Application to consider disqualifying directors puts focus on "fundamental incongruity" in case, writes Colm Keena, Public Affairs Correspondent

The Supreme Court application by the Director of Corporate Enforcement this week has brought into focus one of the most fascinating aspects of the ongoing clash between Fyffes and DCC.

The bruising civil case was notable for the reputational damage it did to senior directors on both sides in a context where only one side - DCC and its executive chairman, Jim Flavin - were defendants.

This week's move by the director, Paul Appleby, means that the High Court will be asked to consider if disqualification orders should be made against parties on both sides, based on the evidence heard and rulings made, and irrespective of who is the plaintiff and who is the defendant in the case.

Fyffes directors took the case against DCC knowing that it would raise questions about their own conduct. They feared that Fyffes could be sued down the line if a criminal insider dealing prosecution was ever secured against DCC's executive chairman, Jim Flavin, in a scenario where Fyffes had failed to try to retrieve the losses suffered by investors who had bought the Fyffes shares sold by DCC.

DCC sold Fyffes shares worth €106.7 million in early February 2000. On March 20th, Fyffes issued a trading statement that caused the shares to lose 25 per cent of their value. The Irish Stock Exchange conducted inquiries and reported the matter to the Director of Public Prosecutions.

When news of this leaked, Fyffes felt compelled to act before the statute of limitations came into effect. No criminal prosecution has ever been brought against Mr Flavin.

During the marathon court hearing that followed, Fyffes argued that Mr Flavin, who had been a non-executive director of Fyffes, was in possession of price-sensitive information when DCC sold its Fyffes shares.

Yet the evidence showed that Fyffes had not even considered issuing a profit warning to inform the market of its concerns in February 2000, as it was obliged to if its directors felt that they had information that would materially affect the market's expectations.

The court also heard that in late January, Fyffes issued options to senior executives and allowed a senior executive to sell shares.

Neither thing should have happened if the company had believed that it was in possession of price-sensitive information at the time.

The judge, Ms Justice Laffoy, referred to these matters in her judgment as a "fundamental incongruity" in the Fyffes case. However, she noted it was one that she did not have to address, as she had ruled that the information Mr Flavin had in his possession, was not price-sensitive. The Supreme Court subsequently overturned that judgment, and said that the information was price-sensitive.

The move by Mr Appleby this week brings the fundamental incongruity in the Fyffes/DCC case into focus.

While Mr Appleby's affidavit makes it clear that the chief and obvious target of his attention is Mr Flavin, whom the courts have found dealt in shares worth €106.7 million while in possession of price-sensitive information, his affidavit to the Supreme Court invited the courts to consider bringing others into the frame.

Mr Appleby asked the Supreme Court to consider the fact that it had the power, of its own motion, to disqualify persons from acting as directors arising from proceedings where it was satisfied that "certain matters are established".

He referred to the fact that Mr Flavin had dealt in the shares while in possession of information which the Supreme Court has ruled was price-sensitive. He then referred to three further matters arising from the Fyffes/DCC case, two of which concern Fyffes: "The support which other senior persons in the DCC group gave to the execution of the insider dealing transactions"; Fyffes's "grant of share options to a number of individuals in January, 2000 at a time when it was in possession of information which this court has concluded was price-sensitive" and Fyffes's "agreement in January 2000 to allow the sale of Fyffes shares by one of its senior employees when it was in possession of information which this court has concluded was price-sensitive".

The Supreme Court said that the matter is one for the High Court, which is due to decide some time next year how much DCC will have to pay in damages to Fyffes.

The matters raised by Mr Appleby were considered by the judge in her December, 2005 judgment.

On January 25th, 2000, the second of the two trading reports that constituted the price-sensitive information were sent out to, thought not received by, the Fyffes directors. Also on the morning of January 25th, a Fyffes committee granted 900,000 share options, including 50,000 to its company secretary, Philip Halpenny.

The judge, in her ruling, said; "If on 25th January, 2000 Mr Flavin was precluded from dealing in Fyffes's shares because he was in possession of the information contained in the November and December trading reports, in my view, the company, acting by the organ to which it had delegated competence to grant options, the compensation committee, would not have been free to grant the options."

The court heard that Fyffes executive vice-chairman Carl McCann, on January 22nd, approved the list of persons who would receive options, and he notified the recipients of the options by letter on January 25th.

The decision to award the options was taken by the compensation committee, which, ironically, was chaired by Mr Flavin and did not include executive directors.

The second Fyffes issue concerns the sale of 45,000 shares by the UK-based executive director of Fyffes, John Ellis, on January 26th, 2000.

As the judge noted in her ruling, Mr Ellis, as required, "sought the permission of the chairman of Fyffes [ Neil McCann] to sell shares by letter dated 19th January, 2000. Clearance was given by the chairman through Carl McCann", seemingly on January 20th.

The judge went on to say: "Because of the case the plaintiff is making against Mr Flavin in these proceedings, Carl McCann felt constrained to acknowledge that giving clearance to Mr Ellis had been a mistake."

The judge's very lengthy ruling summarised the various developments within DCC leading up to the share sales, including the involvement of senior DCC figures other than Mr Flavin.

She described as an "absurdity" the position adopted in evidence by DCC and Mr Flavin, that a Dutch-resident DCC subsidiary, Lotus Green, had dealt in the shares, and not Mr Flavin.

The court had been told a tax scheme implemented by DCC to save it from having to pay tax on its profits from the share sale, required the sale to be controlled from Holland by Lotus Green. The judge ruled that Mr Flavin and not Lotus Green dealt in the shares.

However, she also ruled that Mr Flavin was not motivated to sell by the confidential negative trading information which he had in his possession, but rather by the opportunity to make a substantial profit on the back of high Fyffes share price that existed, because of Fyffes worldoffruit.com project, and the then existing dotcom boom.