Re Missford Ltd (t/a Residence Members Club)

• Jurisdiction: Ireland
• Judge: Mr. Justice Kelly
• Judgment Date: 20 January 2010
• Neutral Citation: [2010] IEHC 11
• Court: High Court
• Date: 20 January 2010

[2010] IEHC 11

THE HIGH COURT

[No. 2 COS/2010]

Missford Ltd (t/a Residence Members Club), In Re

IN THE MATTER OF MISSFORD LIMITED TRADING AS RESIDENCE MEMBERS CLUB AND IN THE MATTER OF THE COMPANIES (AMENDMENT) ACT 1990, AS AMENDED

COMPANIES (AMDT) ACT 1990 S2

COMPANIES ACT 1963 S297

COMPANIES ACT 1963 S297A

COMPANIES (AMDT) ACT 1990 S2(2)

GALLIUM LTD (T/A FIRST EQUITY GROUP), IN RE UNREP SUPREME 3.2.2009 2009 IESC 8

TRAFFIC GROUP LTD, IN RE 2008 3 IR 253 2008 2 ILRM 1 2007/58/12501 2007 IEHC 445

COMPANIES (AMDT) ACT 1990 S9

COMPANY LAW

Examinership

Discretion of court - Survival - Reasonable prospect - No net profit made by company since commencement of trading - Propriety of behaviour by company in question - Difficulties with revenue commissioners - Large company loans - Reasonable prospect of survival shown by independent accountant - Threshold of proof met - Whether examiner should be appointed - Whether discretion of court exercised - Companies (Amendment) Act 1990 (No 27) ss 2, 297, 297A - In Re Traffic Group Ltd [2007] IEHC 445 [2008] 3 IR 253 and In Re Gallium Ltd [2009] IESC 8 (Unrep, Supreme Court, 3/2/2009) applied - Petition refused (2010/2COS - Kelly J - 20/1/2010) [2010] IEHC 11

In Re Missford Ltd

Facts: The company at issue petitioned to have an examiner appointed to it pursuant to s. 2 Companies (Amendment) Act 1990, as amended. The company had never traded profitably and the trading had been done with the benefit of funds due to the Revenue Commissioner. The company made incorrect returns of VAT, PAYE and PRIS contributions. The company was a private members club. The Revenue Commissioners had a position of guarded neutrality as to the application. The company had incurred significant capital expenditure and the independent accountant had reported survival as a going concern, subject to five conditions. The issue arose as to whether proceedings pursuant to ss. 297 or 297A of the Companies Act 1963 might become necessary and whether an examiner could be appointed.

Held by Kelly J. that the petition would be dismissed and the court would refuse to appoint an examiner. The protection of the court would be withdrawn. With an examiner in situ, it was likely that there would be a further reduction in the number of staff employed. On refusing the appointment of an examiner, with the bank would appoint a receiver or alternatively the court would appoint a liquidator or perhaps both. The real attraction of the business was its venue. The secured creditors were well-secured. The unsecured creditors were unlikely to do much better in the case of an examinership.

Reporter: E.F

1 Mr. Justice Kelly delivered on the 20th day of January, 2010

Introduction

2 Missford Limited (the Company) petitions to have an examiner appointed to it pursuant to the provisions of s. 2 of the Companies (Amendment) Act 1990, as amended. If an examiner is appointed it hopes to have a scheme of arrangement approved by the court so that it "can continue to trade profitably". (Vide p. 26 of the Petition)

3 In fact the Company has never traded profitably and such trading as it has done has been with the benefit of funds due to the Revenue Commissioners.

Background

4 The company was incorporated on 29 ^th November, 2006, but commenced trading as recently as May 2008. It has a nominal capital of€1m of which only €100 is paid up. The principal shareholders are Simon, Christian and Geoffrey Stokes, each of whom holds 33 shares and David McDonnell who holds a single share. There are two directors of the company namely Simon and Christian Stokes.

5 It is a remarkable feature of the company that it has never made a net profit since it commenced trading. During that period it made incorrect returns to the Revenue Commissioners in respect of both Value Added Tax, PAYE tax and PRSI contributions. This has given rise to a debt in favour of the Revenue Commissioners in the sum of €1.2m. The Company is insolvent and it appears to me has been so for a considerable period of time.

