Re Cognotec Ltd ((in Receivership))

• Jurisdiction: Ireland
• Judge: Mr. Justice Brian J. McGovern
• Judgment Date: 30 July 2010
• Neutral Citation: [2010] IEHC 309
• Docket Number: [No. 191 COS/2010]
• Court: High Court
• Date: 30 July 2010

[2010] IEHC 309

THE HIGH COURT

[No. 191 COS/2010]

Cognotec Ltd (In Receivership), In Re

COMMERCIAL

IN THE MATTER OF COGNOTEC LIMITED (IN RECEIVERSHIP)

AND

IN THE MATTER OF SECTION 316 OF THE COMPANIES ACT 1963

COMPANIES ACT 1963 S316

COMPANIES ACT 1963 S60

COMPANIES ACT 1963 S60(10)

COMPANIES ACT 1963 S316(3)

COMPANIES ACT 1963 S60(14)

COMPANIES ACT 1963 S60(3)

COMPANIES ACT 1963 S60(4)

BANK OF IRELAND FINANCE LTD v ROCKFIELD LTD 1979 IR 21

COMPANIES ACT 1963 S60(1)

LOMBARD & ULSTER BANKING LTD v BANK OF IRELAND & BROOKHOUSE SCHOOL 1988 DULJ 146 1987/7/1847

COMPANIES ACT 1963 S60(2)(B)

LASCOMME LTD T/A BALLYGLASS HOUSE HOTEL v UNITED DOMINIONS TRUST (IRL) LTD 1993 3 IR 412 1994 1 ILRM 227 1993/12/3919

COMPANIES ACT 1963 S60(15)

NL ELECTRICAL, IN RE; GHOSH & ANOR v 3I PLC 1994 1 BCLC 22

COMPANY LAW

Receivership

Directions - Debenture - Validity - Directions as to validity of appointment of receiver - Whether debenture invalidated by breach of company law - Whether company estopped from voiding debenture - Whether receiver entitled to pay proceeds of sale of property on foot of debenture - Execution of debenture forming security for borrowings - Loan for purpose of providing financial assistance in connection with purchase of shares of company - Obligation of directors to make statutory declaration - Undertaking by solicitors to deliver statutory declaration to companies registration office - Failure to deliver undertaking within relevant period - Onus of establishing person on notice of breach - Whether actual or constructive notice required - Meeting of directors purporting to void security - Whether power to convene meeting when steps taken to validate procedure at earlier date - Whether bank had actual notice of fact constituting breach - Absence of actual notice - Bank of Ireland Finance Ltd v Rockfield Ltd [1979] IR 21; Lombard and Ulster Banking Ltd v Bank of Ireland (Unrep, Costello J, 2/6/1997); United Dominions Trust (Ireland) Ltd [1993] IR 412 and Re NL Electrical Ltd [1994] 1 BCLC 22 considered - Companies Act 1963 (No 33), ss 60 and 316 - Direction that debenture valid (2010/191COS - McGovern J - 30/7/2010) [2010] IEHC 309

Re Cognotec Limited

Mr. Justice Brian J. McGovern

1 This is an application for direction on foot of s. 316 of the Companies Act1963 ("the Act"). The application is brought on behalf of Kieran Wallace, the receiver of Cognotec Ltd. ("the Company") for:

2 (a) Directions as to the validity of a debenture dated 7^th March, 2006, created by the Company, in favour of Barclays Bank Ireland plc. ("the Bank");

3 (b) directions as to the validity of Kieran Wallace's appointment as receiver of the Company, pursuant to the debenture;

4 (c) a direction that the debenture, the appointment of Kieran Wallace as receiver of the Company, and the Bank's interest, as mortgagee and chargee of any property comprised in the debenture, are not invalidated by any breach of s. 60 of the Companies Act1963;

5 (d) a direction that the Company is estopped from voiding the debenture, pursuant to s. 60(10) of the Companies Act1963, or otherwise;

6 (e) a direction that Kieran Wallace, as receiver of the Company, is entitled to pay to the Bank, the proceeds of the sale of any property sold or otherwise realised by him on foot of and in accordance with the debenture.

7 The plaintiff seeks other consequential relief, including an order, if necessary, pursuant to s. 316(3) of the Companies Act1963, that he be relieved wholly, or to such extent as the court thinks fit, from personal liability in respect of anything done or omitted by him in relation to any property purporting to be compromised in the debenture.

