Irish Bank Resolution Corporation Ltd & Irish Nationwide Building Society v Fingleton and Others

• Jurisdiction: Ireland
• Judge: Ms. Justice Costello
• Judgment Date: 15 April 2015
• Neutral Citation: [2015] IEHC 296
• Court: High Court
• Date: 15 April 2015

Irish Bank Resolution Corporation Limited & Irish Nationwide Building Society v Fingleton & Ors

COMMERCIAL

No Redaction Needed

Approved Judgment

BETWEEN

IRISH BANK RESOLUTION CORPORATION LIMITED

IRISH NATIONWIDE BUILDING SOCIETY

PLAINTIFFS

AND

MICHAEL P. FINGLETON

DEFENDANT

IRISH BANK RESOLUTION CORPORATION LIMITED

IRISH NATIONWIDE BUILDING SOCIETY

PLAINTIFFS

AND

JOHN S. PURCELL, DAVID M. H. BROPHY, TERENCE J. COONEY, MICHAEL P. WALSH, CORNELIUS P. POWER

DEFENDANTS

[2015] IEHC 296

[No. 3280 P/2012]

[No. 74 COM/2013]

[No. 3279 P/2012]

[No. 75 COM/2013]

THE HIGH COURT

Insolvency – Damages – Breach of contract – Buildings Societies Act, 1989 – Irish Bank Resolution Corporation Act 2013 – Discovery of documents

Facts: In the proceedings concerning damages for breach of contract, negligence and breach of fiduciary and statutory duty, the defendants in each set of proceedings sought an order for discovery against the plaintiffs.

Ms. Justice Costello granted orders for discovery against the plaintiffs for certain categories. The Court, however, refused to grant orders for discovery of documents in certain categories. The Court held that before exercising its discretion to direct the discovery of documents, it must be established that the documents sought to be discovered were relevant for the fair disposal of the case keeping in mind the financial burden it would likely have on the plaintiff. The Court held that the discovery would not be granted if the defendant had other alternatives to seek the necessary information, such as admission of facts or interrogatories. The Court observed that it must ensure that the party seeking the documents must not be acting oppressively to the interests of the other party as it would then have the advantage of knowing the opponent's defence in advance.

Introduction

1 1. Even in the context of the myriad of litigation which has been one of the fallouts of the economic crisis which has befallen the State in recent years these two related cases are extraordinary by any measure. The proceedings arise out of the gross insolvency of the Irish Nationwide Building Society ("the Society") which was a building society registered under the Building Societies Act 1989, as amended. The defendant in the first proceedings ("the Fingleton proceedings") was a long time secretary and director of the Society. He was appointed Secretary of the Society, which was then known as the Irish Industrial Building Society, in 1971 and it is pleaded that he was Chief Executive Officer of the Society from that time until the end of April, 2009. He was appointed a director of the Society in 1971 to 26 ^th January, 2008, and it is pleaded that he was the Managing Director of the Society from 1981 until his resignation as a director on 26 ^th January, 2008.

2 2. The defendants in the second proceedings ("the Directors proceedings") were all directors of the Society and are sued in their capacity as directors of the Society. The Society merged with the first named plaintiff upon the issuing of a transfer order made pursuant to the Irish Bank Resolution Corporation Act 2013. In each case the plaintiffs seek damages for breach of contract, damages for negligence including gross negligence and damages for breach of duty including breach of fiduciary duty and breach of statutory duty.

The Fingleton proceedings

3 3. The scope of the allegations in the Statement of Claim is extraordinarily wide ranging. Many of the allegations are not time limited. This means that they can range from 1971 up to April, 2009. It is claimed that from, at the latest, the 31 ^st March, 1981, until his resignation in April, 2009 the Board of the Society delegated all of its powers to the defendant for the effective management and control of the Society. It is also alleged that in practice the defendant enjoyed very considerable autonomy and freedom from oversight by the Board in his conduct of the business of the Society such that there was unusual and excessive concentration of the powers of the Society in the hands of the defendant. It is alleged that he failed to take any, or any appropriate, steps to ensure that the necessary oversight was established or maintained or the concentration of the powers of the Society in his hands diluted and/or to ensure that the excessive delegation of powers to him did not continue. It is said that in practice the defendant exercised control and enjoyed very significant responsibility for the lending functions of the Society, including as regards commercial and development lending, such that there was unusual and excessive concentration in his hands of the decision making power of the Society to approve applications or requests for commercial and development lending. It is also alleged that he made lending decisions which were the function of the Board and/or sought retrospective approval for decisions already made by him.

