints the validation procedure and becomes relevant if the Bank had actual notice. Although I was referred to the decision In Re N.L. Electrical Ltd., Ghosh and Another v. 3i plc. [1994] 1 B.C.L.C 22, which dealt with the consequences of failing to deliver the particulars to the Companies Registration Office, it is not necessary to consider its application in this jurisdiction in circumstances where the Bank did not have notice of the failure to deliver the declaration for registration. Nor do I have to construe sub-section 14 to determine whether it could have been the intention of the legislature that a failure to deliver the declaration for registration would have the effect contended for by the Company.
19. I give the following directions on the motion brought, pursuant to s. 316 of the Companies Act 1963:
(a) The debenture dated 7th March, 2006, created by the Company in favour of Barclays Bank Ireland plc. is a valid debenture;
(b) the appointment of Mr. Kieran Wallace, pursuant to the debenture, is valid;
(c) the debenture, the appointment of Kieran Wallace as receiver of the Company and the Bank’s interest as mortgagee and chargee of any property comprised in the debenture are not invalidated by any breach of s. 60 of the Companies Act 1963;
(d) the decision of the board meeting in Jerusalem on 19th March, 2010, purporting to void the security is null and void and shall not affect the debenture of 7th March, 2006, held by the Bank and the Company is estopped from voiding the debenture, pursuant to s. 60(1) of the Companies Act 1963;
(e) Mr. Kieran Wallace, as receiver of the Company, is entitled to pay to the Bank the proceeds of the sale of any property sold or otherwise realised by him on foot of and in accordance with the terms of the debenture.
Van Hool McArdle v. Rohan Industrial Estates
[1980] IR 238
O’Higgins C.J.
26th October 1979
This appeal comes before this Court under the following circumstances. On the 10th April, 1978, Van Hool McArdle Ltd. was ordered to be wound up by the High Court pursuant to the provisions of the Companies Act, 1963. Mr. John Donnelly was appointed official liquidator. One of the principal assets of the company consists of 20 acres of land at Palmerston in the county of Dublin, which have the benefit of full planning permission in respect of factory development. The liquidator engaged the services of two firms of estate agents for the purpose of advising him in relation to the value of this property and the best manner of selling it. He decided to offer the property for sale by tender, in accordance with the advice he received from these two firms. He was also advised that the value of the property was of the order of £600,000 but that £650,000 might be obtained. Tenders for the property were duly received but all of these fell far short of the figure of £600,000. The matter was then reconsidered and it was decided to reject these offers and to seek fresh tenders.
On the 4th September, 1979, an offer of £750,000 was received from Mr. Jeff Schools on behalf of the Van Hool group of companies in Belgium, which includes the second respondent. This offer was conditional upon exchange-control consent being obtained. On the 6th September an offer of £730,000 was received from Rohan Industrial Estates Ltd. This offer was open for acceptance only for that day. The liquidator sought the advice of the two firms of estate agents, he came to the conclusion that the Rohan offer ought to be accepted since, although smaller, it was not subject to any condition as to exchange-control consent. Naturally the liquidator was apprehensive lest any delay might result in this offer being withdrawn. Accordingly, on the 7th September a contract for the sale of the property at the price of £730,000 was made between the liquidator and Rohan.
This contract was made subject, inter alia, to the following condition:”The sale to the purchaser shall be subject to and conditional upon the consent of the High Court thereto being obtained and if such consent shall not have been obtained on or before 31st October 1979, either party hereto may by notice in writing to the other determine this contract and thereupon the purchaser shall be entitled to the return of its deposit but without interest, compensation, or otherwise. The liquidator shall use his best endeavours to obtain the consent of the Court to this sale.”
On the 10th September the liquidator received from Mr. Schools on behalf of the second respondent an offer of £850,000 subject, again, to exchange-control consent. The matter was then brought before the High Court on the motion of the liquidator who sought an order approving the proposed sale in accordance with the Rohan contract of the 7th September. 1979. In his affidavit the liquidator disclosed the subsequent offer from the second respondent.
