Re Custom House Capital Ltd

• Jurisdiction: Ireland
• Judge: Mr. Justice Hogan
• Judgment Date: 18 July 2011
• Neutral Citation: [2011] IEHC 298
• Date: 18 July 2011
• Court: High Court
• Docket Number: [2011 No. 219 MCA]

[2011] IEHC 298

THE HIGH COURT

[No. 219 MCA/2011]

Custom House Capital Ltd, In Re

IN THE MATTER OF CUSTOM HOUSE CAPITAL LTD. AND IN THE MATTER OF AN APPLICATION UNDER REGULATION 166 OF THE EUROPEAN COMMUNITIES (MARKETS IN FINANCIAL INSTRUMENTS) REGULATIONS 2007

AND IN THE MATTER OF AN APPLICATION BY THE CENTRAL BANK OF IRELAND

EUROPEAN COMMUNITIES (MARKETS IN FINANCIAL INSTRUMENTS) REGS 2007 SI 60/2007 REG 166(1)

CENTRAL BANK ACT 1942 PART IIIC

KIBERD & CAREY v HAMILTON 1992 2 IR 257 1992 ILRM 574 1992/3/654

EUROPEAN COMMUNITIES (MARKETS IN FINANCIAL INSTRUMENTS) REGS 2007 SI 60/2007 REG 166(2)

EUROPEAN COMMUNITIES (MARKETS IN FINANCIAL INSTRUMENTS) REGS 2007 SI 60/2007 REG 166(2)(B)

EUROPEAN COMMUNITIES (MARKETS IN FINANCIAL INSTRUMENTS) REGS 2007 SI 60/2007 REG 166(3)

KEATING v JUDGE CROWLEY & ORS 2002 2 IR 744 2003 1 ILRM 88 2002/14/3380

DELLWAY INVESTMENTS LTD & ORS v NATIONAL ASSET MANAGEMENT AGENCY (NAMA) & ORS (NO 2) UNREP SUPREME 12.4.2011 2011 IESC 14

DOMESTIC VIOLENCE ACT 1996 S4

EAST DONEGAL CO-OPERATIVE LIVESTOCK MART LTD & ORS v AG 1970 IR 317

O CEALLAIGH v BORD ALTRANAIS 2000 4 IR 54 2000/2/648

CONSTITUTION ART 40.3.1

CONSTITUTION ART 40.3.2

COMPANY LAW

Inspectors

Appointment - Fair procedures - Proportionality - Statutory interpretation - Ex parte order - Appointment of inspectors to company - Whether ex parte appointment of inspectors interim or final order - Whether ex parte final order appointing inspectors unconstitutional - DK v Crowley [2002] 2 IR 744; Dellway Investments Ltd v National Asset Management Agency (No 2) [2011] IESC 14 (Unrep, SC, 12/4/2011) applied - European Communities (Markets in Financial Instruments) Regulations 2007 (SI 60/2007), reg 166 - Constitution of Ireland 1937, Articles 40.1, 40.3.1 and 40.3.2 - Interim order appointing spectators with return date granted (2011/219MCA - Hogan J - 18/7/2011) [2011] IEHC 298

Re Custom House Capital Ltd

1 1. In the late evening of 15 ^th July, 2011, on the ex parte application of the Central Bank of Ireland, I made an order pursuant to Article 166(1) of the European Communities (Market in Financial Instruments) Regulations 2007 (S.I. No. 60 of 2007) ("the MiFID Regulations") providing for the appointment of two inspectors, George Treacy and Noel Thompson, to Custom House Capital Ltd. ("Custom House"). Mr. Treacy is the head of the Investments Service Providers Supervision division of the Central Bank and Mr. Thompson is an authorised officer within that division. Since this was the first occasion an application of this kind has been by the Central Bank, it seems appropriate that the reasons for my decision be set out briefly in writing.

The background to the application

2 2. Custom House is an investment fund management firm which was incorporated in 1997 with its registered office in Merrion Square, Dublin 2. In March, 2011 the firm reported to the Central Bank that it had approximately assets in value to some €1.15bn. under management on behalf of its clients and that it held approximately €24m. in cash in designated client accounts.

