Downey v O'Brien

• Jurisdiction: Ireland
• Judge: MR. JUSTICE COSTELLO
• Judgment Date: 12 April 1994
• Neutral Citation: 1994 WJSC-HC 2574
• Court: High Court
• Docket Number: 18P/1989
• Date: 12 April 1994

DOWNEY v. O'BRIEN

BETWEEN

MAURICE E. DOWNEY

PLAINTIFF

AND

JOHN C. O'BRIEN

DEFENDANT

1994 WJSC-HC 2574

18P/1989

THE HIGH COURT

Synopsis:

COMPANY

Shares

Valuation - Object - Sale - Undervalue - Surcharge - Public body - Harbour commissioners - Chairman - Negligence - (1989/18 P - Costello J. - 12/4/94) 1994 2 ILRM 130

|Downey v. O'Brien|

NEGLIGENCE

Accountant

Company - Shares - Valuation - Method - Deductions - Insurance policy - Provision for deferred tax - Harbour commissioners held shares in company - Sale of shares at undervalue - Chairman of commissioners surcharged by local government auditor - Local Government (Ireland) Act, 1871, s. 12 - Local Government (Ireland) Act, 1902, s. 20 - (1989/18 P - Costello J. - 12/4/94)

|Downey v. O'Brien|

Citations:

LOCAL GOVT (IRL) ACT 1902 S20

LOCAL GOVT (IRL) 1871 S12

RAFTIS, STATE V LEONARD 1961 IR 381

PENTECOST V LONDON DISTRICT AUDITOR 1951 2 KB 759

LOCAL GOVT (IRL) ACT 1902 S21

LOCAL GOVT (IRL) ACT 1902 S22

HARBOURS ACT 1946 S132

HARBOURS ACT 1946 S174

KEANE, THE LAW OF LOCAL GOVT IN THE REPUBLIC OF IRELAND 313–314

STREET, THE LAW RELATING TO LOCAL GOVT 1263–1264

1 JUDGMENT OF MR. JUSTICE COSTELLO delivered this12th day of April 1994.

INTRODUCTION

2 In 1983 the Waterford Harbour Commissioners entered into a joint venture agreement with a Mr. William O'Hanlon for the dredging of Waterford Harbour which provided that a company would be established for the purpose, that the Commissioners would own 51 of its issued capital and that the Company would buy a dredger from Mr. O'Hanlon. Pursuant to this agreement a company was incorporated on the 13 April, 1983 called Hellebore Limited. The Commissioners subscribed for and were alloted 10,002 fully paid up £1 shares and Mr. O'Hanlon subscribed for and was alloted 10,000 fully paid up £1shares. In addition the parties agreed to make funds available to Hellebore by means of loans and the Commissioners granted a loan of £84,348 interest free to the company. Mr. O'Hanlon also agreed to lend to the company a sum of £80,650 also interest free. Three years later the Commissioners decided to sell all their shares to Mr. O'Hanlon and it is that sale which has resulted in these proceedings. A statutory audit of the Commissioners accounts was carried out by a Local Government Auditor, Mr. John C. O'Brien (the respondent herein) in the years 1987/1988. On the 16 November 1988 pursuant to section 20 of the Local Government (Ireland) Act 1902 he charged the sum of £42,300 jointly and severally on the Commissioner's Chairman Mr. M. E. Downey (the appellant herein) and on the Commissioners General Manager, Mr. McQuillan. Mr. O'Brien maintained that due to their negligence in selling the Commissioners shares in Hellebore at less than their true value the Commissioners had suffered a loss of £42,300.

3 With the document of charge he delivered a further document ("Reasons for Charge") (hereinafter "Reasons") which detailed the reasons why the charge was imposed. Pursuant to section 12 of the Local Government Act 1871 Mr. Downey appealed by way of an application for an Order of Certiorari against the charge imposed on him (as did the General Manager whose appeal is still pending). Leave to apply for the Order was given on the 21 December 1988 and thereafter these plenary proceedings were instituted. Before turning to the facts of the case I think I should begin my judgment by reference to the statutory provisions as these are relevant both to the nature of this appeal and to the principles of the law of negligence which I should apply.