8 2. The Company is in receivership and has ceased trading. It designed and produced computer software used by banks and other financial institutions to assist them in trading in foreign exchange and other financial instruments. Mr. Kieran Wallace was appointed receiver and manager by the Bank on foot of a debenture executed by the Company on 7^th March, 2006. The debenture secured a loan of US$12,500,000. The Bank loaned this money in two tranches to the Company. On 7^th March, 2006, a sum of US$10 million was lent and on 18^th July, 2006, a further sum of US$2,500,000 was drawn down. It was accepted by the parties that this latter sum was not to facilitate the purchase of the Company's shares, but was for the purpose of repaying a loan.

9 3. Of the monies lent by the Bank to the Company, US$10m was provided for the purpose of financial assistance in connection with the purchase or acquisition of its own shares. A reorganisation of the Company involved one of its shareholders (Softbank AM Corporation) selling its shares to the remaining shareholders. The shares were to be held by Cognotec Ireland Ltd. ("Ireland") which, in turn, would be controlled by Cognotec Holdings Ltd. ("Holdings"). The funds were borrowed by Holdings, as borrower, and both Ireland and the Company provided a guarantee to the Bank in respect of the borrowings. Holdings was to lend the funds to Ireland for the purchase of the shares and following the reorganisation of the Company, Holdings would become the holding company of Ireland, and Ireland would, in turn, become the immediate holding company of the Company.

10 4. The Company executed a debenture comprising a fixed and floating charge over its assets (including its Intellectual Property) as security for these borrowings.

11 5. Because the loan was for the purpose of providing financial assistance in connection with the purchase or acquisition of the Company's own shares, s. 60 of the Companies Act 1963, applies. The following are the relevant provisions of s. 60:

12 2 "60(1) Subject to sub-sections (2), (12) and (13), it shall not be lawful for a company to give, whether directly or indirectly, and whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of or in connection with a purchase or subscription made or to be made by any person of or for any shares in the company, or, where the company is a subsidiary company in its holdings company.

13 (2) Sub-section (1) shall not apply to the giving of financial assistance by a company if-

14 (a) such financial assistance is given under the authority of a special resolution of the company passed not more than twelve months previously; and

15 (b) the company has forwarded with each notice of the meeting at which the special resolution is to be considered … a copy of a statutory declaration which complies with sub-sections (3) and (4) and also delivers, within 21 days, after the date on which the financial assistance was given, a copy of the declaration to the Registrar of Companies for Registration.

16 (3) The statutory declaration shall be made at a meeting of the directors held not more than 24 days before the said meeting, and shall be made by the directors or, in the case of a company having more than two directors, by a majority of the directors.

17 (4) The statutory declaration shall state-

18 (a) the form which such assistance is to take;

19 (b) the persons to whom such assistance is to be given;

20 (c) the purpose for which the company intends those persons to use such assistance;

21 (d) that the declarants have made a full enquiry into the affairs of the company and that, having done so, they have formed the opinion that the company, having carried out the transaction whereby such assistance is to be given, will be able to pay its debts in full as they become due."

22 The section provides that, if a director makes a statutory declaration without having reasonable grounds for his opinion that the company will be able to pay its debts in full as they fall due, shall be guilty of an offence and liable to a fine and/or imprisonment or both.

23 6. Sub-section 14 states:

"Any transaction in breach of this section shall be voidable at the incidence of the company against the person (whether a party to the transaction or not) who had notice of the facts which constitute such breach."

24 7. As can be seen from the text of the Act, a copy of the statutory declaration which has to comply with sub-sections (3) and (4) has to be delivered to the Registrar of Companies for Registration within twenty-one days after the date on which the financial assistance was given. That was not done in this case. The Bank maintains that it was not aware of this at the time. It had instructed Messrs. Matheson Ormsby & Prentice, solicitors, to act for them in the transaction. McCann Fitzgerald, solicitors, were acting for the Company, Holdings and the other group company involved. McCann Fitzgerald undertook to deliver the statutory declaration to the Companies Registration Office. For reasons which are unexplained, they did not do so within the relevant period and the Bank only became aware of this default in October 2007.

25 8. Mr. Cregan S.C. for the Company accepted that all necessary steps in the statutory validation procedure were completed except for the delivery a copy of the statutory declaration of the directors to the Registrar of Companies for Registration within twenty-one days after the date on which the financial assistance was given. Therefore, what the court has to consider, in this case, is what was the effect of that failure.

26 9. Section 60(14) provides:

"Any transaction in breach of this section shall be voidable at the instance of the company against any person (whether a party to the transaction or not) who had notice of the facts which constitute such breach."

27 There was no disagreement between the parties as to what kind of notice was required, namely, actual notice. The case ofBank of Ireland...