Re Hefferon Kearns Ltd (No. 2)

• Jurisdiction: Ireland
• Judgment Date: 14 January 1993
• Date: 14 January 1993
• Docket Number: [1990 No. 14426P]
• Court: High Court

High Court

[1990 No. 14426P]

In re Hefferon Kearns Ltd. (No. 2)

In the matter of Hefferon Kearns Ltd. (under the protection of the Court) (No. 2) And in the matter of Section 33 of the Companies Act

1990

on the application of Dublin Heating Company Ltd

Dublin Heating Company Ltd.

Plaintiff

and

Thomas Hefferon, Michael Kearns, Cosmo Mellon and Finbar O'Neill

Defendants

Cases mentioned in this report:—

Andrews v. D.P.P. [1937] A.C. 576; [1937] 2 All E.R. 552.

Angus v. Clifford [1891] 2 Ch. 449.

Battle v. Irish Art Promotion Centre Ltd. [1968] I.R. 252.

Breslin v. Brennan [1937] I.R. 350.

Donovan v. Landys Ltd. [1963] I.R. 441.

In re Hefferon Kearns Ltd. (No. 1) [1993] 3 I.R. 177; [1992] I.L.R.M. 51.

Excelsior Wire Rope Co. Ltd. v. Callan [1930] A.C. 404; (1930) 142 L.T. 53; (1930) 99 L.J.K.B. 380.

Gardner v. Lucas (1878) 2 App. Cas. 582.

Hamilton v. Hamilton [1982] I.R. 466; [1982] I.L.R.M. 290.

In re Hunting Lodges Ltd. (In Liquidation) [1985] I.L.R.M. 75.

O'H. v. O'H. [1991] I.L.R.M. 108.

Re Produce Marketing Consortium Ltd. (No. 2) [1989] B.C.L.C. 520.

R. v. Bates and Russell [1953] 1 W.L.R. 77.

R. v. Grunwald [1961] 2 W.L.R. 606; [1960] 3 All E.R. 380.

R. v. MacKinnon [1959] 1 Q.B. 150; [1951] 3 All E.R. 657.

Albert E. Reed & Co. Ltd. v. London & Rochester Trading Co. Ltd.[1954] 2 Lloyds Rep. 463.

Salomon v. Salomon & Co. Ltd. [1897] A.C. 22; (1897) 66 L.J.Ch. 35; (1897) 75 L.T. 426.

Shawinigan v. Vokins [1961] 2 Lloyds Rep. 153.

Re West Mercia Safety Wear Ltd. [1988] B.C.L.C. 250.

Company - Reckless trading - Officers - Directors - Company under protection of court - Liability of officers for debts of company without limitation - Whether necessary for plaintiff to establish fraud - Whether officers could be liable for debts incurred prior to commencement date of legislation - Whether acts or knowledge prior to commencement date relevant - Whether liability of directors collective or individual - Meaning of "reckless trading" - Whether reckless trading established - Nature of court's power to relieve officer of personal liability despite finding of reckless trading - Whether plaintiff suffering loss and damage - Whether losses attributable to reckless trading by defendants - Whether trivial amount constituting "loss and damage" - Companies (Amendment) Act, 1990 (No. 27), s. 33 - Companies Act, 1990 (No. 33), s. 297A.

Words and phrases - "Knowingly a party to carrying on any business of the company in a reckless manner" - Companies (Amendment) Act, 1990 (No. 27), s. 33, sub-s. 1 (a).

Originating Notice of Motion.

The facts and the relevant statutory provisions are summarised in the headnote and are fully set out in the judgment of Lynch J., infra.

By notice of application dated the 11th December, 1990, the plaintiff sought, inter alia:

• (a) A declaration that the defendants were knowingly party to the carrying on of the business of Hefferon Kearns Ltd. in a reckless manner.

• (b) A declaration that the defendants be personally liable without any limitation of liability for all of the debts of the company.

• (c) An order directing that such sums recovered from the defendants should be paid firstly to discharge the indebtedness of the company to the plaintiff.

• (d) Such directions as the court might think fit as to pleadings.

Pursuant to notice of motion dated the 14th December, 1990, the plaintiff applied to the High Court (Costello J.) for directions in relation to pleadings; it was ordered that points of claim be filed by the 7th January, 1991. The points of claim sought the relief set out above.

By order of the High Court (Carroll J.) made on the 21st February, 1991, a fifth defendant was struck out of the proceedings. On the 20th February, 1991, the High Court (Murphy J.) tried the following preliminary issues:—

• (a) Whether the liability created by s. 33, sub-s. 1 (a) was retrospective in its effect?

• (b) Whether the plaintiff was precluded from bringing its claim at that time by virtue of s. 5 of the Companies (Amendment) Act, 1990?

