Connolly v Seskin Properties Ltd

JurisdictionIreland
JudgeMr. Justice Kelly
Judgment Date27 July 2012
Neutral Citation[2012] IEHC 332
Judgment citation (vLex)[2012] 7 JIC 2707
CourtHigh Court
Date27 July 2012

[2012] IEHC 332

THE HIGH COURT

[No. 5 IA/2012]
Connolly v Seskin Properties Ltd & Whelan
COMMERCIAL
IN THE MATTER OF AN INTENDED DERIVATIVE ACTION

BETWEEN

SEÁN CONNOLLY
APPLICANT

AND

SESKIN PROPERTIES LIMITED, MICHAEL WHELAN AND MICHAEL J. WHELAN
RESPONDENTS

FOSS v HARBOTTLE 1843 2 HARE 416

RULES OF THE SUPERIOR COURTS (DERIVATIVE ACTIONS) 2010 SI 503/2010

RSC O.15

BARRETT v DUCKETT 1995 1 BCLC 243

PRUDENTIAL ASSURANCE COMPANY LTD v NEWMAN INDUSTRIES LTD (NO.2) 1982 1 CH 204

FANNING v MURTAGH 2009 1 IR 551

GLYNN & MCCABE v OWEN & ORS UNREP HIGH FINLAY-GEOGHEGAN 21.12.2007 2007/26/5372 2007 IEHC 328

BIALA PTY LTD v MALLINA HOLDINGS LTD 1993 ACSR 785

CRINDLE INVESTMENTS v WYMES 1998 4 IR 567

PAVLIDES v JENSEN 1956 CH 565

BURLAND v EARLE 1902 AC 83

Company Law - Derivative action - Minority shareholders - Leave of the court - Directors - Fraud - Wrongdoing - Interests of justice

Facts: The applicant was a minority shareholder in the first respondent with 49% of shares. The remaining 51% was held by Mr Whelan (the second named respondent) and Mr Whelan Jr (the third named respondent). All three were directors within the company. The second and third named respondents were also shareholders and directors in a company called Maplewood Developments. It was the applicant's contention that through their control of the company, the second and third named respondents allowed a substantial debt to accumulate owed to the first respondent for works completed by them on behalf of Maplewood Developments, with an intention not to pursue full payment. The applicant sought leave to commence a derivative action in the name of the first respondent against Maplewood and the second and third named respondent with the objective of recovering the debt owed.

Held by Kelly J that to fall within the first exception, the applicant had to demonstrate that , which was done at a time when the second and third named respondents were in control of the company and that they benefited from the contended wrongdoing but the applicant had failed to do so. Whilst it was accepted that the second and third named respondents were in control of the company at the relevant time, the court was not satisfied a wrong had been done on the first respondent as evidence showed that there had been previous arrangements between the companies and that the recent debt owed to The first respondent could be attributed to the economic downturn. Further, it was doubted whether there had been any fiscal benefit from any alleged wrongdoing as it was the applicant's own assertion that the second and third named respondents had made personal guarantees.

It was further held that the applicant had failed to show that the exception should be allowed in the interests of justice. A strong case had to be made out which was consistent with the Foss v Harbottle principles and its exceptions but with the prospects of success for the case doubtful, the applicant had failed to do so. Foss v Harbottle ([1843] 2 Hare 416 considered.

Application dismissed.

Introduction
1

1. If a company suffers a legal wrong it is the company itself which must sue in respect of damage resulting from it. That is the rule in Foss v. Harbottle [1843] 2 Hare 416.

2

2. The reason for the rule is that, in law, a company is a legal person with its own corporate identity. That identity is separate and distinct from its directors and shareholders.

3

3. As is the case with most legal rules, the rule in Foss v. Harbottle admits of exceptions. Were it not to do so, it could work injustice. For example, if a company is defrauded by directors who control it and who hold a majority of the shares, they will not authorise proceedings to be taken by the company against themselves. So the rule in Foss v. Harbottle may be abrogated in such circumstances. In an appropriate case, the law permits of a derivative action being taken on behalf of the company with leave of the court. The applicant contends that this is such a case.

4

4. The procedure to be followed in seeking leave to commence a derivative action is now governed by an amendment to the Rules of the Superior Courts which came into operation on 16 th November, 2010. ( S.I. 503/2010).

5

5. This amendment to O. 15 of the Rules of the Superior Courts sets out in some detail the steps which must be taken in order to secure leave to commence a derivative action.

