Le Chatelaine Thudichum Ltd (in Voluntary Liquidation) v Conway

• Jurisdiction: Ireland
• Judge: Mr Justice Roderick Murphy
• Judgment Date: 11 November 2008
• Neutral Citation: [2008] IEHC 349
• Court: High Court
• Docket Number: [No. 89 COS/2007]
• Date: 11 November 2008

[2008] IEHC 349

THE HIGH COURT

[No. 89 COS/2007]

Le Chatelaine Thudichum Ltd (in Voluntary Liquidation) v Conway

IN THE MATTER OF SECTION 286 OF THE COMPANIES ACT 1963 AS

AMENDED AND IN THE MATTER OF SECTION 139 OF THE COMPANIES ACT 1990

BETWEEN

LE CHATELAINE THUDICHUM LIMITED (IN VOLUNTARY LIQUIDATION)

APPLICANT

AND

NOEL CONWAY

RESPONDENT

COMPANIES ACT 1963 S286

COMPANIES ACT 1990 S139

COMPANIES ACT 1963 S286(1)

COMPANIES ACT 1990 S135

CORRAN CONSTRUCTION CO v BANK OF IRELAND FINANCE LTD 1976-7 ILRM 175

STATION MOTORS LTD v AIB LTD 1985 IR 756

COMPANIES ACT 1990 S139(1)

WHITE COMMERCIAL LAW 1ED 2002 79

CARNA FOODS LTD & MALLON v EAGLE STAR INSURANCE CO (IRL) LTD 1997 2 IR 193

TROLLOPE & COLLS LTD v NORTH WEST METROPOLITAN REGIONAL HOSPITAL BOARD 1973 1 WLR 601

SULLIVAN v SOUTHERN HEALTH BOARD 1997 3 IR 123

WARD v SPIVACK LTD 1957 IR 40

COURTNEY LAW OF PRIVATE COMPANIES 2ED 2002

EJECTMENT & DISTRESS (IRELAND) ACT 1846 S10 (UK)

EJECTMENT & DISTRESS (IRELAND) ACT 1846 S14 (UK)

DISTRESS FOR RENT ACT 1741 S4 (15 GEO II C8)

DISTRESS FOR RENT ACT 1751 S5 (25 GEO II C13)

COMPANIES ACT 1990 S139(3)

COMPANY LAW

Fraudulent preference

Disposal - Disposition - Whether disposal of goods was fraudulent preference - Whether dominant intention was to prefer one creditor over other creditors - Whether goods acquired in knowledge that company could not discharge debts to other creditors - Carna Foods Ltd v Eagle Star Insurance Co (Ireland) Ltd [1997] 2 IR 193, Sullivan v Southern Health Board [1997] 3 IR 123 and Ward v Spivack Ltd [1957] IR 40, Corran Construction Co v Bank of Ireland Finance Ltd [1976- 1977] ILRM 175 and Station Motors Ltd v AIB Ltd [1985] IR 756 applied; Trollope and Colls Ltd v North West Metropolitan Regional Hospital Board [1973] 1 WLR 601 and Re M Kushler Ltd [1943] Ch 248 considered - Companies Act 1963 (No 33), s 286 - Companies Act 1990 (No 3), s 139 - Payment to liquidator ordered (2007/89Cos - Murphy J - 11/11/2008) [2008] IEHC 349

Le Chatelaine Thudichum Ltd: Le Chatelaine Thudichum Ltd v Conway

Facts: The liquidator of the applicant company applied for a declaration that a transfer of goods and cash to the respondent company constituted a fraudulent preference or a fraudulent disposition. The respondent had engaged a South African national to manage the franchised Spar outlet. The commercial venture ran into difficulties and the applicant returned control of the premises to the respondent. The company was heavily indebted. A stock take was performed and the respondent took possession of cash sums and stock.

Held by Murphy J. that the disposition in favour of the respondent had the effect of perpetrating a fraud on the applicant in depriving it of its assets and on the creditors of diminishing the pool of assets available for distribution upon liquidation. The creditors were denied the possibility of having a portion of the debts owed to them repaid. The court would require the respondent to pay a sum to the company in respect of the property acquired.

Reporter: E.F.

JUDGMENT of

Mr Justice Roderick Murphy

1 delivered on the 11th day of November, 2008 .

2 This is an application by the liquidator of the applicant company for a declaration that a transfer of goods and cash to the respondent by the company constituted a fraudulent preference or, in the alternative, a fraudulent disposition. The background to that transaction is as follows. In 2001 the respondent engaged Mr Thudichum, a South African national with extensive experience in the retail trade, to manage the franchised Spar outlet in the respondent's premises at Ratoath, Co. Meath. After more than a year in this capacity, Mr Thudichum approached the respondent with a view to leasing the premises. The respondent agreed.

