Meetings
Company Meetings I
Shareholders participate in companies through members’ meetings. There are two main kinds of meetings, Annual General Meeting (AGMs) and Extraordinary General Meetings (EGMs). AGMs are held annually and deal with certain regular business.
Where separate classes are constituted, separate meetings may be required in respect of matters specific to the shareholders of that class. In particular, this will be required where there is any proposal to change their class rights.
An ordinary resolution is a resolution passed by a simple majority of the votes cast by members of the company, being entitled to vote. The members may vote in person or by proxy at a general meeting of the company. A shareholder is entitled to propose a resolution at a shareholders’ meeting. He must give notice of his intention to propose the resolution when the meeting is called.
Company Meetings II
All general meetings of the company other than annual general meetings are extraordinary general meetings. EGMs are convened as required for particular exceptional circumstances. For example, an EGM may be required to approve an exceptional transaction or to do something fundamental, such as amending the articles of association.
The directors of a company may convene an extraordinary general meeting whenever they think fit. If at any time there are insufficient directors capable of forming a quorum, any director may convene an EGM in the same manner as it might be convened by the directors.
A special resolution is that required by the Act or the company’s constitution, to be passed as a special resolution. It is to be passed by not less than 75 percent of the votes cast. The resolution must be passed at a meeting of which at least 21 days’ notice has been given. The text or substance of the resolution is to be set out in the notice. There are exceptions where there is a unanimous waiver of this requirement and for certain written resolutions.
2014 Act Defaults I
The 2014 Act preserves the rules regarding general meetings of members and resolutions, with some modifications. The former Table A provisions are reflected in the Act. The non-mandatory provisions (formerly in the Tables) may be dis-applied. There remain certain key rights which are preserved, such as the rights to a poll, the basic rights of rights of shareholders and the rights to appoint directors.
A multi-member limited company may dispense with holding an annual general meeting under the 2014 Act for the first time. Single member companies were of necessity, exempt from the requirement to hold annual general meetings.
2014 Act Defaults II
Under the 2014 Act, the annual general meeting may be dispensed with, where all persons entitled to attend and vote, before the due date for the meeting, sign a written resolution acknowledging receipt of the financial statements which would have been required to be laid before the meeting and resolving in terms of the matters which would have been required to be resolved at the meeting. The resolution must confirm there has been no change in the appointment of the proposed auditor.
Under the 2014 Act, one or more members holding not less than 50 percent, or such other percentage as may be specified in the constitution, may convene an extraordinary general meeting. They must be holders of paid up share capital, carrying voting rights. This does not affect the rights of qualifying members to requisition a meeting. This right, effectively allows the holder of more than 50 percent of the share capital to convene the meeting himself, rather than requiring the directors to do so.
Foreign and Remote Meetings
An annual general meeting or extraordinary general meeting of a company may be held inside or outside the State. Such a meeting may be held in two or more venues, whether inside or outside the State at the same time using any technology that provides members as a whole with a reasonable opportunity to participate.
An annual general meeting or extraordinary general meeting may be held outside the State, if all members entitled to attend and vote, consent in writing or the company has made all necessary arrangements to ensure that members can by technological means, participate in the meeting without leaving the State.
If the company holds its annual general meeting or any extraordinary general meeting outside the State, then unless all of the members entitled to attend and vote consent, the company must ensure at its expense, that all necessary arrangements are made to ensure that members can by technological means participate in such meeting without leaving the state.
Business of AGM
With limited exceptions, every company must hold an annual general meeting each year. There can be no more than 15 months between AGMs. When a company is formed, its first AGM must be held within 18 months. Some companies may dispense with the requirement for an annual general meeting.
The business of the annual general meeting includes
- consideration of the statutory financial accounts and the directors’ report and unless the company is entitled to and has availed of the audit exemption, the report of the statutory auditors and those statements and the report;
- the review by the members of the company’s affairs;
- unless the constitution otherwise provides, the declaration of a dividend not exceeding the amount recommended by the directors;
- authorisation of the directors to approve the remuneration of the statutory auditors (unless the audit exemption applies);
- if the constitution so provides, the election and re-election of the directors;
- the appointment or re-appointment of statutory auditors, if applicable; and
- where the company constitution so provides, the remuneration of the directors.
The above items are the ordinary business of the Annual General Meeting. Any other business is special business. Other issues may be raised at the meeting itself.
Laying of Accounts
A copy of the balance sheet, profit and loss account, auditor’s report and director’s report must be sent with the notice of the meeting to every member, debenture holder, and others so entitled, at least 21 days before the meeting. In public companies, more extensive materials are usually circulated.
The profit and loss account covers the period from the previous accounts to a date not less than nine months before the meeting. This is generally an annual period and marks the company’s financial year. The balance sheet is made up as at the date the profit and loss account is made up to.
The auditor’s report must be read at the meeting and be open for inspection. The auditor is automatically reappointed unless he resigns or a resolution is passed which replaces them.
There is no requirement that the AGM actually approves the accounts, auditor’s report minutes, etc. it is sufficient that they are laid before the meeting, in order to comply with the statutory requirement.
References and Sources
Primary References
Companies Act 2014 (Irish Statute Book)
Companies Act 2014: An Annotation (2015) Conroy
Law of Companies 4th Ed. (2016) Ch.14 Courtney
Keane on Company Law 5th Ed. (2016) Ch.25 Hutchinson
Other Irish Sources
Tables of Origins & Destinations Companies Act 2014 (2016) Bloomsbury
Introduction to Irish Company Law 4th Ed. (2015) Callanan
Bloomsbury’s Guide to the Companies Act 2015 Courtney & Ors
Company Law in Ireland 2nd Ed. (2015) Thuillier
Pre-2014 Legislation Editions
Modern Irish Company Law 2nd Ed. (2001) Ellis
Cases & Materials Company Law 2nd Ed. (1998) Forde
Company Law 4th Ed. (2008) Forde & Kennedy
Corporations & Partnerships in Ireland (2010) Lynch-Fannon & Cuddihy
Companies Acts 1963-2012 (2012) MacCann & Courtney
Constitutional Rights of Companies (2007) O’Neill
Court Applications Under the Companies Act (2013) Samad
Shorter Guides
Company Law – Nutshell 3rd Ed. (2013) McConville
Questions & Answers on Company Law (2008) McGrath, N & Murphy
Make That Grade Irish Company Law 5th Ed. (2015) Murphy
Company Law BELR Series (2015) O’Mahony
UK Sources
Companies Act 2006 (UK) (Legilsation.gov.uk)
Statute books Blackstone’s statutes on company law (OUP)
Gower Principles of Modern Company Law 10th Ed. (2016) P. and S. Worthington
Company Law in Context 2nd Ed. (2012) D Kershaw
Company Law (9th Ed.) OUP (2016) J Lowry and A Dignam
Cases and Materials in Company law 11th Ed (2016) Sealy and Worthington
UK Practitioners Services
Tolley’s Company Law Handbook
Palmer’s Company Law
Cases
Glynn & Anor -v- Owen & Ors
[2007] IEHC 328
Judgment of Ms. Justice Finlay Geoghegan delivered the 5th day of October, 2007.
The plaintiffs and the first, second and third named defendants are each a twenty per cent shareholder in and director of the fourth and fifth named defendants.
These proceedings commenced in September, 2005. They were admitted to the commercial list by order of 14th November, 2005. On 31st July, 2006, the Court was asked to receive and file a document entitled “proceedings settled on the following terms” but not to make it a rule of court. The intended settlement was not achieved and the matter was ultimately listed for hearing on 6th March, 2007, before Clarke J. The opening commenced but, at the request of the parties, time was given and I understand at the end of a few days the proceedings appeared capable of settlement and were again adjourned back into the commercial list. However, settlement was not achieved and the matter was re-listed for hearing before me on 27th June, 2007. The proceedings in the form they commenced before me indicated that the plaintiffs were maintaining both personal claims for alleged wrongs done by the first to third named defendants and derivative claims on behalf of the fourth and fifth named defendants by way of exception to the rule in Foss v. Harbottle (1843) 2 Hare 461. Counsel for the third named defendant at an early stage made an application that I determine, as preliminary matters, whether the plaintiffs are entitled to maintain these proceedings as derivative claims on behalf of the fourth and fifth defendants having regard to the rule in Foss v. Harbottle and as to the plaintiffs’ right to maintain a personal claim alongside the intended derivative claim.
