In the Matter of Hayes Homes Ltd (in Voluntary Liquidation) and in the Matter of the Companies Acts 1963-2001 and in the Matter of the Petition of Liam J Irwin Collector General and Officer of the Revenue Commission
Company law - Winding up - Voluntary liquidation - Creditors' meeting - Petitioner's proxy - Failure to lodge instrument of proxy in accordance with the Rules - Whether failure has effect of disenfranchising proxy on a resolution to appoint a liquidator - Basis on which court should replace a voluntary winding up with a compulsory winding up - Factors to be taken into account by court in exercising its discretion - Sections 266 and 267(3) of the Companies Act, 1963 as amended - Order 74 Rule 83(1) of the Rules of the Superior Courts
The High Court (before Mr Justice O'Neill); judgment delivered on July 8th, 2004
Compliance with Order 74 Rule 82(1) is required before a petitioner's proxy is entitled to participate in a vote on a resolution to appoint a liquidator notwithstanding that the debt was either proven or admitted. Order 74 Rule 82(1) requires that the instrument of proxy be lodged at the registered office of the company for a meeting under section 266 of the Companies Act, 1963 as amended, not later than 4pm on the day before the meeting.
The court may attach weight to the creditors' sense of grievance in exercising its discretion to replace a voluntary winding up with a compulsory winding up. The court shall be disposed to order the compulsory winding up of the company if the evidence shows that a) the assets of the company have gone to an associated company without any payment, b) the liquidation is in the hands of the nominee of the persons who had control over the company and the connected or associated companies, c) and the nominee of the majority creditors who stand to lose substantial monies has been rejected.
The High Court so held in granting the relief claimed in the petition.
Dermot Cahill, BL, for the petitioner; David Keane, BL, for the director; Jennifer O'Connell, BL, for the liquidator
Mr Justice O'Neill stated that, in the instant case, the petitioner sought an order that Hayes Homes Limited (hereinafter referred to as the company) be compulsorily wound up by the court under the provisions of the Companies Act, or in the alternative an order setting aside a nomination of Tony Fitzpatrick to act as liquidator. Mr Justice O'Neill outlined the factual background to the matter. The company had engaged in the business of running a nursing home and had ceased trading on February 28th, 2003. The company was indebted to the petitioner in the sum of €264,456 approx. This sum was claimed in a letter of demand dated March 22nd, 2004. The company failed to pay the sum demanded. The debt due to the petitioner represented in excess of 90% of the total indebtedness of the company. On May 4th, 2004, at a meeting of the members of the company, it was resolved that the company be wound up voluntarily. On the same day a meeting of the creditors of the company took place. The petitioner sent a proxy to that meeting, Mr Philip Maloney. He was accompanied by Mr Barry Forest, an accountant whom the petitioner proposed to nominate as liquidator. On April 26th, 2004, the petitioner had executed a proxy form and posted it to the registered office of the company.
The petitioner's proxy considered that the petitioner, being the holder of in excess of 90% of the indebtedness of the company, was entitled to avail of section 267 (3) of the Companies Act as amended which provides "that if, at a meeting of the creditors' mentioned in section 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 on the resolution".
An issue arose at the meeting as to whether or not the form of proxy had been properly executed or transmitted to the registered office of the company. The meeting was adjourned on two occasions to enable the chairman, Mr Power, who was a director and shareholder of the company, to seek legal advice relating to the validity of the position of the petitioner. Mr Power was advised that the petitioner's proxy had not been lodged in the registered office and the proposed appointment of Mr Forest, as liquidator would have been invalid. As a result of this advice, Mr Maloney was excluded from voting and Mr Forest was not appointed as liquidator.
