Oisin Fanning v Brendan Murtagh and Others

• Jurisdiction: Ireland
• Judge: Ms. Justice Irvine
• Judgment Date: 30 July 2008
• Neutral Citation: [2008] IEHC 277
• Court: High Court
• Docket Number: [2008 No. 30 IA]
• Date: 30 July 2008

[2008] IEHC 277

THE HIGH COURT

[No. 30 IA/2008]

Fanning v Murtagh & Ors

IN THE MATTER OF INTENDED PROCEEDINGS

COMMERCIAL

BETWEEN

OISIN FANNING

PLAINTIFF

AND

BRENDAN MURTAGH, ALAN MURTAGH, FERGAL MURTAGH, SMART TELECOM PLC AND SMART YUROE BROADBAND LTD

DEFENDANTS

COMPANIES ACTS 1963 TO 2006 S205

RSC O.19 r28

WALLERSTEINER v MOIR (NO 2) 1975 QB 373

BARRETT v DUCKETT 1995 1 BCLC 243

FOSS v HARBOTTLE 1843 2 HARE 461

MORSE CHARLESWORTH'S COMPANY LAW 17ED 2005

BIALA PTY v MALLINA HOLDINGS LTD 1993 11 ACSR 785

MOYLAN v IRISH WHITING MANUFACTURING LTD UNREP HIGH HAMILTON 14.4.1980 1980/7/1373

GLYNN & MCCABE v OWEN & ORS UNREP HIGH FINLAY-GEOGHEGAN 5.10.2007 2007/26/5342

DANIELS v DANIELS 1978 CH 406

CRINDLE INVESTMENTS v WYMES 1998 4 IR 567

KEANE COMPANY LAW 4ED 2006

CIVIL PROCEDURE (AMDT) RULES 2000 SI 221/2000 (UK)

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

COMPANIES ACT 1963 S231

COMPANIES ACT 1990 S124

PRUDENTIAL ASSURANCE COMPANY LTD v. NEWMAN INDUSTRIES LTD & ORS (No. 2) 1982 CH 204

COMPANY LAW

Shareholder

Derivative action - Fraud on minority - Locus standi - Whether plaintiff could institute proceedings on behalf of company - Whether plaintiff entitled to institute proceedings where justice of case required it - Whether right to bring derivative action to be determined as preliminary issue - Whether court should have regard to plaintiff's potential right to indemnity from company in respect of legal costs - Appropriate burden of proof when granting leave to take derivative action - Foss v Harbottle (1843) 2 Hare 461 applied; Barrett v Duckett [1995] 1 B.C.L.C. 243 and Wallersteiner v Moir (No 2) [1975] QB373 followed; Biala PTY v Mallina Holdings Ltd [1993] ACFR 785, Glynn v Owen [2007] IEHC 328 (Unrep, Finlay Geoghegan J, 5/10/2007) and Moylan v Irish Whiting Manufacturers Ltd (Unrep, Hamilton J, 14/4/1980) considered - Leave refused (2008/30IA - Irvine J - 30/7/2008) [2008] IEHC 277

Fanning v Murtagh & Ors

1 Ms. Justice Irvine delivered the 30th day of July, 2008

2 The plaintiff is a member of Smart Telecom PLC, the fourth named defendant, hereinafter referred to as "the company", and is seeking leave pursuant to a notice of motion dated 26 ^th May, 2008, to issue a derivative action on behalf of the company on the grounds that, inter alia, the first, second and third named defendants in October, 2006 perpetrated a fraud on the minority by procuring the purchase of the assets and undertaking of the company at an undervalue. The first named defendant is alleged to have been a de facto director or alternatively a shadow director of the company at the time of the transaction which the plaintiff seeks to impugn in the present proceedings. The second and third named defendants are sons of the first named defendant and were at the time of the said transaction non-executive directors of the company. The fifth named defendant is a limited liability company which became the transferee of the assets and undertaking of the company under the said agreement ("the Business Purchase Agreement").

3 The within application is grounded upon the affidavit of the plaintiff dated 7 ^th May, 2008, wherein he exhibits the intended Plenary Summons and Statement of Claim. As can be seen from these pleadings, the focus of the intended proceedings is the Business Purchase Agreement entered into on 6 ^th October, 2006, whereby the assets and undertaking of the company were transferred to a corporate vehicle, Callaly Ltd. ("Callaly") now renamed Smart Yuroe Broadband Ltd., for a sum of €1 in return for the issue to the company of 10% of its shares.