Counsel for the plaintiffs then informed the Court that the plaintiffs were not now proceeding with the personal claims. The only claims being pursued were the derivative claims on behalf of the fourth and fifth named defendants. This was a significant change by the plaintiffs. The existence of the personal claims alongside the derivative claim had been relied upon heavily by the former counsel for the plaintiffs in resisting an application brought in January, 2006 on behalf of the first and second named defendants (who were then legally represented) for an order inter alia that the plaintiffs’ right to pursue a derivative claim would be heard as a preliminary issue.
Having heard submissions on the application for the determination as a preliminary matter the plaintiffs’ entitlement to maintain the proceedings against the first to third named defendants by way of derivative claim on behalf of the fourth and fifth named defendants, I ruled on 2nd July that I should determine as a preliminary matter the following issue:
Are the plaintiffs entitled to pursue, on behalf of the fourth and fifth named defendants, the claims pleaded in the statement of claim for wrongs allegedly committed to the fourth and fifth named defendants;
(i) against the third defendant
(ii) against the first defendant
(iii) against the second defendant.
In the same ruling I refused an application from the third named defendant that the plaintiffs be required to establish a prima facie case that the fourth and fifth defendants (collectively referred to as “the Companies”) are entitled to the reliefs claimed. I ruled that the issue should be determined in relation to the claims as pleaded. Having regard to the late withdrawal of the personal claims and a certain lack of clarity as to the factual basis of the wrongs alleged against the Companies, I also gave ancillary directions for clarification by the plaintiffs of the basis of the claims pleaded.
These were complied with and I heard oral evidence limited to the issues relevant to the reliance by the plaintiff on the exceptions to the rule in Foss v. Harbottle and the parties adduced certain documentary evidence relating to the factual matrix in which the claims are sought to be pursued and to the background to the claims pleaded.
At the conclusion of the evidence counsel for the third defendant, the first and second named defendants (who were appearing in person) and counsel for the plaintiffs furnished written submissions and made helpful oral submissions on the preliminary issue.
The rule in Foss v. Harbottle
The parties are in agreement as to the nature of the rule. In O’Neill v. Ryan [1993] I.L.R.M. 557 Blayney J. at 567 stated:
“The rule is concerned with answering the question of who is the proper plaintiff to bring an action in respect of damage suffered by a company. It states that the proper plaintiff is the company itself. In the case of Prudential Assurance Co. Ltd. v Newman Industries Ltd (No. 2) [1982] Ch 204 the Court of Appeal said in its judgment at p. 219 referring to the case of Gray v Lewis (1873) LR 8 Ch App 1035:
‘This case highlights what the rule in Foss v Harbottle is primarily concerned with, namely, is a plaintiff shareholder entitled to prosecute an action on behalf of the company for a wrong done to it, or ought the action to be struck out on the footing that it is for the company and not for a shareholder to sue? That is what Foss v Harbottle itself was about …’”
A derivative action
such as sought to be pursued by the plaintiffs herein is permitted only as an exception to the rule in Foss v. Harbottle which, as the Court of Appeal in Prudential Assurance at p. 210 points out, forms part of the “elementary principle” that “A cannot, as a general rule, bring an action against B to recover damages or secure other relief on behalf of C for an injury done by B to C. C is the proper plaintiff because C is the party injured, and, therefore, the person in whom the cause of action is vested”.
The classic restatement of the rule in Foss v. Harbottle and the exceptions to it is that of Jenkins L.J. in Edwards v. Halliwell [1950] 2 A.E.R. 1064 at 1066:
“The rule in Foss v. Harbottle (1), as I understand it, comes to no more than this. First, the proper plaintiff in an action in respect of a wrong alleged to be done to a company or association of persons is prima facie the company or the association of persons itself. Secondly, where the alleged wrong is a transaction which might be made binding on the company or association and on all its members by a simple majority of the members, no individual member of the company is allowed to maintain an action in respect of that matter for the simple reason that, if a mere majority of the members of the company or association is in favour of what has been done, then cadit quœstio. No wrong had been done to the company or association and there is nothing in respect of which anyone can sue. If, on the other hand, a simple majority of members of the company or association is against what has been done, then there is no valid reason why the company or association itself should not sue. In my judgment, it is implicit in the rule that the matter relied on as constituting the cause of action should be a cause of action properly belonging to the general body of corporators or members of the company or association as opposed to a cause of action which some individual member can assert in his own right.
The cases falling within the general ambit of the rule are subject to certain exceptions. It has been noted in the course of argument that in cases where the act complained of is wholly ultra vires the company or association the rule has no application because there is no question of the transaction being confirmed by any majority. It has been further pointed out that where what has been done amounts to what is generally called in these cases a fraud on the minority and the wrongdoers are themselves in control of the company, the rule is relaxed in favour of the aggrieved minority who are allowed to bring what is known as a minority shareholders’ action on behalf of themselves and all others. The reason for this is that, if they were denied that right, their grievance could never reach the court because the wrongdoers themselves, being in control, would not allow the company to sue. Those exceptions are not directly in point in this case but they show, especially the last one, that the rule is not an inflexible rule and it will be relaxed where necessary in the interests of justice.”
The plaintiffs herein rely upon the exception identified by Jenkins L.J. normally referred to as
“a fraud on the minority”. They also submit that it and other decisions permit of a further general exception in “the interests of justice”.
It is well established that it is not necessary to allege fraudulent conduct in the criminal sense to maintain a derivative action in reliance upon this exception. The ambit of this exception was stated as follows by Lord Davey in Burland v. Earle [1902] AC 83 at p. 93 (and cited with approval by Keane J. (as he then was) in the Supreme Court in Crindle v. Wymes [1998] 4 IR 567 at 593):
“The cases in which the minority can maintain such an action are … confined to those in which the acts complained of are of a fraudulent character or beyond the powers of the company. A familiar example is where the majority are endeavouring directly or indirectly to appropriate to themselves money, property, or advantages which belong to the company, or in which the other shareholders are entitled to participate …”
Counsel for the third named defendant appear to me correct in their submission that the cases in which a plaintiff has been permitted to proceed with a derivative action in reliance upon the exception of the alleged wrongs constituting “a fraud on the minority” all include at minimum an allegation that the wrongdoers have derived some personal benefit from the wrongs alleged. Keane J. in Crindle Investments v. Wymes refers to the following passage from Templeman J., as he then was, in Daniels v. Daniels [1978] Ch. 406 where, at p. 413, he said:
“The authorities which deal with simple fraud on the one hand and gross negligence on the other do not cover the situation which arises where, without fraud, the directors and majority shareholders are guilty of a breach of duty which they owe to the company and that breach of duty not only harms the company but benefits the directors … If minority shareholders can sue if there is fraud, I see no reason why they cannot sue where the action of the majority and the directors, though without fraud, confers some benefit on those directors and majority shareholders themselves. It would seem to me quite monstrous – particularly as fraud is so hard to plead and difficult to prove – if the confines of the exception to Foss v. Harbottle (1843) 2 Hare. 461, were drawn so narrowly that directors could make a profit out of their negligence.”
Having cited the above, Keane J. stated:
“In the context of the present case, it is unnecessary to say whether that interesting passage states the law too widely.”
It is unnecessary in the context of this case to consider whether Templeman J. was intending to expand the meaning of “fraud” or to develop a further exception “in the interests of justice” to permit a claim to be pursued by minority shareholders where the action alleges that the majority benefited wrongly at the expense of the company as a result of the alleged negligence. On either basis I would respectfully agree that such actions may come within the class of action in which a court should permit minority shareholders to pursue a derivative claim for the very reasons set out by Templeman J. However, as far as the facts of this case are concerned, even if the court accepts that a plaintiff should be permitted to pursue such a claim by way of derivative action, it is clear that the principle as stated by Templeman J. is limited to circumstances in which it is alleged that a majority benefited from the alleged wrongdoing.
Counsel for the plaintiffs have not referred to any decision in which the exception was extended to an allegation of wrongdoing by a majority which is not alleged to benefit them at the expense of the company.