The liquidator’s motion was heard by Mr. Justice McWilliam on the 12th September, and it was adjourned by him for further consideration to the 28th September. In so adjourning the matter the learned judge was concerned with the reality of the second respondent’s offer having regard to the exchange-control consent subject to which it was conditioned. However, on the 28th September Mr. Justice McWilliam felt that he was bound to uphold the Rohan contract made by the liquidator on the 7th September even though the price or consideration was substantially smaller than the offer then before the court, and although the necessary consent was then forthcoming. In so deciding, the learned judge was affected by the fact that the Rohan contract had been properly made on proper advice and that the liquidator’s action and conduct had been prudent and bona fide at all times. In such circumstances he felt that he could not have regard to any subsequent or higher offer and that he was bound to approve of the Rohan contract made by the liquidator as an officer of the court. Against his decision in this respect this appeal has been brought.
In the first place it should be said that no criticism was, or could be, directed against the liquidator as to the manner in which he acted. All parties accept that he acted with great care and prudence and that his concern at all times was to secure the best possible price for the property. The Rohan contract was, therefore, properly concluded by him and was in all respects a bona fide and due discharge of his duties as liquidator. The question for decision on this appeal is whether, this being so, the High Court has any function or discretion in the matter. Mr. Justice McWilliam took the view that it had not and that, once the Rohan contract was concluded in such circumstances, the court was bound to approve it. In my view, this was to approach a rather difficult question in too doctrinaire a manner.
It seems to me that regard must be had to the actual contract concluded by the liquidator. Under the provisions1 of s. 231, sub-s. 2, of the Companies Act, 1963, the liquidator in a winding up by the court (as is the case here) was empowered to sell this property by public auction of by private treaty without seeking the approach or consent of the High Court. Had he done so, and had his action been subsequently questioned, the court would only have been concerned to see whether he acted bona fide and in due discharge of his duties as liquidator. If on investigation such had proved to be the case, the court would be bound to hold that he had acted within his powers and that the contract he had made should be enforced accordingly.
However, in my view different considerations apply where the liquidator decides not to exercise this power and not to act independently of the court. Regard must be had to the actual contract made by the liquidator and to the terms thereof. Here the liquidator stipulated that the sale was to be “subject to and conditional upon the consent of the High Court thereto being obtained.” This, to my mind, contemplates something more than mere approval of action already taken by a liquidator acting bona fide and properly. It is a proviso that the consent of the court to the particular sale shall be necessary and that, if such is not obtained, the contract for sale shall be determinable. In my view, such a condition requires the court to consider whether its consent should be given to the sale, having regard to the circumstances obtaining not merely at the time when the sale was effected but also at the time of the application for such consent.
In the course of argument reliance was placed on a number of cases, namely, Munster Bank v. Munster Motor Co .3 ; Provincial Bank v. Farris 4 ; In re Hibernian Transport Cos. Ltd .1 and In re Wyvern Developments Ltd .5 I do not think any of these cases are in point. They relate to circumstances in which there was, for one reason or another, an unconditional acceptance of an offer, which acceptance was made properly and prudently by or on behalf of the court. The ratio decidendi in such cases would be appropriate to the exercise by a liquidator of his powers of independent action under the provisions of s. 231, sub-s. 2, of the Act of 1963. Here, a carefully drawn condition was attached to the sale, and the condition was justified by the circumstances obtaining at the time the sale was concluded. That condition requires the court to consider whether, having regard to the circumstances obtaining at the time of the sale and the subsequent developments, its consent ought to be given. In my view, Mr. Justice McWilliam ought to have considered the matter in this light.
Therefore, I would allow this appeal and would direct that the consent of the Court ought not to be given to the proposed sale to Rohan Industrial Estates Ltd.
Kenny J.
Van Hool McArdle Ltd. (the company) was incorporated in the State. By order made on the 10th April, 1978, it was ordered to be wound up by the court and Mr. John Donnelly was appointed to be the official liquidator. The company is insolvent; it owes large sums of money which are secured by mortgages and charges, and it is unlikely that its unsecured creditors will be paid anything. One of its principal assets is 20 acres of land at Irishtown (sometimes called Palmerston) the title to which is registered under the Registration of Title Act, 1964. These lands are outside the county borough of Dublin so that, if the lands were sold to another company, the consent of the Land Commission to the sale would be necessary: see s. 45 of the Land Act, 1965. Full planning permission for the erection of a factory on the lands has been granted.
