Pre-2016 Procedures
Cases
Cognotec Ltd (in recievership) -v- Companies Acts [2010] IEHC 309
McGovern J.
“The law
9. Section 60(14) provides:
“Any transaction in breach of this section shall be voidable at the instance of the company against any person (whether a party to the transaction or not) who had notice of the facts which constitute such breach.”
There was no disagreement between the parties as to what kind of notice was required, namely, actual notice. The case of Bank of Ireland Finance Ltd. v. Rockfield Ltd. [1979] 21, involved the loan of money by the plaintiff to two individuals for the purchase of lands on the understanding that the property would be conveyed by them to a company called Rockfield Limited. Unknown to the plaintiff, the defendant company was the owner of the property and that fact was recorded on the Folio in the Register of Freeholders in County Wicklow. Prior to advancing the money, the plaintiff did not make any enquiries about the ownership of the property and had not seen either the Folio or the Certificate of Title. The two individuals concerned used the money to buy the issued shares in the defendant company and, thus, obtain control over it. It was, therefore, an act coming within the ambit of s. 60(1) of the Companies Act 1963. The bank had taken security for the loan, which, it transpired, was for the purchase of shares in the company. The Supreme Court held that “notice” within the meaning of s. 60(14) meant actual notice and not constructive notice. Kenny J. stated, at p. 36:
“This is the first case, as far as I know, in which the meaning of sub-s. 14 of s. 60 has been considered by any court in this country. The onus of proving that the money was advanced for the purchase of shares in the defendant company lies on the person who alleges this. The plaintiffs do not have to prove that they had no notice of facts which constituted a breach of section 60. What has to be established is that the plaintiffs had notice, when lending the money, that it was to be used for the purchase of shares in the defendant company. The fact which constituted such breach in this case was the application of £150,000 to the purchase of the shares in the defendant company. As the purchase followed the loan, the defendants must establish that the plaintiffs knew, at the time when they made the loan, that it was to be applied for this purpose. If they got notice of this, subsequently, that is irrelevant.
The notice referred to in sub-s. 14 of s. 60 is actual notice and not constructive notice. As there has been considerable confusion as to the meaning of the terms ‘actual notice’ and ‘imputed notice’ and ‘constructive notice’ – a confusion which has been pointed out by many judges and text-book writers – I wish to say that I use the term ‘actual notice’ as meaning, in this case, that the plaintiff bank, or any of its officials, had been informed, either verbally or in writing, that part of the advance was to be applied in the purchase of shares in the defendant company, or that they knew facts from which they must have inferred that part of the advance was to be applied for this purpose.”
10. In Lombard and Ulster Banking Ltd. v. Bank of Ireland and Brook House School (Unreported, High Court, 2nd June, 1997), there was further judicial analysis of the meaning of s. 60(14) of the Act, by Costello J. In that case, the company sought to avail of the validation procedure under the section, but there were a number of procedural defects in the manner in which this was done. The company agreed to give the bank a guarantee and charge as security for a loan to buy shares in the company. The bank had incorrectly been told that the validation procedure had been complied with when this was not so. Costello J. stated, at p. 10 of the judgment:
“What [s. 60(14)] means is (a) that although a transaction in breach of the section is illegal, it is only ‘voidable’ not void, and (b) it is only voidable against a person who had notice of the facts which constituted the breach.
There are three issues arising on the ‘notice’ point in this case. Firstly, the liquidator has argued that the phrase ‘transaction in breach of the section’ means the carrying out of a transaction prohibited by s.(1) and that as Lombard and Ulster knew that the transaction was prohibited by sub-section (1), it had sufficient ‘notice’ for the purposes of sub-section (14) to enable the company to avoid the transaction. I do not think that that can be correct. The sub-section does not permit the avoidance of a transaction which is ‘in breach of sub-section (1) of this section’, but ‘any transaction in breach of this section’. And so, if a lender knows that an attempt to validate a prohibited transaction and avoid breaching the section by adopting the procedures set out in sub-sections (2), (3) and (4) is to be made, I do not think that he has notice of any breach within the meaning of the sub-section unless it can be shown (a) that there was, in fact, non-compliance with the sub-sections and (b) that he knew of the facts which resulted in non-compliance.
Secondly, as to the onus of proof, if, as has happened in this case, a defendant puts in issue the validity of a transaction prohibited by s. 60, the onus is on the plaintiff to establish his case. However, if he fails to establish the validity of a transaction, it does not follow that his claim on foot of a Deed which is part of the transaction and is otherwise valid, fails – the transaction is merely a voidable one. And it seems to me that the onus is then on the company which seeks to avoid it to show that the plaintiff had ‘notice’ as required by sub-section (14). This means that in this case, the liquidator must establish, as a matter of probability, that Lombard and Ulster had ‘notice’ that there was non-compliance with the provisions of sub-sections (2), (3) and (4). If he cannot do so, the deed of charge is enforceable.
Thirdly, as to the nature of the ‘notice’, it is not sufficient for the liquidator to show that if Lombard and Ulster had made proper enquiries, that they would have ascertained that the company had failed to comply with the sub-section. It must be shown that Lombard and Ulster had ‘actual notice’ of the facts which constituted the breach, that is, (a) that they or their officials actually knew that the required procedures were not adopted, or that they knew facts from which they must have inferred that the company had failed to adopt the required procedures, or (b) that an agent of theirs actually knew of the failure or knew facts from which he must have inferred that a failure had occurred (see; Bank of Ireland v. Rockfield Ltd. [1979] I.R. 21, 37). ‘Constructive notice’ of the failure is not sufficient for sub-section (14).”
11. The Lombard and Ulster case has a direct relevance to the issues before me because it is quite clear that all the parties to the agreement to provide financial assistance knew that it was for the purchase of shares in the Company and therefore, prima facie, unlawful, unless a permitted validation under the section could be effected.
12. A significant plank in the Company’s submission in seeking to void the transaction is that the Bank knew that the provision of finance was an illegal transaction as it was to enable the Company to purchase its own shares. I do not accept that submission because the test is not whether the Bank knew the transaction was in breach of s. 60(1), but whether it was a transaction in breach of the entire section. A similar argument was made in the Lombard and Ulster case and was rejected by Costello J. who stated that sub-section 14 referred to “ . . . any transaction in breach of this section . . .” and not the voidance of a transaction which is “in breach of sub-section (1)”. There is no ambiguity in the words of the section and I entirely agree with the views expressed by Costello J. and would adopt them. In the case of Bank of Ireland v. Rockfield Ltd., the issue was whether or not the bank knew that the transaction was one involving s. 60(1), but that is not the issue here.
13. From the decisions referred to above, three principles emerge:-
(i) The onus of establishing that a person is on notice of a breach of s. 60 lies on the person asserting it.
(ii) The notice required to be established is actual notice not constructive notice.
(iii) The party asserting that a person is affected by actual notice must establish that they had such notice (of the relevant breach) prior to or simultaneously with the transaction sought to be impugned – and not thereafter.”
….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.”