The conclusion I have reached appears supported by the view taken in Joffe Minority Shareholders: Law Practice and Procedure, 2nd edition (Tottel) where at paragraph 1.43 the authors’ state:
“It is an essential element of the concept of ‘fraud on the minority’ that the persons engaging in the fraudulent conduct should have received some benefit. It is for this reason that negligence on the part of a director without any corresponding benefit to himself is not actionable by means of a derivative claim under the ‘fraud on the minority’ principle.”
In Pavlides v. Jensen [1956] 1 Ch. 565 a minority shareholder was not permitted to pursue a derivative action claiming damages for negligence against directors arising out of an alleged sale of a mine at an undervalue as, inter alia, there was no allegation that the directors had appropriated to themselves any assets of the company.
The second relevant aspect of the exception of alleged wrongs constituting a “fraud on the minority” is that the alleged wrongdoers are in control of the company.
In considering whether or not the defendants who are alleged to be wrongdoers are in control of the Companies the plaintiffs submit that the court should apply a broad concept of “control” and rely upon the test applied by Jessel M.R. in Russell v. Wakefield Waterworks Co. (1875) L.R. 20 Eq., 474 at 482:
“It is not necessary that the corporation should absolutely refuse by vote at the general meeting, if it can be shewn either that the wrong-doer had command of the majority of the votes, so that it would be absurd to call the meeting; or if it can be shewn that there has been a general meeting substantially approving of what has been done; or if it can be shewn from the acts of the corporation as a corporation, distinguished from the mere acts of the directors of it, that they have approved of what has been done, and have allowed a long time to elapse without interfering, so that they do not intend and are not willing to sue. In all those cases the same doctrine applies, and the individual corporator may maintain the suit.”
In Prudential Assurance Company the Court of Appeal at p. 219 stated:
“… what is meant by ‘control’, which embraces a broad spectrum extending from an overall absolute majority of votes at one end, to a majority of votes at the other end made up of those likely to be cast by the delinquent himself plus those voting with him as a result of influence or apathy.”
I would respectfully agree with the above approaches. What constitutes ‘control’ must be determined in a common sense way in the context of the relevant facts and company structure.
The plaintiffs, in the alternative, seek to pursue the derivative claims as an exception to the rule in Foss v. Harbottle “in the interests of justice”. In Crindle Investments v. Wymes Keane J., at p. 592, refers to this as “the less solidly based fifth exception which suggests that the rule may be relaxed where the interests of justice so require”. On the facts of that appeal it was not necessary for the Supreme Court to decide whether such an exception exists.
Writing extra-judicially Keane C.J. at paragraph 26.20 of his Company Law, 4th Ed., (Tottel, 2007), takes a more positive view and states:
“While the view was advanced in earlier editions of this book that the Irish courts might be reluctant to extend the exceptions to the rule, that is probably to err on the side of caution. While it is true that the wide import of the term ‘fraud’ enables most deserving cases to avail of the third exception where the other two are not available, there is probably no good reason why the courts should not carve out further exceptions if justice so requires. Not only should the judicial comments in support of that view already cited be borne in mind; it is also worth noting that in the two seminal cases of Foss v Harbottle itself and Edwards v Halliwell, Wigram V-C and Jenkins LJ both observed that the rule should not be applied in so rigorous a fashion in any case as to lead to injustice.”
I respectfully agree that the formulation of the rule in the earlier cases makes clear that it should not be applied in such a way as to lead to injustice. Nevertheless, the entitlement of a shareholder to pursue by way of derivative action a claim for and on behalf of a company is an exception to an “elementary principle” as referred to above. As such it should not be broadly or liberally applied. A very strong case would have to be made out. It would also have to be consistent with the principles underlying the rule in Foss v. Harbottle and the exceptions to it. These include the reluctance of the courts to interfere in the internal management of a company.
Factual matrix of claims.
The parties are in agreement that the preliminary issue as to the plaintiffs’ entitlement to pursue the derivative actions on behalf of the Companies against the first to third defendants is a mixed question of fact and law. It is further agreed that the issue must be determined in the relevant factual matrix. The plaintiffs at the direction of the court prepared a statement of the facts upon which they rely. Evidence was given by the plaintiffs and third named defendant and a significant number of documents in the books of core documents and books of the minutes of meetings of the directors were referred to in submission without objection from any party. Accordingly I have considered them as being in evidence.
The following is a brief summary of the factual background to the present proceedings. Most of the facts are not in dispute. Where they are, this summary includes my findings of fact. The plaintiffs and first to third defendants are all businessmen. The plaintiffs prior to 2001 were involved together in the environmental technology industry. The second defendant was the inventor of a separator of oil and water which has particular application in the food industry for the purpose of removing liquid greases, fat and oils from waste water prior to going into the drainage system. The first defendant is the son of the second defendant. Both are resident in the U.K. The product manufactured in accordance with the invention of the second defendant was known as “Fatstrippa” and the first defendant was primarily involved in the development and distribution of the product in the U.K.
The third defendant is resident in Northern Ireland and prior to 2001 did business with the plaintiffs.
The plaintiffs were introduced to the first and second defendants and the plaintiffs in turn introduced the third defendant to the first and second defendants. By 30th April, 2001, all five had agreed to become equal twenty per cent shareholders in the two companies which are the fourth and fifth named defendants. On that day shareholders’ agreements prepared by Arthur Cox & Co. were executed. Also on 30th April, 2001, the second defendant assigned to the fourth defendant his interest in the then application for a patent for his invention. On the same day the fourth defendant granted an exclusive licence to the fifth defendant to manufacture and sell products coming within the claim of the patent and otherwise exploit the patent.
It appears from the minutes that the fourth defendant subsequently became the holder of the patent in six European countries including Ireland and the original licence to the fifth defendant was altered from an exclusive to a non-exclusive licence.
In accordance with the shareholders’ agreements all five shareholders were also to be the directors of each of the Companies. Memoranda and articles of association were approved for the Companies. These permitted the appointment of alternate directors.
Each Company was a party to its shareholders’ agreement. The agreements contain a list of the decisions and transactions which require consent of 80% of the shareholders. These do not include commencement of proceedings. They also contain provisions in relation to non-competition with the business of the company and non-disclosure of trade secrets or confidential information in relation to the company.
The company had no employees. Prior to 2004 the second defendant acted as chairman of the Board and the second plaintiff had been named as Chief Executive Officer and/or Managing Director of the fifth defendant. The nature of that appointment is a matter of dispute.
The Fatstrippa product was manufactured by a company in Donegal for the fifth defendant. The distribution of the product in the U.K. was carried out by Baden-Powell Environmental Technologies Limited (“BPET”), a company in which the first defendant had a significant interest. The greater part of the business of the fifth defendant appears to have been in the U.K.
The five directors held regular board meetings. A book of minutes and transcripts of certain minutes was handed into court. The minutes sometimes expressly refer to the meeting as a meeting of the Board of the fifth defendant and sometimes just “Fatstrippa”. Nothing turns on this. The parties in submission did not distinguish between meetings of the fourth or fifth defendants. The exploitation of the patented product in other countries was regularly discussed. By the autumn of 2003 the board of directors was aware that contacts had been made by the first defendant with certain Americans, including Mr. Doug Samuelson, with a view to exploiting the Fatstrippa product in the U.S. By this time Mr. Paul O’Kelly (who appears to have been introduced by the plaintiffs) of O’Kelly Sutton who were then accountants to the Companies was also carrying out consultancy work in particular in relation to the possible U.S. business. He reported on the potential U.S. business at a board meeting in October, 2003. The report appears to have raised queries about the proposed U.S. contacts.
In early 2004, difficulties arose with the U.K. distributor, BPET. It became insolvent. A new U.K. distributor “Fatstrippa U.K.” was proposed. Ms. Pamela Lewis, an accountant who was already an advisor to the first and second defendant, was being proposed as a shareholder and director of Fatstrippa U.K. (FSUK). At this time there was also concern about the amount of the outstanding debt from BPET to the fifth defendant.
The third defendant gave uncontested evidence that for some time there was a significant difference of approach between the second plaintiff on the one hand and the first and second defendants on the other as to how worldwide expansion should take place. The second plaintiff favoured what was referred to as “a big bang” approach with high borrowings. The first and second defendants favoured a more low-key licensing system. It appears that tension had increased by early autumn of 2004 due in part to the insolvency of BPET and at board level no significant progress had been made in relation to business in the U.S.