4 4. It is said that as a result of the delegation and the practice so pleaded the defendant bore a very significant responsibility for the conduct of the business of the Society. It is said that in practice and as a result of delegation he had the sole authority to approve decisions by the Society to lend amounts in excess of €1 million. It is also said that he authorised the paying out of funds in excess of €1 million to borrowers before the Board had considered the matter.

5 5. Section 76 of the Building Societies Act 1989, as amended, requires that a building society keep proper accounting records on a continuous and consistent basis and that it establishes and maintains systems of control of its business and records and systems of inspection and reports on these records. It is said that the appropriate systems of control of the conduct of the Society's business and the appropriate systems of inspection and reporting were neither established nor maintained in breach of the requirements of s.76 of the Act. It is alleged that the defendant as the Chief Executive owed a duty to the Society to take all reasonable steps to secure compliance by the Society with the obligations imposed by s.76 of the Act including but not limited to those pleaded in the Statement of Claim.

6 6. It is also pleaded that the Society was under a statutory obligation to obtain sufficient security for its loans so as to comply in respect of residential lending with the requirements of s.22 of the Act and, in respect of lending for the purposes of property development and/or investment, with the requirements of s.23 of the Act and that the loan be fully secured by a mortgage of freehold or leasehold estate or interest pursuant to s.25 of the Act. The Society was obliged to make arrangements for assessing the adequacy of the security for the loans to be secured by the mortgage of the freehold or leasehold estate or interest.

7 7. It was also pleaded that the defendant owed further duties, including fiduciary duties, to the Society to act honestly and responsibly and to act in good faith in the interests of the Society. It is pleaded that he owed a duty to exercise reasonable care, skill and diligence in exercising and discharging the powers and functions delegated to him by the Board of the Society, both by resolution and in practice, to protect the assets and interests of the Society, not to expose the Society to unnecessary and/or excessive risks in its lending and its business generally, to ensure that proper and effective controls were in place in the Society, to ensure that all reasonable steps to ascertain the real level of risk associated with the lending engaged in by the Society was assessed and to ensure that the Society obtained adequate security in respect of its loans and did not engage in speculative lending on the basis of obtaining speculative profits or returns in the future.

8 8. It is pleaded that the defendant as Chief Executive had a significant responsibility for the strategic direction of the Society and, in particular, for the radical change in the Society's loan book from the 1990s when it was predominantly based on residential lending. In the early 2000s the Society increased its activity in commercial lending and in particular in lending for commercial property development. It also lent considerable sums for developments in the United Kingdom and in France. It is pleaded that the defendant failed in his duty to put in place appropriate policies and structures and to monitor and/or ensure compliance with lending policies and corporate governance and risk management structures that were, in all the circumstances, adequate to enable the Society to comply with its duties under law and to manage the greater risks to which the Society was increasingly subject. It is said that the structures should have been commensurate with the scope, size and complexity of the activities being conducted and should have incorporated continuous measuring, monitoring and controlling of risk, accurate and reliable management information systems, timely management reporting and thorough audit and control procedures.

9 9. It is claimed that in breach of his duties owed to the Society the defendant failed to put in place, implement, monitor and ensure compliance with lending policies and corporate governance and risk management structures that were adequate in all the circumstances and that his failures in this regard were ongoing up to the date of his resignation as Chief Executive (April, 2009) and constituted gross negligence on his part. There are then 52 different particulars of breach of duty set out in pp. 22-32 of the Statement of Claim. Paragraph 39 of the Statement of Claim reads as follows:-

"The failures and breaches of duty aforesaid on the part of the Defendant caused or contributed to the massive losses...