Mr Justice O'Neill set out the submissions of the parties. The petitioner submitted that Mr Power was in error in excluding Mr Maloney, as he had brought to the meeting a copy of the proxy form and the envelope in which it was sent. It was further submitted that all that was required to entitle Mr Maloney to participate in the vote, as proxy was proof of the petitioner's debt. It was also submitted that even if Mr Power was correct in excluding Mr Maloney from the vote, that having regard to the petitioner's statutory entitlement to nominate a liquidator and the size of its debt, that the court should exercise its discretion to order that the company be compulsorily wound up because of the suspicious nature of the circumstances in which the business of the company appeared to have promptly restarted, in the same premises, with the same employees, and having shed the very substantial debt due to the petitioner. In this regard the petitioner relied upon the persuasive authority of two English cases namely Parma Surveys Limited, In re BCLC 106 and the case of Falcon RJ Developments Limited, In re BCLC 437.
On behalf of Mr Power it was submitted that his decision was correct having regard to Order 74, and in particular Order 74 Rule 82, of the Rules of the Superior Courts. Order 74 Rule 82 reads as follows: "Every instrument of proxy shall be lodged with the official liquidator in a winding up by the court, with the company at its registered office for a meeting under s266, and with a liquidator or if there is no liquidator with the person named on the notice convening the meeting to receive same in a voluntary winding up, not later than 4.00 pm in the afternoon of the day before the meeting or adjourned meeting at which it is to be used.." It was further submitted that the petitioner could more appropriately invoke s280 of the Companies Act, 1963 as amended to apply to court to have the veil of incorporation lifted so as to render Mr Power personally liable for the debt due to them. It was further submitted that having regard to the complete absence of evidence of any wrongdoing that there were no grounds to displace the voluntary liquidation and replace it with a compulsory winding up. In this regard reliance was placed on the following cases; In the Matter of Gilt Construction Ltd 2ILRM 456 and In the Matter of Eurochick (Ireland) Ltd; unreported judgment of McCracken J delivered March 23rd, 1998.
Mr Justice O'Neill, in giving his decision, said that the first issue to be confronted was whether or not Mr Power was correct to have excluded Mr Maloney from the vote. Counsel for the petitioner placed much reliance on Order 74 Rule 67, maintaining that what was required to be proved in order to vote was the debt. Mr Justice O'Neill said that reading the rules in a literal way could lead to the conclusion that proof of a debt was not a requirement at a meeting convened under s266 of the Companies Act, 1963 as amended. However such a construction would lead to a strange and anomalous result. Clearly at a meeting of creditors by definition, one must be a creditor before one is entitled to be there and to participate. Hence unless the debt is already admitted, proof of the debt would necessarily be required to entitle the person to participate in the meeting and in particular vote on a resolution to appoint a liquidator. Mr Justice O'Neill wassatisfied therefore that Order 74 Rule 67 must apply in these circumstances. In this case the petitioner's debt was admitted and was listed amongst the debt set out in the Statement of Affairs. There was no dispute whatsoever as to the identity or credentials of Mr Maloney and hence prima facia and subject to the provisions of the rules in relation to proxies, he was entitled to participate in the meeting and to vote on a resolution to appoint a liquidator. Having regard to the size of the company's debt due to the petitioner, under section 267 (3) Mr Maloney's vote would have been decisive in appointing a liquidator.
The question then arises whether or not the failure to have lodged the instrument of proxy pursuant to Order 74 Rule 82(1) had the effect of disenfranchising Mr Maloney. Mr Justice O'Neill was satisfied on the evidence that, as a matter of probability, the instrument was sent by ordinary prepaid post and not by registered post and that for whatever reasons the instrument of proxy did not arrive at the registered office of the company in time. Mr Justice O'Neill said that Order 74 Rule 82 (1) is expressed in mandatory terms. If proof of debt, where that debt is not admitted and proof of identity were sufficient to entitle a proxy to vote Rule 82(1) would be rendered nugatory or superfluous. Compliance with Order 74 Rule 82(1) is required before a proxy is entitled to participate in a vote on a resolution to appoint a liquidator notwithstanding that the debt was either proven or admitted. Hence, Mr Power was correct in excluding Mr Maloney from voting on the resolution to appoint a liquidator.