In the autumn of 2004 the second plaintiff was contacted by a Mr. David Lawson making certain allegations in relation to the Fatstrippa business which were of immediate concern. The second plaintiff organised the establishment of a sub-committee of the Board to investigate these allegations. He travelled to London to do so. The sub-committee also retained Paul O’Kelly to work with them. In the course of the second plaintiff’s investigations in London he became aware of what he perceived were even more serious matters concerning alleged activities of both the first and second defendants in relation to the Fatstrippa product in the U.S. and in China. No evidence was given of the detail of these matters save to the extent that they are referred to in the minutes of the board meeting of 9th November, 2004, and subsequent minutes, all of which were put into evidence. Some difficulties arise in relation to those minutes as they are not signed and for some meetings there is more than one version of the minutes. A board meeting was held on 9th November, 2004, at which the plaintiffs and the first to third defendants were present. Mr. Paul O’Kelly was invited by the second plaintiff to join the meeting, which he did, (at least for part of same) albeit with objection from the first and second defendants. The second plaintiff appears to have reported on his investigations and Mr. O’Kelly also reported on what he had learned and outlined certain steps which he considered should be taken by the Company.
The court is not concerned on this issue with the accuracy of the allegations made or even what precisely was decided at the meeting of 9th November about which there appears to be dispute. It is sufficient for the preliminary issue to understand the nature of the allegations and the general thrust of the decisions taken.
The second plaintiff appears to have learnt in the course of the investigations what he perceived as disturbing additional information surrounding the insolvency of BPET and the use to which monies earned by that company had been put. Alleged wrongdoing by the first defendant was central to those allegations.
He also learnt of significant ongoing contacts between the first defendant and a number of U.S. parties. He learnt of ongoing involvement of the second defendant with U.S. parties including, it was alleged, receiving them in London. He learnt of the manufacture in China of products allegedly using Fatstrippa technology and the first defendant’s involvement in China. He learnt of the proximate arrival of those products from China to the U.S.
The plaintiffs and the third defendant were all unaware of any of this activity until the investigation. The first and second defendants acknowledged certain of the alleged activities and that these had been undertaken without disclosure to the remaining members of the board.
The second plaintiff, prior to and in the course of the Board meeting of 9th November, took advice from Arthur Cox & Co.
In the course of the meeting, the second plaintiff proposed that the third defendant replace the second defendant as chairman of the board. The third defendant agreed to consider this and subsequently, with the agreement of the second defendant, he agreed to take over as chairman.
As already noted, there is a dispute as to precisely what was decided at the meeting. A copy of a handwritten resolution signed by all five directors and shareholders was put in evidence. This reads:
“That the board appoints a member/members to lead the integration and regularisation of all existing Fatstrippa activities, assets, intellectual property, patents, etc. globally. And that the company makes a resolution to appoint a nominated person to act on its behalf in the integration and regularisation of all existing Fatstrippa activities, assets, intellectual property, patents etc. globally, and that only board approved companies can be allowed to represent us in future. This is agreed by all board members as follows. This position to be reviewed by the board in ninety days.”
It is not in dispute that the third defendant agreed to become the member of the board referred to in this resolution. It is also not in dispute that Mr. Paul O’Kelly was to be the nominated person. The relationship between the third defendant and Mr. Paul O’Kelly is in dispute. However, nothing turns on that for the preliminary issue. The third defendant made contact with certain of the American parties. He also had certain contacts with Messrs. Arthur Cox & Co. and with Mr. Paul O’Kelly. Central to the claim now sought to be made by way of derivative action against the third defendant is an allegation that he acted in breach of duty to the Companies in failing to sanction and authorise Arthur Cox & Co. to instruct a firm of U.S. attorneys in California to commence proceedings there to obtain orders to enable seizure of allegedly counterfeit separator products in the U.S. which, it was alleged, infringed the rights of the fourth and fifth defendants. It is also alleged that the third defendant wrongfully and in breach of duty terminated the appointment of Mr. O’Kelly.
The third defendant has given evidence of his explanations for why he took the steps he did and did not take other steps subsequent to the meeting of 9th November in furtherance of the resolution of the Board. It forms no part of the decision on the preliminary issue to determine whether such actions were reasonable or, as alleged by the plaintiffs, in breach of the duty which he owed to the fourth and fifth named defendants.
The third defendant sought to hold a board meeting in Northern Ireland on 23rd November. The plaintiffs were unwilling to attend such a meeting.
The next board meeting was held on 2nd December. The third defendant acted as chairman of that meeting. Ms. Pamela Lewis attended as alternate for the second defendant. At that meeting there was a review of what had been done since the last meeting. The plaintiffs disputed the third defendant’s understanding of the role given to him by the resolution of the previous meeting. Following much discussion at that meeting it is not in dispute that it was unanimously resolved that “regularisation of the Company’s interest in the U.S. will be pursued through negotiation with the Americans rather than legal action”. Further detailed decisions were taken as to how the third defendant as Chairman should proceed and that the Chairman, the second plaintiff and possibly the first defendant should go to the U.S. to negotiate with the Americans. The third defendant and second plaintiff did travel to the U.S. in early 2005 but negotiations were not successful.
A board meeting was held on 14th February, 2005. At that meeting Ms. Pamela Lewis again attended but as an alternate director for the second defendant and the second defendant is recorded as attending as an alternate director for the first defendant. At that meeting the third defendant stated that he was formally offering all his shares in the Companies for sale and invited the other directors to discuss the mechanism and price for the transaction. He was requested by the second plaintiff and the second defendant to reconsider and urged to withdraw his offer. Ms. Lewis suggested that he remain in his current capacity (presumably as Chairman) for at least another month until after the next board meeting. At that meeting there appears to have been considerable discussion as to a way forward for the Company, notwithstanding the then existing disagreements between the members of the board. Two decisions of relevance were taken.
(i) That Mr. Paul O’Kelly and Ms. Pamela Lewis (and at the third defendant’s option a nominee of him) formulate a business brief for the Company to set out broad business goals and strategy of the Company and that such brief be presented to the next meeting of the board.
(ii) The Company not take any action against the first defendant arising out of his involvement in BPET and that Ms. Pamela Lewis not take any action against the second plaintiff or Mr. O’Kelly for alleged damage to her professional reputation caused by their alleged actions. (No evidence was given as to what this latter matter related)
Agreement also seems to have been reached at that meeting about certain other normal issues relating to the business of the Company including development in South Africa and audit and other accountancy matters.
The third defendant did not dispose of his shares. The first plaintiff wrote expressing an interest in purchasing the shares on 17th February and seeking a price and the required mechanism. This does not appear to have been responded to and not then pursued.
The report prepared by Ms. Pamela Lewis and Mr. Paul O’Kelly was presented to the board meeting of 14th April, 2005. That board meeting was attended by the plaintiffs, second and third defendants and Ms. Pamela Lewis as alternate for the first defendant. Following the presentation of the report the minutes indicate that a list of agreed urgent issues was drawn up and responsibility allocated to individual persons. In relation to the U.S.A. under the heading of ‘action to be taken’, it is recorded “It was acknowledged that the meeting with the Americans attended by SL [third defendant] and KM [second plaintiff] had not generated any solution. In the light of this the board considered that they should arrange another meeting with the Americans to see if there is anything that can be salvaged from the relationship. Under the heading of ‘persons responsible for this matter’ it is recorded “AO [second defendant] and PL [Pamela Lewis] to arrange meeting with the Americans to see if they can find any way forward.”
At the same meeting the second plaintiff proposed and the first plaintiff seconded “that this board immediately proceed to take action against BPET and Jonathan Owen”. The proposals were not carried, the other three directors present voting against.
In the course of his evidence, the second plaintiff was asked whether he had proposed that the Company take action against the first defendant arising out of his alleged activities in the U.S. In response he referred to this meeting and this minute. I have concluded as a matter of probability that his recollection is mistaken and that, having regard to the proposals in relation to the U.S. at that meeting and the proposal of litigation referring to BPET, that the then intended litigation was confined to the alleged wrongdoing surrounding the insolvency of BPET.
No further board meetings were held until 17th August, 2005.