3 3. Between 2009-2010 there were extensive contacts between the Central Bank and Custom House following the receipt of information from an individual to the effect that some clients' monies were being invested without their knowledge or consent in an investment framework described as the Mezzanine Bond Fund. According to Custom House's own promotional literature, it appears that the fund had been created in order to enable it (i.e., Custom House) to assist in the short term financing of properties in the European market.

4 4. Along with members of the prominent accountancy firm, KPMG, Mr. Thompson was then appointed as an authorised officer to investigate a sample of property transactions which included such mezzanine financing. Further directions were then given under the MiFID Regulations. These included a requirement that Custom House clarify the financial position of each syndicated special purpose vehicle for individual properties by reference to identifying current valuations compared with the valuation at the time of purchase along with any shortfalls in equity being raised and that the level of regulatory capital be raised to €5m. to cover potential liabilities arising from the Mezzanine Bond.

5 5. Further directions issued in April 2010 and these directions were (with one minor exception) renewed in April 2011. These directions included a direction not pay any dividends to shareholders or to provide any loan to a director. Significant restrictions on the right of the firm to advertise for or solicit new business were also imposed.

6 6. In February, 2011 the Central Bank wrote to Custom House and Mr. Harry Cassidy (the chief executive officer) alleging breaches of regulatory requirements relating to the sale of the mezzanine bond to clients and an administrative sanctions procedure under Part IIIC of the Central Bank Act 1942 (as amended) was initiated. Responses were supplied by Custom House in April, 2011.

7 7. So far as the mezzanine bond is concerned, the evidence to date suggests that over €10m. is owed to investors. The regulatory capital requirement of €5m. which the Central Bank imposed has been varied to take account of the fact that Custom House now has to deduct any contingent liability arising on the mezzanine bond when calculating its regulatory capital. A further complication is that the Central Bank maintains that inconsistent views have been expressed by Custom House as to whether the mezzanine investors rank pari passu with ordinary equity investors in the special purpose vehicle or whether the former enjoy priority. This uncertainty clearly had implications for the question of whether Custom House's capital reserves were adequate for this purpose.

8 8. These developments obviously gave grounds for concern. These concerns were plainly heightened by developments which have taken place within the last few days. According to the grounding affidavit sworn by Mr. Thompson, a senior staff member of Custom House requested a meeting with Central Bank on 11 ^th July. At that meeting, the staff member concerned expressed concern that monies may have been taken from pooled client asset accounts by Custom House without appropriate authority and used to cover shortfalls in property investments on behalf of clients. It was similarly contended that equity unit trusts and cash unit trusts were also improperly used in this way. There is concern that the shortfall in respect of the trust assets may be upwards of €13m.

9 9. Running in tandem with this are the separate concerns voiced by Appian Asset Management Ltd. ("Appian") and Mr. John O'Dwyer, the Chairman of Custom House. Appian entered into a services agreement with Custom House in May, 2011 and it is duly authorised under the MiFID Regulations for this purpose. In the course of familiarising itself with the services to be rendered, Appian became aware of certain apparent discrepancies in records of the firm relating to some clients. These included incomplete information between valuations of assets supplied to certain clients and the underlying records of Custom House relating to those client's accounts, along with other issues relevant to the security and good order of the holding of client assets. In the light of these developments it appears that Appian are now taking steps to terminate their appointment with Custom House. It is proper to record that Appian at all times have acted with utmost propriety and have been very helpful and co-operative with the Central Bank.

10 10. Mr. O'Dwyer had been asked to join the firm as a non-executive director in 2009 in the wake of a request from the Central Bank to strengthen the board by bringing in an experienced outsider who could assist the independence of the decision making within the company. To that end, Mr. O'Dwyer agreed to join Custom House in July 2010 and he subsequently took over the role of Chairman in late 2010. It is equally proper to record that Mr. O'Dwyer's integrity is beyond question and that illness this year hampered his ability to perform his task as Chairman.

11 11. On 11 ^th July Mr. Thompson received a telephone conversation from Mr. O'Dwyer in which the latter stated that he could no longer regard the information he received from Custom House as dependable. While senior figures within the company had assured Mr. O'Dwyer over the weekend of July 9-10 that investor monies had not been...