3 The applicant company was incorporated on the 11^th June 2003, with Mr Thudichum as its managing director, and went into occupation of the premises in October of that year. The respondent, in his own name and on behalf and with the agreement of the applicant company, continued to order some stock from the main supplier, BWG, which was associated with Spar. Invoices issued at the end of each week and were duly paid by the company. The respondent's accountant, Mr Sweetman, became accountant to the company and oversaw these transactions.

4 Between October 2003, when the company went into occupation, and April 2004, shortly after a competing new retailer opened in the area, the parties' solicitors were engaged in correspondence concerning a written lease agreement. The draft lease provided that rent was payable weekly and calculated as 8% of net turnover, excluding VAT and disregarding what were termed 'agency sales', which term covered bus tickets and phone cards among other items. The respondent suggested that once these exclusions were taken into account, only about 5.5% of total weekly net turnover was paid, but this was disputed. The evidence did not establish a precise figure, but it was in the region of €30, 000 per month approximately.

5 There was a dispute as to the effect of the correspondence to which I will return later in this judgment. Whether or not the written agreement came into effect however, the parties' commercial relationship carried on as planned, though the venture later ran into difficulties.

6 Despite a reduction in rent in August 2005 to accommodate the applicant, the business experienced trading losses, largely because of an increase in competition with the opening of new retail outlets in the area. In March 2006 Mr Thudichum reached the conclusion that he could no longer continue to operate the business, and informed the respondent accordingly. On the 10^th April 2006, after two and a half years in occupation, the applicant "returned control of the premises" to the respondent.

7 The company was by then heavily indebted, both to the respondent and to other creditors, and was unable to pay its debts. The indebtedness to the respondent was in respect of rent owing and of four weeks unpaid invoices. On that date a stock take was performed in the presence of the respondent and Mr Thudichum, after which the respondent took possession of cash sums on the premises totalling €9, 500, together with stock valued at €112, 080. The company was wound up on the ninth day of September 2006 and Mr Randal Gray was appointed its liquidator.

8 The liquidator has applied to this court for a declaration that the aforementioned transaction is a fraudulent preference of, or alternatively a fraudulent disposition of its assets to, the respondent.

9 So far as material, s. 286 (1) of the Companies Act,1963, as amended by s. 135 of the Companies Act, 1990, provides:

"Subject to the provisions of this section, any…delivery of goods, payment, execution or other act relating to property made or done by or against a company which is unable to pay its debts as they become due in favour of any creditor…with a view to giving such creditor…a preference over the other creditors, shall, if a winding-up of the company commences within 6 months of the making or doing the same and the company is at the time of the commencement of the winding-up unable to pay its debts (taking into account the contingent and prospective liabilities), be deemed a fraudulent preference of its creditors and be invalid accordingly."

10 It is settled law that, to succeed in an application under this provision, the liquidator must prove that the transfer of property or funds was carried out with the dominant intention of preferring the recipient over the other creditors (Corran Construction Co. Ltd. v. Bank of Ireland Finance Ltd. [1976- 77] ILRM 175 at 178; Station Motors Ltd. v. ATB Ltd. [1985] IR 756 at 760). Where the court is faced with a member or director who has effective control over the affairs of the company, it may attribute his state of mind in this regard to the company (Corran Construction [1976- 77] ILRM 175 at 178; Station Motors [1985] IR 756 at 761).

11 InStation Motors, Carroll J accepted the principle laid down in Re M Kushler Ltd. [1943] 1 Ch 248 that an intention to prefer cannot be inferred in hindsight merely from the fact that an actual preferment occurred. However, in the absence of direct evidence of intention it remains possible for the court to infer intention, even where an alternative explanation is open (Station Motors [1985] IR 756 at 761).

12 Nevertheless, Carroll J sounded a cautionary note, quoting the following passage from the judgment of Lord Greene MR inKushler:

"It must, however, be remembered that the inference to be drawn is of something which has about it, at the least, a taint of dishonesty, and, in extreme cases, much more than a mere taint of dishonesty. The court is not in the habit of drawing inferences which involve dishonesty or something approaching dishonesty unless there are solid grounds for drawing them." ([1-943] 1 Ch 248 at 252).

13 In this case it is clear that an actual preferment occurred. Substantial amounts of stock and cash were transferred to the respondent less than six months prior to the commencement of its winding up in September 2006. Both at the commencement of its winding up and at the time of the impugned transaction the company was unable to pay its debts.

14 The presence or absence of an intention to prefer is more difficult to ascertain. In this case it is not disputed that Mr Thudichum, as managing director, controlled the affairs of the company. He gave evidence of his mindset at the time of the transaction, saying it was his intention to hand over the stock and cash to the respondent. However, he said in evidence that he understood at the time that he, the respondent and Mr Sweetman would arrive at a compromise arrangement with the other creditors such that no individual would be left unduly exposed...