Notwithstanding, relations between the plaintiffs on the one hand and the first and second defendants and Ms. Lewis on the other appear to have deteriorated further. This appears to have been partly caused by further facts ascertained by the plaintiffs in relation to involvements of the first and second defendants and Ms. Lewis in the American activities. The relationship between the second plaintiff and the third defendant also appears to have seriously deteriorated in relation to matters not relevant to the fourth and fifth defendants herein but giving rise to an extremely acrimonious telephone conversation which the second plaintiff in evidence accepted was inappropriate on his behalf.
A board meeting was called for on 17th August in the Great Southern Hotel at Dublin Airport, to commence at 2 p.m. or 2.30 p.m. The level of mistrust and suspicion between the plaintiffs and the other board members was such that the plaintiffs contacted the hotel, ascertained that the room was booked from 10 a.m., visited the room and left a recording device in the room. A preliminary meeting was held during the morning between the second and third defendants and Ms. Lewis at which the removal of the title of CEO and/or Managing Director from the second plaintiff was discussed. The second and third defendants and Ms. Lewis were unaware of the recording. The plaintiffs were unaware of the content at the time of the board meeting in the afternoon of 17th August. There were further disputes as to the manner in which the existence of the recording was disclosed by the plaintiffs as part of the discovery process. Nothing turns on that for the determination of the preliminary issue. I have read the transcripts of the morning and afternoon meetings of 17th August.
The board meeting on the afternoon of 17th August was extremely acrimonious. The second plaintiff, supported by the first plaintiff, sought to introduce a series of documents and proposed resolution to which he required the other members of the board present to agree. Those documents have not been put in evidence. What is clear from the transcript is that there were extremely heated exchanges, in particular between the second plaintiff on the one hand and the second defendant and Ms. Lewis on the other. The discussion at times appears irrational and certainly not worthy of the parties who all appear in separate lives to have been successful business people.
I have considered carefully the evidence adduced in relation to the morning meeting of 17th August between Ms. Lewis, the second defendant and third defendant and the afternoon board meeting. That evidence includes the transcripts, the minutes and the oral evidence given by the second plaintiff and third defendant. I have had the benefit of observing the second plaintiff and third defendant in the witness box. The plaintiffs rely in part on these meetings of 17th August in support of the contention that the third defendant with the first and second defendants should for the purposes of the preliminary issue be regarded as allegedly wrongdoing shareholders in control of the Company.
I have concluded that the evidence in relation to the actions of the third defendant prior to, at the meeting of 17th August and subsequently prior to the issue of proceedings does not support such a conclusion. Rather I have formed the view that the third defendant at this time was continuing to discharge his role as Chairman of the Company and, where possible, to avoid conflicts and get the directors to work together in the interests of the Company. I accept his evidence that at the morning meeting he attempted to and did procure the withdrawal by the second defendant of a letter which he knew would exacerbate difficulties with the second plaintiff. I formed the view that he maintained an open mind as to the actions which should be taken in the interests of the Companies. In furtherance of this approach, as recorded, he requested the plaintiffs to prepare five sets of documents outlining charges and proposed solutions and enclosing documentation which they consider as evidence of the charges. Those charges appear to relate to the first and second defendants.
The third defendant has acknowledged in evidence that he did decide that the title of CEO and/or Managing Director should be removed from the second plaintiff. I am satisfied on his evidence that that is a decision he took in what he perceived to be in the interests of the Company having regard to the behaviour of the second plaintiff as he then perceived it.
On 9th September, 2005, Messrs. Lavelle Coleman, then solicitors for the plaintiffs, wrote to the third named defendant setting out allegations which form the subject matter of these proceedings and seeking certain undertakings and in default threatening proceedings. This was responded to on 19th September, 2005, essentially disputing the allegations and refusing the undertakings and indicating an intention to act properly and in a manner that appropriately advanced the Company’s position.
The summons was issued on 28th September, 2005, and served on the third defendant on 30th September, 2005.
Nature of Proceedings
These proceedings are different to many of the authorities to which I was referred as they do not comprise the same claim against all defendants who are alleged to be jointly in control of the Companies. Rather they principally comprise distinct claims against each of the first, second and third defendants. There is minimal overlap between the claims pleaded against third defendant and those pleaded against first and second defendants. There is a little more between first and second defendants. It is therefore necessary to consider claims against defendants separately.
Claim against third defendant
The claim pleaded against the third defendant which is sought to be pursued as a derivative action is an allegation of negligence and breach of duty including breach of fiduciary duty to the fourth and fifth named defendants in respect of the matters particularised at paragraph 14(a), (b), (c), (d), (e), (f) and (m) of the statement of claim. These are:
(a) Allowing or permitting the intellectual property, trade secrets and confidential information of the fourth and fifth named defendants to be infringed and violated by other parties.
(b) Failing to take any or any appropriate or adequate steps to protect and secure the intellectual property rights of the fourth and fifth named defendants.
(c) Failing to instruct solicitors to pursue and restrain infringement of the intellectual property rights of the fourth and fifth named defendants.
(d) Frustrating and obstructing the implementation of the resolution of the board of directors of the fourth and firth named defendants passed on the 9th day of November, 2004.
(e) Terminating the appointment of Mr. Paul O’Kelly and the activities of the sub-committee appointed by the board of directors of the fourth and fifth named defendants to regularise and integrate all operations of both companies.
(f) Conspired and collaborated with each other to frustrate and obstruct the implementation of the resolutions passed on the 9th day of November, 2004.
(m) Attempted to remove the second named plaintiff from his position as Chief Executive Officer and Managing Director of the fifth named defendant.
Those allegations are further particularised in the replies to particulars and indeed set out in paragraphs 13(i) – (iv) inclusive of the statement of claim.
As appears, the allegations primarily relate to the role conferred on him by the resolution of 9th November, 2004, and his alleged failures in the period immediately following that resolution.
The one separate and distinct matter is the alleged attempt to remove the second plaintiff from his position as Chief Executive Officer and Managing Director of the fifth defendant.
In the replies to particulars the plaintiffs confirm that no allegation of conversion is being made against the third defendant and that there is no allegation that he failed to account for any funds due to the fifth defendant. In the course of submission it was properly confirmed by counsel on behalf of the plaintiffs that it does not form part of any allegation against the third defendant that he benefited improperly at the expense of the fourth or fifth named defendant by reason of any of the alleged breach of duty or negligence.
For the reasons set out above, I have formed a view that in order that a claim be considered one which comes within the exception to the rule in Foss v. Harbottle as being a “fraud” on the minority, it must include an allegation that the defendant has wrongly benefited at the expense of the company. There being no such allegation in the claim sought to be made against the third defendant herein I have concluded that the plaintiffs have failed on this account alone to bring themselves within the exception to the rule in Foss v. Harbottle.
Insofar as the plaintiffs seek to make a claim alleging wrongful attempted removal of the second plaintiff from his position as CEO and/or Managing Director, in addition to the above, that does not appear to me to be a claim which could ever be pursued by the fourth or fifth named defendants. The cause of action, if any, subsists in the second plaintiff personally.
Having regard to these conclusions it is not necessary for me to consider whether in relation to the exception of “fraud on the minority” and the wrongs alleged against the third defendant he should be considered to be part of a group of shareholders or directors in “control” of the Companies. It may be relevant to any right to proceed “in the interests of justice” and the pursuit of claims against the first and second defendant.
I have concluded that he should not be so regarded. The third defendant became a director and shareholder of the fourth and fifth named defendants at the behest of the plaintiffs with whom he had prior business connections. He has no business or other links with the first and second defendants. For the reasons set out above and having regard to the evidence, much of which is not in dispute and the actions taken by the board and in particular the third defendant from November, 2004 until the commencement of proceedings in September, 2005, I have concluded that the plaintiffs have failed to satisfy me on the normal balance of probabilities that he forms part of a controlling majority of either of the Companies applying the broad concept of ‘control’ set out above.
The final question is whether the proceedings should be permitted to proceed against the third defendant “in the interests of justice”. My conclusion in accordance with the principles set out above is that the plaintiffs have not established the existence of any such injustice or interests of justice on the fact herein. I have reached this conclusion having regard to the nature of the wrongs alleged, the fact that I have concluded that the third defendant should not be regarded as part of a controlling majority and the positions of each of the plaintiffs and third defendant as equal 20% shareholders and directors of the Companies.
