Pebble Beach Owners Management Company Ltd v Neville
 IEHC 446
THE HIGH COURT
[2014 No. 7345 P]
Company – s. 52 of the Companies Act, 2014 – Occupational leases – Development of holiday homes – Transfer of common areas – Rent – Security for costs.
This judgment is given in the application by the eighth and ninth defendants, a firm of auditors, pursuant to s. 52 of the Companies Act, 2014 (the ‘Act of 2014’) that the plaintiff should provide security for their costs in these proceedings.
Briefly, the defendant is a firm of chartered accountants and auditors and acted as auditor to the plaintiff until it resigned from that office in February, 2011.
The plaintiff is the owners' management company of a development of holiday homes in Tramore, Co. Waterford, and was formerly known as Cyclegrove Limited.
The development of holiday homes had the benefit of a tax scheme established under s. 48 of the Finance Act 1995 and as part of the requirements for tax relief the individual units were to be available for tourists through Fáilte Ireland for the ten year period of the tax break. For that purpose the owners of the units entered into 21-year leases from 1st January, 1999, subject to a break clause which could be exercised on three months notice on the 11th anniversary of the term thereof. The leases were made in all cases to the persons named as the third, fourth, fifth, sixth and seventh defendants to these proceedings, collectively trading as the ‘Pebble Beach Holiday Homes Operator’ (‘the Operator’).
The occupational leases contained the usual covenant on the part of the lessee to repair the premises, and a specific provision that the premises were not to be used for any purposes other than as holiday homes and other uses consistent with s. 9 of the Tourist Traffic Act, 1957. Rent was calculated in accordance with the provisions in the second schedule as the net letting income received by the lessees in the letting of the demised premises minus VAT.
The break option was exercised, and in or around the year 2010 the individual unit owners accepted a surrender of their respective leases and took possession of their individual unit.
By Transfer made on 29th February, 2000 the unit owners had acquired title to the premises, and the owners' management company joined in the deed of transfer for the purposes of granting certain rights and easements over the common areas agreed to be transferred to it by the development agreement. Under the terms of the occupational leases, the Operator as lessee covenanted to perform all of the obligations of the unit owner in respect of his or her obligations to the management company.
In the events, the common areas were transferred to the management company by deed of 30th December, 2009.
The eighth and ninth defendants are a firm of auditors and accountants who at all material times were the auditors to the management company and also acted as auditors to the Operator. It seems that up to the time when the common areas were transferred to the management company on 30th December, 2009, the management company did not collect the annual management charges in accordance with the covenant contained in the fifth schedule to the deed of transfer. Instead, the Operator collected the rents paid from time to time by tourists taking short term lettings of the units, and collected a management fee directly from the owners. The plaintiff estimates that over the period of October, 2000 to 31st March, 2010, a total of €4.1million was collected by the Operator in respect of the units.
Financial statements were prepared and filed with the CRO for each relevant year, and at least up to 31st December, 2009 the management company showed a nil figure for receipts and outgoings. The eighth and ninth defendants describe the management company as being ‘dormant’ through those years until it came to take over the management of the common areas and collect the management charges to which it was entitled under the Transfer.
The plaintiff inter alia argues that the common areas should have been transferred to the management company by December, 2003 when the last unit was sold, and that from that time the management company ought to have been in receipt of the management charges pursuant to the covenant in that behalf contained in the Transfer. The auditors are said to be negligent in failing to ensure the assurance of the common areas took place at the appropriate time.
The plaintiff claims that the eighth and ninth defendants failed to properly ensure that the management company kept proper books of account which showed a true and fair statement of the company's financial affairs. The plaintiff also pleads that the auditors were negligent and in breach of their statutory duty as auditors in failing to ensure that the relevant portion, comprising the management charges, of the monies collected by the Operator were transferred to the management company. It is also pleaded that the auditors failed to ensure that the unit owners complied with the covenant in the Transfer, and that they negligently and in breach of duty and in breach of contract permitted or assisted in the filing of accounts which did not reflect the entitlement of the company to the management charges, which were not collected on its behalf, or passed on to it. A further part of the claim is that the auditors permitted the intermingling in the accounts of charges collected for day-to-day management of the holiday lettings and the true management charges payable to the management company under the Transfer.
The eighth and ninth defendants have filed a full defence in which inter alia it is pleaded that some or all of the claims, primarily that made in respect of charges not collected prior to 14th August, 2008 (six years before the plenary summons issued) is barred by virtue of the Statute of Limitations, 1957 as amended. These defendants also plead substantive defences with regard to the contents of the books and records of the plaintiff company, and that the loss, if any, was caused or contributed to by the acts or omissions of the plaintiff company insofar as it acquiesced in, accepted or approved, the structure by which the Operator collected the management charges.
The eighth and ninth defendants seek that the plaintiff would provide security for their anticipated costs of the litigation pursuant to s. 52 of the Act of 2014 which is in broadly similar terms to that contained in the old s. 390 of the Act of 1963. The new statutory provisions do not provide that the security be ‘sufficient’, but no argument is made by either party to this application that that difference has any relevance to the present application.
The test that an applicant for security for costs against a company must establish is clear from the authorities, and I do not propose outlining the evolution of the test as interpreted by the Irish courts. It is clear that the party seeking security must satisfy the two cumulative tests described by the Supreme Court in The Environmental Protection Agency as:
(a) The moving party has to establish that he has a prima facie defence to the claim of the plaintiffs and
(b) That the plaintiff will not be able to pay the costs of the moving party if the moving party is successful in defending the claim.
Once the applicant for security meets these two cumulative tests, security ought to be required, but the court has a discretion which it may exercise if special circumstances are shown to exist, and the onus of establishing such special circumstances rests on the person resisting the provision of security.
The plaintiff relies in particular in defending this application for security for costs, on an assertion that there are special circumstances akin to those identified in an number of decided authorities, namely that the plaintiff's current impecuniosity, or relative impecuniosity, was caused by the wrongdoing of the relevant defendant in respect of which the claim is brought.
I turn now to consider the two requirements that an applicant for security must establish.
The standard that must be met by a defendant in establishing a prima facie defence does not require the court to make an assessment of liability, and as Charleton J. said in , , the court must ask ‘ whether there is a reasonable prospect of a defence succeeding at trial’.
Laffoy J. in ... at paras. 17-18 explained the requirement was to demonstrate by
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