6

6. It is such an application that falls to be dealt with in this judgment. The parties have complied with S.I. 503/2010.

Background
7

7. The applicant is a shareholder and director in the first named respondent (Seskin). Seskin was incorporated in June 1998. Its shareholders at the time of incorporation were the applicant as to 49% and the second named respondent (Mr. Whelan) as to the balance. Since incorporation, a company called Moritz Property Investment Company or Moritz Holdings (Moritz) acquired Mr. Whelan's shares in Seskin. There is disagreement as to which Moritz entity is involved but nothing turns on that. The applicant has maintained his 49%.

8

8. The directors of Seskin are the applicant, Mr. Whelan and the third named respondent (Mr. Whelan Jr.).

9

9. Moritz is a company owned and controlled by Mr. Whelan and Mr. Whelan Jr.

10

10. It is clear, therefore, that at all relevant times, Mr. Whelan and Mr. Whelan Jr. have either directly or indirectly been in control of Seskin. The applicant is in a minority at both board and shareholder level of that company.

11

11. Mr. Whelan and Mr. Whelan Jr. are also shareholders and directors of a company called Maplewood Developments (Maplewood). That is the proposed first defendant in the intended derivative action. The second and third defendants in the intended derivative action are Messrs. Whelan and Whelan Jr.

The Claim
12

12. The applicant seeks leave to commence a derivative action in the name of Seskin against Maplewood and the two Whelans. The claim is for the sum of €5,329,920. It is alleged that this is the balance due and owing on an account pursuant to an agreement dated 14 th June, 2007 (the agreement). That agreement was made between Maplewood and Seskin. Under it, Seskin agreed to carry out the construction and completion of 82 residential units on a site at Ballynakelly, Newcastle, Co. Dublin. It is the applicant's belief that that sum is due, particularly having regard to the provisions of clause 4 of the agreement.

Clause 4
13

13. Clause 4 identified the contract price for the carrying out of the works by the contractor (Seskin) in the sum of €15,744,000 plus VAT at the applicable rate. Maplewood agreed to pay that in the manner set out as follows in the remainder of clause 4:-

2

2 "4.1.1 On the completion of each sale by the developer of each completed residential unit the developer shall pay to the contractor the sum of €192,000 (plus VAT at the applicable rate).

3

3 4.1.2 The contract price shall be increased in the event that the actual sales prices of the residential units are higher than the projected sales prices of the residential units to a sum to be agreed between the developer and the contractor based upon any difference between the projected sales prices of the residential units and the actual sales prices of the residential units and the payment of any such increase shall be made at such time or times as agreed between the developer and the contractor. The projected sales prices of the residential units are referred to in the schedule to this agreement."

14

14. Seskin completed the works provided for in the contract and issued invoices in respect of them. Between February 2008 and November 2011, Seskin issued invoices totalling €14,342,400. During that period, Maplewood paid Seskin €9,012,408. The balance is alleged to be due to Seskin by Maplewood.

Applicant's Case
15

15. The applicant believes that Mr. Whelan and Mr. Whelan Jr. in their capacity as controlling directors of Seskin, allowed a substantial debt to accumulate with Maplewood in circumstances where they knew or ought to have known that Maplewood would not be in a position to pay the debt. He alleges that they have an intention not to pursue Maplewood for the recovery of the monies. He contends that the accrual of that debt and the refusal by Mr. Whelan and Mr. Whelan Jr. to institute proceedings in their capacity as directors of Seskin is not in the interests of that company. Rather, it is in the interests of Maplewood which is owned and controlled by them. As already mentioned, the applicant, in his proposed proceedings, does not limit his claim to one against Maplewood. He seeks to sue Mr. Whelan and Mr. Whelan Jr. The basis of the claim against them is that in the event of Maplewood being unable to satisfy any judgment which may be obtained against it, they should be liable for the judgment sum by reference to their breach of duty towards Seskin. It is alleged that they owe obligations including fiduciary ones to Seskin as its directors. They failed to live up to them, it is said, by not acting bona fide in Seskin's best interests by allowing the debt in question to mount up when they knew Maplewood might not be in a position to pay it. It is in these circumstances that this application for leave to commence the derivative action is brought.

16

16. The applicant also alleged in a supplemental affidavit that Mr. Whelan and Mr. Whelan Jr had personally guaranteed the borrowings of Maplewood and thus had "used the money owed to Seskin to shore up the financial position of Maplewood in their own personal interest". The existence of such guarantees was denied in categoric terms. Ultimately, it was accepted by the applicant that there are no such guarantees.

17

17. The applicant accepts that he did not raise this issue before June 2011...

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