Claim against first and second defendant
The claims pleaded against the first defendant do not include any express plea that he acted fraudulently. Nevertheless, they do include claims that he personally wrongfully benefited at the expense of the fourth or fifth named defendant. Such allegations are included in the claims at paragraph 13(i), (ii), (iii), (v) and (vi) of the statement of claim. These are:
(i) Acting without authority and contrary to the interests of the plaintiffs in selling a licence to distribute the separator product to a company partly owned and/or controlled by the first named defendant without obtaining approval of the board of directors and the fourth and fifth named defendants before so doing.
(ii) Failed to account for funds paid to him on foot of contracts which he made with other third party companies to licence the distribution of the separator product which licences were not agreed to or approved by the board of directors of both companies.
(iii) Procure the payment of Stg£10,000 from one David Lawson purporting to grant to him a licence to sell the separator product in the United Kingdom without the authorisation or sanction of the board of directors of the fifth named defendant.
(iv) …
(v) Attempted to register the trade mark “Fatstrippa” in his own name in the United States of America and in so doing sought to infringe the intellectual property of the fourth named defendant. Subsequently the first named defendant agreed to transfer the application to register “Fatstrippa” as a trade mark in the United States of America to the fourth named defendant but despite discharge of costs associated with the transfer, he failed to do so.
(vi) Allowed Goslyn LLC, a company of which he owned a 35% shareholding, to represent that Fatstrippa Corporation’s customers were the customers of Goslyn LLC when this was not and is not the case.
The claims made in the above paragraphs against the first defendant are made against him alone and not against the second or third defendants.
There is one further claim made which is made both against the first defendant and the second defendant. It is that set out at paragraph 13(iv) in relation to the first defendant and (ii) in relation to the second defendant. It alleges that the first defendant:
(iv) Collaborated and conspired with the second named defendant and various third parties in the United States of America to incorporate various companies including Fatstrippa LLC, Fatstrippa General LLC and Goslyn LLC to which companies he provided drawings, trade secrets, intellectual property and confidential information concerning the separator product to assist in the development of a similar product using technology owned by the fourth named defendant. In addition the first named defendant advised on patenting the product developed in the United States of America.
There was one further relevant claim against the second defendant, namely that at paragraph (i) that he acted wrongfully and unlawfully in:
(i) Allowing Baden-Powell Environmental Technologies Limited, a company controlled by the first named defendant, to obtain €300,000 credit contrary to the credit limit in place in the fifth named defendant.
Applying the law set out above in the manner most favourable to the plaintiffs each of the above claims may be considered as an allegation that the pleaded breach of duty not only harmed the Companies but benefited either directly or indirectly one or other of the first or second defendants. Having regard to the relationship of father and son, I have assumed that those defendants should be considered as jointly in control of 40% of each of the Companies. I make this assumption without necessarily concluding that the plaintiffs have established as a matter of probability that the second defendant would necessarily vote with the first defendant in the event that there were a proposal to institute proceedings against the first defendant.
Notwithstanding such assumption, the first and second defendants collectively are not in “control” of either of these companies. Together they are a minority. For the reasons already set out, applying the broad definition of control referred to above, it does not appear to me that the plaintiffs have established that the third defendant would necessarily vote with the first and second defendants as a result of “influence or apathy” or otherwise. Hence they cannot be considered to be in control.
Accordingly, whilst the nature of the claims against the first and second defendants are such that they might come within the exception of “fraud on a minority” (when applied in the broad sense set out above), the plaintiffs have failed to establish that in respect of those claims the first and second defendants are in control and they are a minority such that they should be permitted to pursue such claims as a derivative action. Such alleged wrongdoers are together a minority and the remaining shareholders capable of forming a majority.
I have also considered whether in respect of the claims against the first and second defendants there is any other exceptional circumstance in accordance with the principles set out above which would justify permitting the claims to proceed “in the interests of justice” or to avoid an injustice. I have concluded that the plaintiffs have not established any such circumstances.
Central to the rationale underlying the rule in Foss v. Harbottle and the exceptions to it is that the courts should not interfere with the internal management of a company. It is a matter for the majority of the board of directors or shareholders to determine in an appropriate case whether litigation should be commenced by, and in the name of, a company against an allegedly wrongdoing director or shareholder or directors or shareholders (at least where the alleged wrongdoers are not in control of the company). Often such decisions will be difficult and a matter of delicate judgment as to whether it is in the interests of a company to commence what may be costly litigation against a director or shareholder, particularly where such person may also be necessary to the future development and progress of the company. The plaintiffs and the third defendant are the shareholders and directors along with the first and second defendants of the Companies. It appears to me consistent with the principles underlying the rule in Foss v. Harbottle, the exceptions to it and the law relating to companies that the decision as to whether or not to pursue claims such as pleaded against the first or second defendant should on the facts herein be taken by a majority of the board of directors and/or shareholders in general meeting and it is not a matter for the courts to interfere.
Conclusion
On the preliminary issue I have concluded the plaintiffs have failed to establish that they should be permitted to pursue by way of derivative action the claims pleaded against the first, second or third defendants for alleged wrongs and breach of duty to the fourth and fifth defendants.
I will hear counsel as to the form of order having regard to the confirmation given at the hearing that the plaintiffs are not now pursuing the personal claims included in the proceedings.
Stainless Pipeline Supplies (Irl) Ltd (in voluntary liquidation) & Ors -v- Companies Acts
[2010] IEHC 318 (29 July 2010)
Judgment of Miss Justice Laffoy delivered on the 29th day of July, 2010.
1. The application
1.1 This application arises out of a meeting of creditors (the meeting) summoned by the second respondent (the company) under s. 266 of the Companies Act 1963 (the Act of 1963) and held on 25th June, 2010. The application was initiated by an originating notice of motion dated 17th July, 2010 in which the applicant, who is a creditor of the company, seeks the following reliefs:
(a) a declaration that the resolution passed at the meeting appointing the first respondent (Mr. Lafferty) as liquidator of the company in the creditors’ voluntary winding is void;
(b) an order under Order 74, rule 71 of the Rules of the Superior Courts 1986 (the Rules) setting aside by way of appeal the decision of the chairman of the meeting to accept the proxies of Outokumpu Limited and Watercut Limited as valid proofs for the purposes of voting at the meeting;
(c) a declaration that the majority in value of the creditors attending the meeting voted in favour of the resolution to appoint Paul McCann (Mr. McCann) as liquidator; and
(d) an order appointing Mr. McCann as liquidator of the company in place of Mr. Lafferty.
1.2 No issue arises as to the qualifications and the experience of Mr. Lafferty to perform the functions of liquidator of the company. The only issue is the outcome of the voting on the resolutions as to the appointment of a liquidator proposed at the meeting. As I understand it, two resolutions were put to the meeting: a resolution proposed on behalf of the applicant that Mr. McCann be appointed liquidator; and a resolution proposing that the members’ nominee for liquidator, Mr. Lafferty, be appointed liquidator. Accordingly, as I understand it, the two candidates for liquidator were put to the vote of the creditors.
2. The relevant statutory provisions and rules
2.1 Sub-section (3) of s. 267 of the Act of 1963, inserted by the Company Law Enforcement Act 2001, provides:
“If at a meeting of creditors mentioned in s. 266(1) a resolution as to the creditors’ nominee as liquidator is proposed, it shall be deemed to be passed when a majority, in value only, of the creditors present personally or by proxy and voting on the resolution have voted in favour of the resolution.”
2.2 Counsel for the applicant also relied on s. 177 of the Act of 1963 which provides that a provision requiring or authorising a thing to be done by or to a director and the secretary shall not be satisfied by its being done by or to the same person acting as director and as, or in place of, the secretary.
2.3 Part X of Order 74 of the Rules deals with, inter alia, general meetings of creditors in a creditors’ voluntary winding up. Rule 71 deals with admission and rejection of proofs for the purpose of voting and provides:
“The chairman shall have power to admit or reject a proof for the purpose of voting, but his decision shall be subject to appeal to the Court. If he is in doubt whether a proof should be admitted or rejected he shall mark it as objected to and allow the creditor to vote subject to the vote being declared invalid in the event of the objection being sustained.”
It is that rule which the applicant invokes to set aside the decision of the chairman of the meeting on the admission of the proxies of Outokumpu Limited and Watercut Limited.
