Comhlucht Páipéar Ríomhaireachta Teo. (in Voluntary Liquidation) v Údarás na Gaeltachta, G.T. Carpets Ltd (in Voluntary Liquidation) and Vincent Duignan

• Jurisdiction: Ireland
• Judgment Date: 01 January 1990
• Date: 01 January 1990
• Docket Number: [S.C. Nos. 241, 242, 262 of 1987]
• Court: Supreme Court

Comhlucht Páipéar Ríomhaireachta Teo. v. Údarás na Gaeltachta

Comhlucht Páipéar Ríomhaireachta Teo. (In Voluntary Liquidation), Plaintiff

and

údarásÚdarás na Gaeltachta, G.T. Carpets Ltd. (In Voluntary Liquidation) and Vincent Duignan

Defendants

[S.C. Nos. 241, 242, 262 of 1987]

Supreme Court

Practice - Security for costs - Limited company - Winding up - Insolvency - Liquidation - Priorities - Payment made by insolvent company - Action by liquidator for return of payment alleging fraudulent preference - Application by defendants for security for costs - Discretion of court - Relevant factors - Special circumstances - Whether defendants' costs, if awarded, payable in priority to costs and expenses of winding up - Ability of plaintiff to pay costs - Whether the strength of parties' cases a relevant factor - Whether application should be refused where strength of plaintiff's case such that there was no real defence - Whether such strength where part of strength lay in what might be found on discovery - Conduct of defendants - Whether plaintiff could resist application on basis that defendants contributed to its insolvent condition - Whether there were special circumstances justifying a refusal of the order - Apparent contradictions in explanations by defendants - Unusual or improper features of transaction between plaintiff and second defendant - Evasiveness of defendant in answering liquidator's questions - Companies Act, 1963 (No. 33), ss. 245, 276, sub-s. 1 (b), 281, 285, 286, 298 and 390.

Section 390 of the Companies Act, 1963, provides:—

"Where a limited company is plaintiff in any action or other legal proceeding, any judge having jurisdiction in the matter, may, if it appears by credible testimony that there is reason to believe that the company will be unable to pay the costs of the defendant if successful in his defence, require sufficient security to be given for those costs and may stay all proceedings until the security is given."

Section 286, sub-s. 1 of the Act of 1963 provides inter alia that any payment made by or against a company within six months before the commencement of its winding up, which, had it been made by or against an individual within six months before the presentation of a bankruptcy petition on which he is adjudged a bankrupt, would be deemed in his bankruptcy a fraudulent preference, shall in the event of the company being would up be deemed a fraudulent preference of its creditors and be invalid accordingly.

Section 281 of the Act of 1963 provides that all costs, charges and expenses properly incurred in the winding up, including the remuneration of the liquidator, shall be payable out of the assets of the company in priority to all other claims.

Section 285, sub-s. 8 of the Act of 1963 provides for the payment of debts which have priority subject to the retention of such sums as may be necessary for the costs and expenses of the winding up.

Section 245 of the Act of 1963 gives the court power to summon for examination any person whom the court deems capable of giving information relating to the promotion, formation, trade, dealings, affairs or property of the company.

Section 298 of the Act of 1963 gives the court the power in the winding up of a company to examine the conduct of any promoter, director, liquidator or officer of a company and to compel him to repay or restore money or property or pay compensation in respect of their misapplication, retainer, misfeasance or breach of trust in relation to the company.

The plaintiff company was insolvent and was in voluntary liquidation. The second defendant was a wholly owned subsidiary of the first defendant. The directors of the second defendant were the nominees of the first defendant of which they were also officers. At the time the proceedings were instituted the second defendant was in liquidation but was solvent.

In investigating the affairs of the plaintiff, the liquidator discovered that it had borrowed a sum of £170,000 in January, 1982, and that those monies had been repaid in June, 1982, at a time when the plaintiff was clearly insolvent. The terms on which the loan had been made provided that it should be repayable with interest on demand but it had not been anticipated that any demand for repayment would be made before October, 1982. The monies advanced were the proceeds of two cheques drawn on the second defendant but the circumstances surrounding the making and repayment of the loan were unclear.

The third defendant, an accountant, was the first defendant's agent in relation to the loan. Under the terms of the loan he was to supervise the preparation of monthly management accounts for the plaintiff and, jointly with the plaintiff's managing director, was authorised to order payments from the plaintiff's funds.

The repayment of the loan had been effected by transferring monies from the plaintiff's bank account to the third defendant's bank account. No interest had been claimed or paid on the loan but the payments out of the plaintiff's account exceeded the capital sum advanced. The surplus was used by the third defendant to pay himself a sum owed for fees and to pay "expenses" to the directors of the plaintiff.