THE LAW

4 The power of a Local Government Auditor to raise a charge against the appellants and the Courts jurisdiction to hear an appeal from such a charge are to be found in section 12 of the Local Government (Ireland) Act 1871 and section 20 of the Local Government (Ireland) Act 1902. Section 20 of the 1902 Act empowers the auditor to charge against any member or officer of a local authority the amount of any deficiency or loss incurred by his negligence or misconduct and provides that section 12 of the 1871 Act will apply to every such charge. As the appeal provisions are to be found in section 12 it is that section to which attention must firstly be directed. Section 12 of the 1871 Act provides that a local government auditor may examine into the matter of every account of a local authority and empowers him to disallow any payments which he decides are unfounded and to sur-charge the person making or authorising the payments. He is required to certify the amount due by the person charged or sur-charged and upon application state in writing the reasons for the decision. The section then goes on to give a right of appeal to a person aggrieved by the charge or sur-charge. An aggrieved person may "apply to the Court of Queen's Bench for a Writ of Certiorari to remove into the said court the said ... sur-charge in the like manner and subject to the like conditions as are provided in respect of persons suing for Writs of Certiorari for the removal of Orders of Justices of the Peace", but subject to two exceptions, one being that the notice of the intended application is to contain a statement of the matter complained of. On the hearing of the application for the Order of Certiorari the Court "shall decide the matter of complaint set forward in such statement and no other" and if it appears to the Court that the decision of the auditor was erroneous the Court is then empowered to remedy the position.

5 The Court's powers on the hearing of an appeal under section 12 have been subject to some debate. The section and the authorities which considered it were carefully reviewed by a divisional Court in the State (Raftis) -v- Leonard ( 1961 I.R. 381) whose conclusions were accurately summarised in the head note of the report as follows:-

"The Court in considering an application for Certiorari under the provisions of section 12 of the Local Government (Ireland) Act 1871 to quash a charge or sur-charge made by local government auditor is restricted to the materials which were before the auditor at the time of the audit, but is free, on those materials, to come to a conclusion of fact, as well as of law, different from that come to by the auditor".

6 I agree, with respect, with the conclusions of the Divisional Court on the construction of the section. It follows, therefore, that on this appeal no fresh evidence ??? be adduced by either party and that the Court must base its decision on the materials which were before the auditor, ??? in order to establish or explain what material was before the auditor affidavit evidence is permissible. Furthermore, it is clear (a) that these certiorari proceedings are not an appeal by way of re-hearing but (b) unlike ordinary certiorari proceedings the Court may come to ??? different conclusion on the evidence which was before the auditor and is not confined merely to considering whether ??? was evidence to support his findings of fact.

7 Finally, there is one other point of procedure to be noted. Where the appellant has filed an affidavit to support his appeal he may be cross-examined on it (see, 1961 ??? p, 420). Where, as in this case, the auditor does not ??? an affidavit but relies on the statement of reasons already given by him it seems to me to be proper that ??? to cross-examine him on that document should, if ???, be granted. This is what happened in the present proceedings.

8 I turn now to the applicable law of negligence.

9 The power to impose a charge on a member of a Local Authority who has acted negligently arises under section 20 of the 1902 Act. The degree of negligence sufficient to justify a charge under the section has been considered on several occasions in the Courts in this country and in England, authorities collected in and commented on in Keane, "The Law of Local Government in the Republic of Ireland" (p. 313-314) and Street "The Law Relating to Local Government" (p. 1263-1264). I accept as correct the statement of the law in Pentecost -v- London District Auditor (1951) 2 K.B. 759 to the effect that negligence which gives rise to a charge under the section does not involve any element of moral culpability or gross negligence and that the ordinary principles of the law of negligence apply when a claim under the section against a member of a local authority is made. This means that the auditor was, and now this Court is, required to consider whether the Chairman of the Commissioners, the appellant herein, owed a duty of care to the Harbour Commissioners, the nature of that duty (if it existed), whether it was breached and whether the Commissioners thereby suffered loss.

THE FACTS

(i) HELLEBORE LIMITED

10 In April 1983 it was agreed between the Commissioners and Mr. O'Hanlon that a new company would be incorporated which would purchase from Mr. O'Hanlon a dredger known as "M.V. Lake Lothing" for the sum of £185,000, that the Commissioners would obtain 51 of the shares and Mr. O'Hanlon 49 of the shares in the new company, that they would contract with the new company to dredge the harbour and that the company would enter into a management contract with Mr. O'Hanlon and that each of the parties would lend a sum of money to the company in addition to subscribing for shares. Pursuant to this agreement the Commissioners funded the new company to the extent of £94,350. In July 1983 they paid a cheque for £9,435 and received 10,002 £1 fully paid up shares and they made an interest free loan to the company of £84,915. Mr. O'Hanlon subscribed for and obtained 10,000 £1 shares and also made an interest free loan of £80,650 to the company. In addition to purchasing the dredger the company also effected two contracts of life assurance on the life of Mr. O'Hanlon's son, Martin, at a cost of £40,000. These were purchased as an investment fund which on maturity after 10...