2.4 Rule 74 deals with proxies and provides that a creditor may vote either in person or by proxy. It further provides:
“Where a person is authorised in manner provided by section 139 to represent a corporation at a meeting of creditors …, such person shall produce to the … chairman of the meeting a copy of the resolution so authorising him. Such copy shall either be under the seal of the corporation or be certified to be a true copy by the secretary or a director of the corporation.”
That provision relates to representation in person. The corresponding formalities in relation to proxies are set out in the notes on the forms of proxy.
2.5 Rule 75 provides that every instrument of proxy shall be in either Form No. 21 or Form No. 22 of Appendix M. Form No. 21 is a general proxy and Form No. 22 is a special proxy.
2.6 As counsel for the applicant acknowledged, the objections raised to the decisions of the chairman of the meeting which are the subject of the appeal under Order 74, rule 71 are technical. I propose to consider first whether the Court should set aside the decisions of the chairman and the result of the voting on the basis of those technicalities and, if it should, the consequence of doing so.
3. The voting
3.1 The meeting was chaired by Eddie St. Ledger, a director of the company. There was before the meeting a statement of affairs, the “bottom line” of which was that the company has a net deficit of in excess of €1.6m on the basis of the realisable value of its assets. The amount for unsecured creditors, who numbered about seventy, shown in the statement of affairs was in excess of €1.453m. A list of unsecured creditors was attached to the statement of affairs. For present purposes it is sufficient to record that the list included the following creditors and the amounts owed:
The applicant €54,519
Liam Duffy €76,470
Outokumpu Limited (formally (sic) Sogepar) €105,684
Outokumpu Stainless AB €56,853
Outokumpu Stainless Oy €43,130
Watercut Limited €71,943
Mr. Duffy is an accountant. He is a director of Watercut Limited and he was a former director of the company having resigned with effect from 20th August, 2009.
3.2 The status of the applicant as creditor arises from the fact that he is the lessor of premises known as Unit R, Kells Business Park, Kells, County Meath, which at the date of the meeting constituted the registered office of the company, which were held by the company under a lease dated 19th August, 2002 made between Royaldrive Developments Limited of the one part and the company of the other part for a term of 21 years from 1st August, 2002. Prior to the meeting, the applicant had obtained judgment for €54,519 in proceedings in the High Court (Record No. 2009/3733S) in respect of arrears of rent. He claimed that there were further sums due to him in respect of arrears of rent or mesne rates which brought the amount due to him as creditor up to €131,000. The affidavits filed on this application are riddled with controversy as to the company’s liability for rent under the lease over and above €54,519. What happened at the meeting, according to the applicant, was that Mr. St. Ledger agreed to minute the applicant’s debt as what the applicant contends is the correct liability of the company to the applicant, that is to say, as €131,000. Mr. St. Ledger, in his replying affidavit, has confirmed that this account of what happened is correct. In any event, Mr. St. Ledger, as chairman, did not mark the applicant’s proof of debt as “objected to” in accordance with Order 74, rule 71.
3.3 The outcome of the voting on the resolutions to appoint the liquidator was announced by Mr. St. Ledger as follows:
• Total votes in value in favour of the nominee of the company, Mr. Lafferty being €354,080, which was made up of the following creditors and amounts as per the list of unsecured creditors:
Liam Duffy €76,470
Outokumpu Limited €105,684
Outokumpu Stainless AB €56,853
Outokumpu Stainless Oy €43,130
Watercut Limited €71,943
_________
TOTAL: €354,080
_________
• Total votes in value in favour of Mr. McCann as liquidator being €280,636, which included the applicant’s debt in the amount of €131,000 and the debts of four other creditors, including the Revenue Commissioners.
3.4 The basis of the applicant’s case is that Mr. St. Ledger, as chairman, should not have admitted the debts of the three Outokumpu companies or the debt of Watercut Limited and, if he had rejected them, the votes in favour of Mr. McCann would have met the requirement of s. 267(3) of the Act of 1963. The grounds on which the applicant appeals the admission of those debts are unquestionably technical. I will consider each separately.
4. Outokumpu
4.1 Essentially, the applicant’s objections to the admission of the three Outokumpu debts are based on the fact that there was only one proxy presented to the chairman, which was in the name of Outokumpu Limited, and the proxy form was not executed in accordance with the articles of association of Outokumpu Limited and was not properly completed. At the core of the objection is the proposition that the proxy did not cover the debts of Outokumpu Stainless AB, a Swedish company, and Outokumpu Stainless OY, a Finnish company. In response, an affidavit has been filed on behalf of the company which was sworn by Sylvia Webb, a director and secretary of Outokumpu Limited, on 15th July, 2010. The proxy form relied on by the chairman of the meeting is exhibited in that affidavit. The special proxy form (Form No. 22) was utilised. The proxy form was signed by Ms. Webb and dated 23rd June, 2010. The creditor was named as “Sylvia Webb of Outokumpu Limited”. The creditor appointed Mr. St. Ledger “or chairman” to be its special proxy at the meeting. The instruction given was to “vote for/against the resolution in the notice convening the meeting”. In other words, in essence, no special instruction was given.
4.2 It is not disputed that the articles of association of Outokumpu Limited require that every instrument to which the seal shall be affixed shall be signed by a director and shall be countersigned by the secretary or a second director or some other person appointed by the directors for that purpose. The notes to Form No. 21 and Form No. 22 in Appendix M (Note 2) state:
“If the appointor is a corporation, then the form of proxy must be under its common seal or under the hand of some officer duly authorised in that behalf, and the fact that he is so authorised must be so stated.”
In her affidavit Ms. Webb has averred that she affixed the common seal of Outokumpu Limited to the special proxy. While that is not obvious from the photocopy of the special proxy exhibited in her affidavit, I am assuming it to be the case. She has also averred that, at the time she signed the special proxy and affixed the common seal to it, she was a director of Outokumpu Limited and she was duly authorised by its board to affix the seal in the manner described. At the time there was only one other director of Outokumpu Limited, who was based in Denmark, and, she averred, “it simply was not expedient for the other to sign the proxy”.
4.3 In relation to the debts of Outokumpu Stainless AB, a company incorporated in Sweden, and Outokumpu Stainless OY, a company incorporated in Finland, Ms. Webb has averred that Outokumpu Limited acts as agents for those two companies in Ireland and collects monies due and owing to those companies for and on their behalf. She specifically averred that she believes that the sums shown in the list of unsecured creditors to be due to the Swedish company and the Finnish company are, in fact, due and owing to Outokumpu Limited as agent for the Swedish company and the Finnish company. She has further averred that she believes that the special proxy she signed authorised Mr. St. Ledger not only in respect of the debt due by the company to Outokumpu Limited in its own right, but also in respect of the debts due by it to Outokumpu Limited “as agent for” the Swedish company and the Finnish company.
4.4 In support of his argument that the special proxy was not properly executed, because the seal of Outokumpu Limited was not affixed in the manner prescribed in its articles of association, counsel for the applicant referred the Court to the decision of Morris J. in Zafeera Limited v. Wallis & Anor. (Unreported, High Court, 12th July, 1994). That case concerned the title to premises in the City of Dublin which were the subject of a contract for sale by the plaintiff to the defendants. The conveying party in a deed of 1987 under which the plaintiff had acquired title to the premises had been a company incorporated under the Companies Act 1908, and the provisions of Table A of that Act, which required that the seal should be countersigned by two directors and the secretary of the company, were applicable to it. However, the deed of 1987 originally was only countersigned by one director and the secretary. Morris J. held that the deed was not executed in accordance with the articles of association and was not effective to convey the company’s interest in the property to the plaintiff.
4.5 On the other hand, counsel for the company has referred the Court to a decision dating from 1905: Re David Wright & Co. Ltd. (1905) 39 ILTR 204. The issue in that case was the validity of debentures issued by the company. The articles of association of the company provided that the seal of the company should not be used, except by the general or special authority of the Board, and in the presence of two directors and the secretary, or a person acting as secretary. The debentures and the trust deed securing them were executed by the affixing of the seal of the company and by countersigning by the two directors and one of the directors as secretary. It was held by the Master of the Rolls that the debentures were “legal and right; that is, they are legal and valid so far as the circumstances permitted”. The Master of the Rolls pointed out that there was no clause in the articles that the person acting as secretary should be different from the directors. Of course that decision pre-dated the Act of 1908 and s. 177 of the Act of 1963.
