Peter Doherty v Karl Donohoe and Others

• Jurisdiction: Ireland
• Judge: Mr. Justice Barrett
• Judgment Date: 01 April 2014
• Neutral Citation: [2014] IEHC 187
• Court: High Court
• Date: 01 April 2014

[2014] IEHC 187

THE HIGH COURT

[No. 254 COS/2012]

Doherty v Donohoe

IN THE MATTER OF GERDANDO LIMITED (IN LIQUIDATION) AND IN THE MATTER OF SECTION 150 OF THE COMPANIES ACT 1990 AND IN THE MATTER OF SECTION 56 OF THE COMPANY LAW ENFORCEMENT ACT, 2001

BETWEEN:

PETER DOHERTY

APPLICANT

AND

KARL DONOHOE, RUTH DONOHOE AND EDITH DONOHOE

RESPONDENTS

COMPANIES ACT 1990 S150

COMPANIES (AMDT) ACT 1983 S45

COMPANIES ACT 1990 S150(2)

LA MOSELLE CLOTHING LTD & ROSEGEM LTD v SOUALHI 1998 2 ILRM 345 1998/23/8886 1998 IEHC 66

KAVANAGH v DELANEY & ORS (TRALEE BEEF & LAMB LTD (IN LIQUIDATION), IN RE) 2008 3 IR 347 2008 2 ILRM 420 2008/32/6904 2008 IESC 1

SQUASH (IRL) LTD, IN RE 2001 3 IR 35 2001/23/6280 2001 IESC 200

KAVANAGH v DELANEY & ORS (TRALEE BEEF & LAMB LTD (IN LIQUIDATION), IN RE) 2005 1 ILRM 34 2004/24/5615 2004 IEHC 139

MITEK HOLDINGS LTD, IN RE; GRACE (LIQUIDATOR) v KACHKAR & MCCELLAN CARRIGAN 2010 3 IR 374 2010/36/9110 2010 IESC 31

COYLE & FENNELL v CALLANAN & HUGHES 2006 1 IR 447 2005/12/2501 2005 IEHC 346

STAFFORD (LIQUIDATOR OF GREENMOUNT HOLDINGS LTD) v O'CONNOR & ORS UNREP MCGOVERN 31.7.2007 2007/57/12167 2007 IEHC 246

MCNULTY'S INTERCHANGE LTD & ANOR, IN RE 1988 4 BCC 533 1989 BCLC 709

ORTEGA ASSOCIATES LTD, IN RE; GREEN v WALKLING 2008 2 BCLC 332 2008 BCC 256 2007 AER (D) 299 (DEC) 2007 EWHC 3251 (CH)

Company Law – liquidator – restriction order – professional advice – reorganistation – responsibility – Company Act 1990 s. 150.

Facts: The respondents were company directors and after taking professional advice entered into a “three-party swap” transaction in an attempt to reorganise the company. In these proceedings the liquidator applied for a restriction order under s. 150 Companies Act 1990.

Held by Barrett J, that there are three instances when a restriction under s. 150 Company Act 1990 will not be granted. These include where the respondent has acted honestly, the respondent has acted responsibly and finally there is no just or equitable reason requiring the order to be granted.

Justice Barrett, after finding that the respondents in this case had acted honestly, considered whether they had acted responsibly in the reorganisation of the company which included the “three-party” swap transaction. In deciding not to issue a restriction order, Barrett J held that the respondents had entered into the transaction after relying in good faith on the advice of qualified professionals and could not be found to have acted irresponsibly.

This same reasoning was applied to the ancillary issues which included errors on the transaction document, an inter-compay loan and an account of company assets with the result that a restriction order under s.150 Companies Act 1990 was not granted.

1 1. This is an application for a restriction order under s. 150 of the Companies Act 1990, as amended, in respect of each of Mr. Karl Donohue, Ms. Ruth Donohue and Ms. Edith Donohue. The key issue arising in the case is the extent to which directors may be held liable in law when they rely on the advices and services of professional advisors.