In July, 1979, the liquidator offered these lands for sale by tender but was advised not to accept any of the offers received; he subsequently entered into negotiations with Rohan Industrial Estates Ltd. and with Van Hool N.V. (a company incorporated outside the State) for the sale of the lands. On the 4th
September, 1979, Van Hool offered £750,000 to the liquidator for the lands, subject to getting exchange-control permission and a consent under s. 45 of the Act of 1965. The liquidator thought that Van Hool were unlikely to get both permissions and he decided to sell the lands to Rohan for £730,000 subject to court consent. This offer was open for acceptance for one day only. On the 7th September a written contract between the liquidator and Rohan for the sale of the lands was made.
Clause C of the special conditions provided: “The sale to the purchaser shall be subject to and conditional upon the consent of the High Court thereto being obtained and if such consent shall not have been obtained on or before 31st October 1979, either party hereto may by notice in writing to the other determine this contract . . . the liquidator shall use his best endeavours to obtain the consent of the Court to this sale.”
On the 10th September the liquidator received from Van Hool an offer of £835,000 plus a contribution of £15,000 to his costs. On the 12th September the liquidator applied to the High Court for its consent to the sale to Rohan and the judge adjourned the matter to the 28th September. On the 25th September the liquidator received from Van Hool’s solicitors copies of the exchange-control permission and of the consent under s. 45 of the Act of 1965. When the matter came before the judge on 28th September, he was told of Van Hool’s offer of £850,000 but he decided to authorise the liquidator to accept Rohan’s offer. The judge did so on the ground that what he had to consider was whether the contract of the 7th September, 1979, was a proper one for the liquidator to have made; the judge considered that, if it was, he should give his consent to the sale of the lands to Rohan.
I wish to state as emphatically as I can that this is not the principle to be applied when an application is made for consent to a sale or approval of a sale in a court liquidation. The cases which are relied on to support the contention which found favour with the judge are In re Bartlett, Newman v.Hook 7 ; Munster Bank v. Munster Motor Co. 3 and In re Hibernian Transport Cos. Ltd. 1 Those cases deal with an entirely different matter and are not authorities for the proposition advanced. Each of them relates to an application to discharge a court order, which had approved a sale, because a higher bid was received after the court’s sanction had been given. In all three of them the court, having approved the sale, had to keep faith with the purchaser. In the instant case the High Court had not given its consent to the sale when Van Hool’s offer of £850,000 was received.
The primary duty of the court and of the liquidator in a court winding up is to get the maximum price for the assets. A system under which a bid of £730,000 is accepted when one of £850,000 has been made would bring the court into well-deserved ridicule.
Counsel for the liquidator said that the court was concerned only with the good faith of his client and that, if he had made the contract honestly, it should be approved. I dissent from this argument. I have no doubt that the liquidator acted with the utmost good faith. However, on the critical date (the 28th September, 1979) the High Court could not give its consent to the sale to Rohan when a much higher offer had been made.
In my opinion, the order of the High Court should be set aside and this Court should refuse to give its consent to the Rohan contract of the 7th September, 1979. I think that the best course to adopt is to give liberty to Rohan and to Van Hool to make tenders to the Court for the lands within one week from this date.
There were a number of dealings between the company and Van Hool and so the liquidator is justifiably concerned that Van Hool, if they become the purchasers, may seek to set off the moneys due to them against the purchase price of the lands. Counsel for Van Hool has given an unconditional undertaking to this Court that his clients will not seek to set off any claim by them against the company (whether arising under a guarantee or otherwise against the purchase money) and has agreed that this undertaking is to be incorporated in the order. If Van Hool become the purchasers then, subject to any adjustment arising out of the apportionment account, they will pay the purchase money to the liquidator or to the company’s mortgagees, or to both.
Parke J.
I agree with the judgments delivered and with the form of the order proposed by Mr. Justice Kenny.
[Sealed tenders were submitted by the respondents, in accordance with the order of the Supreme Court, and the second respondent became the purchaser of the company’s land at the price of £925,000]