Mr Justice O'Neill next addressed the issue as to whether or not the court should exercise its discretion to replace the voluntary winding up with a winding up under the direction of the court. It had been suggested that the English and Irish courts had taken different approaches. Mr Justice O'Neill quoted from the judgment of Hoffmann J in Palmer Marine Service Limited, In re to illustrate the approach taken in the English cases. Hoffman J was of the view that he was entitled to have regard to the general principles of fairness and commercial morality which underlines the details of insolvency laws applied to companies. He believed that a judicial exercise of discretion should not leave substantial creditors with a strong and legitimate sense of grievance. Mr Justice O'Neill referred to the judgment of McCracken J In the Matter of Eurochick (Ireland) Limited to demonstrate the Irish approach. Mr Justice McCracken was of the view that some of the English cases were based on circumstances where it could be shown that there was some wrongdoing by the company itself which needed to be investigated. Mr Justice McCracken cited with approval the following passage from the judgment of Mr Justice O'Hanlon In the Matter of Gilt Construction Ltd at page 458: "The general approach taken in these cases is to have due regard to the cost involved in winding up by the courts and the delays which will be incurred, to the overall value of the assets to be administered and the complexity or simplicity of the task facing the liquidator, as well as to other relevant factors, such as those raised by the petition in the present case, having to do with questions of mala fides on the part of the person or persons involved."
Having considered the caselaw Mr Justice O'Neill stated that he did not see any significant divergence in principle in the approach to be adopted to the question that arises in the instant case namely, whether to replace a voluntary winding up with a compulsory winding up. What is quite clear is that the court has a discretion and it must weigh up all the factors relevant to the exercise of that discretion. In Mr Justice O'Neill's view the court should be disposed to intervene if the circumstances deposed to on affidavit show, that assets of the company such as the good will of its business, have gone to an associated company without any payment and the liquidation is in the hands of the nominee of the person or persons who had control over the company and the connected or associated companies, and where the nominee of the majority creditors who stand to lose substantial monies has been rejected. The clear entitlement of the petitioner to have appointed his nominee and the petitioner's intent to secure the appointment of its nominee are factors to which considerable weight must be attached. Although the evidence in the affidavit fell short of demonstrating wrongdoing on the part of Mr Power, or any other officer of the company, in the pre winding up stage there could be no doubt but that the petitioner would undoubtedly have a strong sense of suspicion and grievance, arsing from the fact that the petitioner was the only party to whom any substantial debt was owed by the company and also the fact that the only potentially realisable asset of the company i.e. its goodwill, would appear to have been transferred to an associated company without any recompense.
Another factor to which Mr Justice O'Neill attached a great deal of weight was the undertaking given to the court by the petitioner to discharge the costs and expenses of the voluntary liquidation to date and to discharge all future costs and expenses to be incurred in a compulsory winding up. Having regard to the potential assets of the company this was a considerable advantage to the company, because it would preserve the assets from depletion by the costs and expenses of liquidation.
Mr Justice O'Neill said that on the other side of the scale, there was the fact that there was no dispute whatsoever as to the independence and capacity of Mr Fitzpatrick to carry out the liquidation. Also it could be fairly said that the stated objective of the petitioner to investigate, and if necessary, to bring a claim for a determination that Mr Power and perhaps others had conducted the affairs of the company in a fraudulent or reckless manner with the consequence of they being held personally liable for the petitioner's debt pursuant to section 297 of the Companies Act, 1963 as amended; could be pursued not just in a compulsory winding up by a liquidator nominated by them, but could also be pursued by them directly as a creditor under the provisions of section 280 of the Act.
Bearing the foregoing factors in mind, and also bearing in mind the fact that the petitioner had moved with considerable expedition so that delay as a result of the replacement with a compulsory winding up was not a significant factor in the completion of the winding up of the company, Mr Justice O'Neill decided to exercise his discretion in favour of the petitioner. Accordingly, Mr Justice O'Neill granted the relief claimed in the petition.
Solicitors: Frances Cooke for the Revenue Commission/ petitioner; D.J. O'Malley & Co. (Limerick) for the director; John A. Tobin (Limerick) for the liquidator.
Ann Marie Courell, barrister