6 The Company has a leasehold interest in premises at 41 St. Stephen's Green where it operates what is called a private member's club. The club is called "The Residence". It is not typical of the normal private member's club in that its facilities at St. Stephen's Green include a bar and nightclub which are open to members of the public.

7 The Company's sources of income are membership subscriptions and food and beverage sales. It has 1,450 members each of whom pays an annual subscription.

8 Despite substantial increases in the amounts realised by way of membership subscriptions and the proceeds of food and beverage sales between 2008 and 2009, the losses sustained by the Company increased from €674,957 in 2008 to €678,342 up to the end of November 2009.

9 The petition attributes these losses as being "primarily due to administrative expenses, depreciation, interest payable and VAT, PAYE/PRSI under returned". I will have more to say about this later in this judgment.

The reasons for the company's difficulties

10 Paragraphs 13 and 14 of the petition purport to deal with this topic. Three reasons are identified.

11 (1) The first involves a loan of €616,709 which the Company made to related companies called Mayfair Properties Limited trading as Bang Café and Auldcarn Limited.

12 With little regard for the obligations of company law, the Company did not operate a bank account from its incorporation until February 2008 which was some six months after it commenced its renovation works on the property.

13 The bank account of Mayfair Properties trading as Bang Café was used as the Company's bank account. Membership subscriptions and bank finance were lodged into that account. The Company's monies in Mayfair's account were then used to discharge liabilities of the Company. The independent accountant in a supplemental affidavit sworn by him on 12 ^th January, 2010, expressed concern at the accuracy of the recording of inter-company transactions because there were significant differences and potential errors in the inter-company balances of each company. He attempted a reconciliation and was partially successful in so doing. He concluded that whilst there was undoubtedly an inter-company balance owing to the Company by Mayfair, he was unable to quantify it. He also established that there was an inter-company balance with Auldcarn Limited in the sum of €113,105.

14 In oral testimony he expressed the view that these matters require further investigation and inquiry by an examiner if appointed. In the course of his evidence he qualified the expression of opinion contained in his independent accountant's report at Section 10. In that section, he indicated that he had not identified any matters which would warrant further inquiries with a view to proceedings under s. 297 or 297A of the Companies Act.

15 (2) The second reason which is given for the Company's difficulties is described as follows:-

"The Company under declared VAT of approximately €207,118 and PAYE/PRSI of approximately €173,770 for the period January to June 2009. This was only identified in July 2009 after the Company hired a new financial controller. This additional liability, coupled with the Revenue Commissioners issuing an attachment order on the Company's bank account in or around 17 ^th December, 2009, has put a further strain on the Company's finances. The Company's liability to the Revenue Commissioners is approximately €1.2m, €956,092 of which would rank as a preferential claim in a liquidation of the Company."

16 The attachment issued by the Revenue Commissioners arose after they had prudently decided to conduct an audit of the Company's affairs in September 2009. That audit arose because of a claim for a VAT refund made on behalf of the Company. Supporting documentation was not furnished when the claim was made. The Revenue Commissioners requested such documents and the Company's new financial controller identified that the Company was not in a VAT refund position at all but was in fact indebted to the Revenue Commissioners. The audit was carried out resulting in an assessment of €472,000 plus penalties being raised. That liability was not discharged and so the Company's bank account was attached on 17 ^th December, 2009. The account was in credit for €87,000.

17 It is clear from the evidence given to me viva voce by the independent accountant that it was the attachment issued by the Revenue Commissioners which triggered the decision to apply to this Court for protection under the examinership legislation.

18 Blame is attached to the former financial controller of the Company in respect of this state of affairs. In fairness, the directors, through counsel, accept that they carry responsibility for this matter. That said, it is difficult to understand, given the size and the single site location of the Company's business, that they could have been totally unaware of miscreancy of this order.

19 (3) The third reason given for the Company's difficulties is the incurring of capital expenditure on the premises prior to the commencement of trade. That was funded by borrowings of approximately €2.3m and lease finance of approximately €300,000. A further €800,000 was expended and funded out of what is described as "working capital". I will return to that description later in this ruling.

Creditors

20 The single biggest creditor is Zurich Bank. It supports the Company's application. It is owed €2.3m but is well secured in that regard. It holds a first legal charge over the leasehold interest in the premises, 41 St. Stephen's Green, Dublin 2. In addition, it has a floating charge over all of the assets of the Company. It also holds an assignment over the licence attaching to the bar/club. It has...