• (c) Whether the court had jurisdiction to make an order under s. 33, on the application of a creditor, while the company was under the protection of the court?

In a reserved judgment, delivered on the 5th July, 1991, and reportedante at p. 177 those questions were answered as follows:—

• (a) No.

• (b) No.

• (c) It was agreed by the parties that the issue no longer arose.

The substantive application came on for hearing before the High Court (Lynch J.) on the 24th, 25th, 26th and 27th November and the 1st, 2nd, 3rd, 4th and 8th December, 1992.

Section 33 of the Companies (Amendment) Act, 1990 (now repealed but substantially re-enacted as s. 297A of the Companies Act, 1963), dealt with the liability, in certain circumstances of the officers of a company under the protection of the court. Section 33, sub-s. 1 provided as follows:—

"If in the course of proceedings under this Act it appears that -

• (a) any person was, while an officer of the company, knowingly a party to the carrying on of any business of the company in a reckless manner; or

• (b) any person was knowingly a party to the carrying on of any business of the company with intent to defraud creditors of the company, or creditors of any other person or for any fraudulent purpose;

the court, on the application of the examiner, or any creditor or contributory of the company, may, if it thinks it proper to do so, declare that such person shall be personally responsible, without any limitation of liability, for all or any part of the debts or other liabilities of the company as the court may direct."

Section 33, sub-s. 2 of the Act of 1990 provided as follows:—

"Without prejudice to the generality of subsection (1) (a), an officer of a company shall be deemed to have been knowingly a party to the carrying on of any business of a company in a reckless manner if -

• (a) he was a party to the carrying on of such business and, having regard to the general knowledge, skill and experience that may reasonably be expected of a person in his position, he ought to have known that his actions or those of the company would cause loss to the creditors of the company, or any of them, or

• (b) he was a party to the contracting of a debt by the company and did not honestly believe on reasonable grounds that the company would be able to pay the debt when it fell due for payment as well as all its other debts (taking into account the contingent and prospective liabilities)."

Section 33, sub-s. 3 of the Act of 1990 provided as follows:—

"Notwithstanding anything contained in subsection (1), the court may grant a declaration on the grounds set out in paragraph (a) of that subsection only if -

• (a) paragraph (a), (b) or (c) of section 214 of the Principal Act applies to the company concerned, and

• (b) an applicant for such a declaration, being a creditor or contributory of the company, or any person on whose behalf such application is made, suffered loss or damage as a consequence of any behaviour mentioned in subsection (1)."

Section 33, sub-s. 4 provided that in deciding whether it was proper to make an order on the grounds set out in s. 33, sub-s. 2 (b), the court should have regard to whether the creditor in question assented to the incurring of the debt while aware of "the company's financial state of affairs."

Section 33, sub-s. 6 of the Act of 1990 provided as follows:—

"Where it appears to the court that any person in respect of whom a declaration has been sought under subsection (1) (a) has acted honestly and responsibly in relation to the conduct of the affairs of the company or any matter or matters on the grounds of which such declaration is sought to be made, the court may, having regard to all the circumstances of the case, relieve him either wholly or in part, from personal liability on such terms as it may think fit."

The provisions of s. 33 came into effect on the 29th August, 1990.

The defendants were the directors of a private company engaged in the business of a building contractor, and held 85% of its shares. The company had been engaged on three main contracts -

• (a) a residential development for a company known as S. Ltd., in which the first and second defendants held 57% of the shares;

• (b) a residential development for a company known as D. Ltd., in which the first and second defendants held all of the shares;

• (c) a residential development for a company known as I.D.N. Ltd., in which none of the defendants held any shares, and which was the only scheme for which there was a formal building contract.

The plaintiff was engaged as a sub-contractor on these contracts, and had assumed that the company was the developer and owned the land in all of them. The company was also involved in a number of other contracts, including work on the defendants' own homes, performed at 105% of the cost price, plus value-added tax. The first defendant was the de facto managing director of the company.

The company had commenced trading in January, 1989. Management accounts showed a net loss for the six months ending the 30th June, 1989, of £73,101; but the loss for the year as a whole was only £8,113. For the year 1990, management accounts were prepared every two months. These showed mounting losses, so that the accounts up to the 30th June, 1990, which became available to the defendants on the 22nd August, 1990, showed a balance sheet deficit of £142,507.

In July, 1990, the first and second defendants had personally borrowed £45,000 from a bank so that related companies could discharge their debts to the company, thereby improving its liquidity. At the end of June, 1990, the defendants had considered the company's position, taking into account the payments referred to above, and had resolved to continue trading, in the belief that the losses could be reversed by the end of the year.

At around the same time, an independent surveyor...