The nature of the claim brought on behalf of the Company in the intended proceedings

4 The General Endorsement of Claim on the Plenary Summons seeks, inter alia, a declaration that the Business Purchase Agreement of 6 ^th October, 2006, is null, void and of no legal effect and claims the Agreement should be set aside as having being procured by the undue influence, misrepresentation, negligent statement and conspiracy on the part of the first, second and third named defendants. The Court is further asked to grant an injunction restraining the first, second, third and fifth named defendants from disposing of or otherwise dealing with the business, assets, undertaking and subsidiaries of the fourth named defendant other than by restoring them to that defendant. In addition, as an alternative, damages are sought in lieu of restitution.

5 The proposed pleadings reveal that the plaintiff will, even if he is unsuccessful in this application, pursue in his personal capacity a number of other claims against the defendants including:

6 (1) A declaration that a severance agreement entered into with the fourth named defendant on 8 ^th September, 2006, whereby the plaintiff stepped down as C.E.O. of the company, was procured by undue influence and/or misrepresentation on the part of the first and/or fourth named defendants;

7 (2) A declaration that a deed of irrevocable proxy signed by the plaintiff in favour of a resolution to approve of the Business Purchase Agreement was procured in like fashion by the first and fourth named defendants;

8 (3) Damages for breach of contract against the fourth named defendant;

9 (4) A declaration that the plaintiff is entitled an indemnity from the first named defendant in respect of borrowings of some €5m from Anglo Irish Bank; and

10 (5) Other ancillary relief.

11 Before considering the principles that the Court should apply on an application such as the present one, it is perhaps helpful to set out a résumé of the more relevant facts in the affidavits and exhibits albeit that some of these facts are disputed in the manner outlined. It further should be noted that the within application was heard at the same time as an application brought by the first, second and third named defendants in proceedings issued by the plaintiff under the provisions of s. 205 of the Companies Acts 1963 to 2006 [Record No. 2008 No. 143 COS] to strike out those proceedings under O. 19 r. 28 of the Rules of the Superior Courts or alternatively under the court's inherent jurisdiction as an abuse of process. Consequently, the parties in the present application relied upon the totality of the affidavits and exhibits filed in both motions and the Court accepted the documents so exhibited as evidence for the purposes of the hearings. None of the parties asked the Court to hear a preliminary issue or any oral evidence. Neither did the parties to this motion serve notices to cross-examine the relevant deponents on their respective affidavits.

12 The principal affidavits relied upon by the plaintiff were those sworn by him on 7 ^th May, 2008 and 11 ^th June, 2008. The first, second and third named defendants in opposing the motion relied upon the affidavit of the first named defendant sworn on 30 ^th May, 2008 and the affidavit of the third named defendant sworn on 9 ^th May, 2008. The company, who is the fourth named defendant to the proceedings appeared as a notice party to the present motion for the purposes of advising the Court that the company's position was neutral in relation to the application. However, the company, through its chairman Mr. Kyran Michael O'Dwyer filed an affidavit in the present application and also in the s. 205 proceedings for the purposes of disputing many of the facts relied upon by the plaintiff in relation to the company's management, its liquidity and the circumstances in which it entered into the Business Purchase Agreement which is at the core of both sets of proceedings.

The Facts

13 The company was incorporated in 1989 and from the year 2000 carried on business as a provider of telecommunications services. In 2004, the company commenced trading on the Alternative Investment Market which market is part of the London Stock Exchange. The nominal share capital of the company was €32, 500m divided into 650 million ordinary shares of which €3 80, 174, 284 where fully paid up. At the relevant time to these proceedings the company had 1, 400 shareholders between private investors and institutional share holders.

14 The plaintiff is a former director and C.E.O. of the company, a position which he held from 22 ^nd November, 2000, until 6 ^th September, 2006. On that date the plaintiff resigned and a severance package was agreed with the company. The plaintiff is also the holder of some 17, 427, 250 shares in the company.

15 The first named defendant is a businessman and according to his own affidavit, at the time relevant to these proceedings, was the beneficial owner of no more than 98, 935, 197 shares in the company. The plaintiff contends that the first named defendant had control over a larger number of shares, namely 110, 555, 141.

16 The second and third named defendants were both non-executive directors of the company at the time material to these proceedings and each was the holder of some 1, 599 shares.

17 It is common case that up to September, 2006 the first named defendant provided substantial financial assistance to the company and that by September, 2005, he had lent the company approximately €8m. In November, 2005 the company made a bid for the remaining Irish Third Generation Mobile Phone Licence which it did with the assistance of its Chinese partner Huawei. Having won the licence, the company was required to lodge a bond of €100m with the Communications Regulator ("Comreg") within 30 days. Unfortunately, Huawei reneged on its agreement with the company at the last minute and notwithstanding it's efforts to meet its requirements, Comreg withdrew the offer of the licence. The company issued proceedings against Comreg which it lost and became liable for its own legal costs as well as those of Comreg.

18 The half year...