In an attempt to clarify the circumstances surrounding the loan and in particular the original source of the monies, the liquidator raised a number of queries with each of the defendants. The first and second defendants answered some of those queries but there was conflict between the answers given by the various officers. Other queries were evaded or ignored. The third defendant gave some general information but refused to deal with a series of specific queries until he was paid a sum of money for fees for co-operating with the liquidator.

The liquidator commenced proceedings in the name of the plaintiff claiming the return of the monies paid by the plaintiff on the grounds that the payments were a fraudulent preference. The defendants each applied, pursuant to s. 390 of the Companies Act, 1963, for an order for security for their costs. The application was refused by the High Court (see [1987] I.R. 684).

The issue of the priority of a successful defendant's costs against the plaintiff had not been raised before the High Court.

On the defendants' appeals against the judgment and order of the High Court it was

Held by the Supreme Court (Finlay C.J., Hederman and McCarthy JJ.), in dismissing the appeals and in confirming the order of the High Court but on different grounds, 1, that where an action is brought by a company after liquidation the costs of a successful defendant (whether they fall within s. 281 or s. 285 of the Act of 1963) rank in priority to all other claims and as there were sufficient funds available to pay the costs of a successful defendant the application for security for costs failed in limine.

In re Red Breast Preserving Co. (Ir.) Ltd. [1958] I.R. 234 considered. In re Pacific Coast Syndicate Ltd.[1913] 2 Ch. 26; In re London Metallurgical Co.[1895] 1 Ch. 758; In re Home Investment Society(1880) 14 Ch. D. 167; In re Dominion of Canada Plumbago Co.(1884) 27 Ch. D. 33 and In re National Building & Land Investment Co.; Ex parte Clitheroe (1885) 15 L.R. Ir. 47 followed. In re Dronfield Silkstone Coal Co. (No. 2)(1883) 23 Ch. D. 511 not followed.

2. That the strength or otherwise of the parties cases was not an appropriate consideration in an application for security for costs unless it could be shown that the strength of the plaintiff's case was such that there was no real defence in which case the application should be refused. The plaintiff's case did not have such strength where part of its strength lay in what might be found on discovery of documents.

Bula Ltd. (In Receivership) v. Tara Mines Ltd. (No. 3) [1987] I.R. 494 approved.

3. That there was no evidence that the making of the order would hamper or prevent the plaintiff from maintaining the action.

4. Since the plaintiff in proceedings alleging fraudulent preference must have been already insolvent at the date(s) of the alleged payments it was not open to it to resist the claim for security for costs on the basis that the defendants contributed to its insolvent condition.

Peppard & Co. v. Bogoff [1962] I.R. 180; S.E.E. Co. Ltd. v. Public Lighting Services Ltd.[1987] I.L.R.M. 255; Jack O'Toole Ltd. v. MacEoin Kelly Associates[1986] I.R. 277 distinguished.

5. That neither the apparent contradictions in the explanations given by the first and second defendants nor the evasiveness of the third defendant in answering the liquidator's questions were special circumstances that would justify refusing an order for security for costs. The liquidator could have invoked the powers of the court under ss. 245 and 298 of the Act of 1963 to deal with this problem.

Cases mentioned in this report:—

Bula Ltd. (In Receivership) v. Tara Mines Ltd. (No. 3) [1987] I.R. 494.

Comhlucht Páipéar Ríomhaireachta Teo. v. Údarás údarás na Gaeltachta [1987] I.R. 684.

Eddison v. A.I.B. (Unreported, High Court, Costello J., 24th July, 1985).

In re Bank of Hindustan, China & Japan Ex p. Levick (1867) L.R. 5 Eq. 69; 17 L.T. 237; 16 W.R. 102.

In re Daly & Co. (1886) 19 L.R. Ir. 83.

In re Dominion of Canada Plumbago Co. (1884) 27 Ch. D. 33; 53 L.J. Ch. 702;sub nom Re Dominion of Canada Plumbago Co. Ltd. Ex p. Beall 50 L.T. 518; 33 W.R. 9.

In re Dronfield Silkstone Coal Co. (No. 2) (1883) 23 Ch. D. 511; 52 L.J. Ch. 963; 31 W.R. 671.

In re Home Investment Society (1880) 14 Ch. D. 167; 28 W.R. 576.

In re London Metallurgical Co. [1895] 1 Ch. 758; (1895) 43 W.R. 476; 11 T.L.R. 308; 39 S.J. 363 sub nom. Re London Metallurgical Co. Ex p. Parker 64 L.J. Ch. 442; 72 L.T. 421.

In re National Building & Land Investment Co.; Ex p. Clitheroe (1885) 15 L.R. Ir. 47.

In re Pacific Coast Syndicate Ltd. [1913] 2 Ch. 26; (1913) 108 L.T. 823; 57 S.J. 518; sub nom. Re Pacific Coast Syndicate Ltd., Ex p. British Columbian Fisheries...