4.6 I must conclude that the special proxy given by Outokumpu Limited was not executed as required by Order 74, rule 75. That rule gives a company two options: either to affix the seal in the manner prescribed by law, or, alternatively, to have the proxy form signed by an officer authorised in that behalf. If the latter option is availed of, then the fact that the officer is so authorised must be stated. Neither option was properly complied with in this case.
4.7 The form of proxy given by Outokumpu Limited was also defective in that, being a special proxy, it did not internally direct the person to whom it was given as to what he was to do, as it should have. That being the case, it could have been open to being construed as giving the person to whom it was given a carte blanche to vote either for or against the resolution and, indeed, that is the way it was treated by Mr. St. Ledger. It is not necessary to decide, and I am not deciding, however, that the internal defect in the proxy form on its own rendered the proxy invalid.
4.8 Outokumpu Stainless AB and Outokumpu Stainless OY were listed as creditors in the list of creditors attached to the statement of affairs separately and distinct from Outokumpu Limited. Presumably, each of those companies was given notice of the summoning the meeting and each was furnished with a general and a special form of proxy with that notice as required by Order 74, rule 76. In my view, if either company wished to vote by proxy at the meeting, it should have submitted a proxy form completed in accordance with the Rules. In my view, the Rules were not complied with in the case of either company and it is no answer that Outokumpu Limited acts as collecting agent for both companies. That does not excuse a failure to comply with the Rules.
4.9 I will consider the implications of the findings in paragraphs 4.6 and 4.8 later.
5. Watercut Limited
5.1 The proxy furnished on behalf of Watercut Limited was a general proxy. It was given by “Liam Duffy of Watercut Limited”. It was dated 23rd June, 2010. According to an affidavit filed on behalf of the company and sworn by Mr. Duffy on 16th July, 2010 he affixed the common seal to the general proxy. While the common seal is not discernible on the photocopy exhibited, I assume that it is there on the original. It was countersigned by Mr. Duffy solely. It is not in issue that under the articles of association of Watercut Limited the affixing of the seal of Watercut Limited to a document must be attested by two directors of the company. Mr. Duffy has averred that he was a director and that he was “simply unaware that there was any requirement” that the affixing of the common seal should be witnessed by the signatures of two directors or officers of Watercut Limited.
5.2 In my view, Watercut Limited did not properly avail of either of the two options provided for in the Rules for execution of a proxy form. There is nothing on the face of the proxy form to state that Mr. Duffy, as an officer, was authorised to sign on behalf of Watercut Limited. Accordingly, the general proxy was not properly executed.
6. The implications of the findings in paragraphs 4.6, 4.8 and 5.2
6.1 It is important to stress that what is at issue on the appeal under Order 74, rule 71 is whether the proxies of Outokumpu and Watercut should have been admitted as valid proofs for the purposes of voting at the meeting. In the applicant’s grounding affidavit sworn on 7th July, 2010, the applicant opened up the question of the validity of all of the returned creditors’ proxies on the basis of an inspection which had been permitted by Mr. St. Ledger and which had been carried out by the applicant’s solicitor, Mr. Damien Hand, at the meeting. In Mr. St. Ledger’s replying affidavit of 16th July, 2010, he has responded to the matters averred to in the applicant’s affidavits. Between the two affidavits issues arise as to the validity or otherwise of other proxies, apart from the Outokumpu and Watercut proxies. Notwithstanding that the validity of those other proxies is not in issue on this application, I consider that, in determining what action should be taken on the basis of the findings I have made in relation to the Outokumpu and the Watercut proxies, I should have regard to the totality of the evidence.
6.2 The applicant has averred that, at the meeting, Mr. Hand concluded that, of the eighteen proxies submitted, eight proxies were invalid, six were valid and two, the Outokumpu and Watercut proxies, were disputed on the basis that their execution was questioned. Mr. Hand requested that Mr. St. Ledger adjourn the meeting to take advice and satisfy himself that the proxies of Outokumpu and Watercut were valid, but Mr. St. Ledger refused to accede to that request.
6.3 In response, Mr. St. Ledger has averred that six of the proxies which the applicant contends were invalid were not invalid. Those six aggregate in value €46,305. Among the six, the creditor with the largest debt is Macro Stainless Limited (Macro) with a debt of €20,658. An affidavit sworn on 14th July, 2010 by Anthony McNamara, a director of Macro, has been filed on behalf of the company, in which Mr. McNamara exhibited the general proxy dated 23rd June, 2010 which he had given to the chairman of the meeting. On the basis of the evidence contained in the affidavit and the exhibits, in the absence of the articles of association of Macro, it is not clear that the proxy, given by Macro and apparently sealed by Macro in the presence of Mr. McNamara only, is a valid proxy.
6.4 However, what is significant, in my view, is that the creditors on whose behalf affidavits have been sworn to apprise the Court that they favoured the appointment of Mr. Lafferty as liquidator (Outokumpu, Watercut and Macro) between them have debts aggregating €298,268. Mr. Duffy’s personal proxy in favour of the chairman related to a debt of €76, 470. Therefore, technicalities aside, it is unquestionably the case that the majority in value of the creditors who gave valid proxies and technically defective proxies to the chairman favoured the appointment of Mr. Lafferty as liquidator. If the Court makes an order under Order 74, rule 71 setting aside the proxies of Outokumpu and Watercut as valid proofs for the purposes of voting at the meeting, as it must do on the basis of the findings made in paragraphs 4.6, 4.8 and 5.2 above, on the basis of the result of the voting as announced by Mr. St. Ledger, as chairman of the meeting, the outcome will be that one creditor was in favour of the appointment of Mr. Lafferty (Mr. Duffy whose debt is €71,943), as against creditors to the value of €280,636 in favour of Mr. McCann. If the Court were to give effect to that outcome, it would certainly not reflect the wishes of the majority in value of creditors who took the trouble to give proxies at the meeting, albeit that most of them did so in a defective manner.
6.5 It seems to me that the options open to the Court are as follows:
(a) to make an order, as sought by the applicant, appointing Mr. McCann as liquidator in place of Mr. Lafferty;
(b) to make an order appointing Mr. McCann as liquidator jointly with Mr. Lafferty, thus reflecting the type of order the Court can make under s. 267(2) where it is applicable, which would not be justified in this case;
(c) to leave Mr. Lafferty in place as liquidator; or
(d) to direct that a further creditors’ meeting be held.
6.6 I consider that on the facts of this case, which have been put comprehensively before the Court by all of the parties, the appropriate course to adopt is to direct that a further meeting of creditors be ordered for the purposes of voting on the appointment of a liquidator. Adopting that course, it seems to me, will give effect to the intention of the Oireachtas in amending s. 267 by the addition of subs. (3). Having regard to what has happened to date, I think the additional costs involved in convening the meeting would be justified. The Court has had the benefit of an affidavit from Mr. Lafferty sworn on 15th July, 2010, exhibiting a report in which he sets out the steps he has taken since the meeting. I am satisfied that there is nothing in the report which contra-indicates the approach I propose adopting.
6.7 The order which I intend to make, which is specified in the next paragraph, is not intended to impinge on the appointment of the committee of inspection at the meeting, of which the applicant is a member.
7. Order
7.1 The order of the Court will have the following elements:
(a) an order under Order 74, rule 71 of the Rules setting aside by way of appeal the decision of the chairman of the meeting to accept the proxies of Outokumpu and Watercut as valid proofs for the purposes of voting at the meeting;
(b) an order directing the company to summon a further creditors’ meeting for the purpose of voting on nominations for the office of liquidator of the company in the creditors’ voluntary winding up on 17th August, 2010 and to comply with the requirements of s. 266 of the Act of 1963 in relation to summoning, giving notice to the creditors of, advertising and conducting the said meeting;
(c) an order suspending the exercise by Mr. Lafferty of the powers of liquidator pending the outcome of the meeting on 17th August, 2010; and
(d) an order that the appointment of the liquidator of the company for the purposes of the creditors’ voluntary winding up shall be made at the said meeting in accordance with the provisions of s. 267 of the Act of 1963.