Facts

2 2. Mr. Karl Donohue, Ms. Ruth Donohue and Ms. Edith Donohue were directors of Gerdando Limited at the date of commencement of its winding-up. Gerdando was incorporated on 2 ^nd November, 1995. It was the proprietor of two 'Eddie Rocket's' restaurants in County Dublin. Gerdando sublet its lease in one of the restaurant premises to an operations company that is also in liquidation at this time. The liquidator of Gerdando has suggested in his affidavit evidence that there were two main reasons for the company's insolvency. The first was the failure of the operations company to pay rent to Gerdando during 2009. The second was a 'reorganisation' in 2008 of the corporate arrangements through which the restaurants were operated by the Donohues, the legitimate intention underpinning this reorganisation being that each restaurant business should be owned and operated by a separate company. It is claimed that this reorganisation was done in breach of the Companies Acts and the fiduciary duties of the Donohues as directors in that it entailed a distribution that was allegedly done in breach of s. 45 of the Companies (Amendment) Act 1983.

3 3. Under s. 150 of the 1990 Act, the court must grant the declarations sought in these proceedings unless satisfied that any of a variety of circumstances identified in s. 150(2) pertain, the relevant circumstances in this case being that each of the Donohues, insofar as application is made in respect of him or her, acted (a) honestly and (b) responsibly in relation to the conduct of the affairs of Gerdando and (c) there is no other reason why it would be just and equitable that an order under s. 150 should issue. In the course of the proceedings before the court it became apparent, and the court finds, that there is no issue as to the honesty of any of the Donohues and, apart from the issue of whether they acted responsibly in relation to the conduct of the affairs of Gerdando, there is no other ground on which a s. 150 declaration should issue against any of them. Thus the only substantive issue that survives for the court to consider, from a s. 150 perspective, is whether the Donohues acted responsibly in relation to the conduct of the affairs of Gerdando, in particular as regards the reorganisation that was effected in 2008.

4 4. Under the 2008 reorganisation, the undertaking of Gerdando was transferred to a company called Terenure Restaurants Limited, in return for which the latter company issued shares to Mr. Karl Donohue and Ms. Ruth Donohue in the same proportion as their shareholdings in Gerdando. This form of transaction is sometimes called a 'three-party swap' and, if done in accordance with the law, represents a tax- efficient method of corporate reorganisation. As mentioned, it has been suggested that the 2008 reorganisation involved a breach of s. 45 of the 1983 Act. It is not necessary for the court in deciding the application now before it to decide whether in fact a breach of s. 45 occurred. Instead, for the reasons stated above, the court needs merely to decide whether the Donohues acted responsibly in effecting the reorganisation in the manner that they did. To this end, Mr. Donohue avers in his affidavit evidence that:

"As appears from the foregoing, the Respondents [the Donohues] sought to restructure the business…but the manner in which that restructuring took place was devised by the Company's professional advisers. They also took steps to give effect to the Transaction....The Applicant asserts…that the other directors and I did not concern ourselves to ensure that the requirements of the Companies Acts were complied with. Neither I nor the other directors are experts in accountancy, tax law or company law. It is true that we sought to reorganise our companies in the most tax efficient manner possible. In order to do so, we engaged the services of appropriate experts to advise on all aspects of the Transaction. I say and believe that it was reasonable for us to assume that those experts were aware of all of the legal implications of the Transaction, that they would bring such implications to our attention and that they would structure the Transaction in such a way as to ensure compliance with all relevant legal obligations. If it is the case that the Transaction contravened provisions of the Companies Acts, that was never our intention and did not, I say and believe, arise as a result of any lack of honesty or responsibility on my part or on that of the Second or Third Named Respondents."

5 5. It is perhaps worth noting in passing that an independent report of 29 ^th June, 2012, produced, at the behest of the respondents, by Hughes Blake, a prominent firm of accountants, concludes in effect that the...