Re Wogan's (Drogheda) Ltd

• Jurisdiction: Ireland
• Judge: Mr. Justice Costello,MR JUSTICE DECLAN COSTELLO
• Judgment Date: 09 February 1993
• Neutral Citation: 1992 WJSC-HC 2889,1993 WJSC-HC 2783
• Docket Number: No. 15465P/1991,No.15465P/1991
• Court: High Court
• Date: 09 February 1993

1992 WJSC-HC 2889

THE HIGH COURT

No.15465P/1991

WOGAN'S (DROGHEDA) LTD

IN THE MATTER OF WOGANS (DROGHEDA) LIMITED (UNDER THE PROTECTION OF THE COURT)

AND IN THE MATTER OF THE COMPANIES (AMENDMENT) ACT1990

Citations:

COMPANIES (AMDT) ACT 1990 S2

COMPANIES (AMDT) ACT 1990 S14

COMPANIES (AMDT) ACT 1990 S15(2)

FINANCE ACT 1970 S14(1)

COMPANIES (AMDT) ACT 1990 S25

COMPANIES (AMDT) ACT 1990 S24(3)

COMPANIES (AMDT) ACT 1990 S15

COMPANIES (AMDT) ACT 1990 S18

Synopsis:

COMPANY

Insolvency

Court - Protection - Examiner - Proposals - Confirmation - Petition ~uberrimae fidei~ - Affidavit - Concealment of extent of in debtedness - Tax clearance sought - Proposals ignored guarantees of directors - Confirmation refused - Companies (Amendment) Act, 1990, ss. 2, 14, 18, 24 - (1991/15465 P - Costello J. - 7/5/92)

|In re Wogans (Drogheda Ltd.|

EVIDENCE

Affidavit

Deponent - Bona fides - Absence - Company - Director - Petition - Verification - Abuse of process of court - Petition dismissed - (1991/15465 P - Costello J. - 7/5/92)

|In re Wogans (Ireland) Ltd.|

MR JUSTICE DECLAN COSTELLO

1 Wogans (Drogheda) Limited was established in 1981 and thereafter carried on business in Drogheda as traders in hardware products and suppliers to the building trade. Initially the company traded successfully achieving a turnover of £1.84M by 1985 and employing more than 20 employees. However, from 1st April 1989 to 31st December 1990 it sustained a substantial loss of £454,000 and continued trading at a further substantial loss in 1991. It became insolvent, but instead of applying to wind up the company a petition was presented by the company on 19th December 1991 under section 2 of the Companies (Amendment) Act1990.It is a family company run by two brothers who are two of its three directors. The petition under section 2 of the 1990 Act was heard on 13th January 1992 and a protection order was made and an examiner appointed. The examiner's section 15 report was presented on 10th February 1992 (the time for doing so having been extended). He prepared a scheme of arrangement and presented it to the members and creditors at meetings on 31st March 1992. He then presented his report under section 18 to the Court and I heard the application to confirm the scheme on 29th and 30th April 1992.

2 The company has continued to trade at what the examiner described as a small loss.

3 The scheme involves the investment in the company of a Dublin firm (Dublin Providers Limited) which has successfully traded in the hardware trade in different parts of Ireland. The scheme will involve the purchase by the new investors of the issued share capital and the appointment of new directors (although one former director will be retained as an employee). The scheme will materially affect the interests of the company's two major creditors, one of which is Hill Samuel (Ireland) Limited, which is owed approximately £462,300 which is secured by a mortgage and a fixed and floating charge. The scheme proposed will result in the debt being written down to £235,000 and the revised amount being restructured as a 7-year term loan with a moratorium on repayment of principal for one year, thereafter payments to be made by equal quarterly amounts with interest as specified on the reducing balance. The other major creditor are the Revenue Commissioners. The total due to the Revenue Commissioners on 13th January 1992 was £293,402.71p, of which only a portion was a preferential debt. Under the proposed scheme the preferential amount was to be £82,598. The scheme involved a total payment to the Revenue Commissioners (over a period of years) of £73,467, that is about 25 per cent of the total taxes due. Both the Bank and the Revenue Commissioners voted against the scheme and objected to its confirmation. The total debt due to the unsecured creditors is £857,800 approximately. Most of these creditors are small creditors and they are to be paid 10 per cent of the sums due to them. A majority in number and value of the unsecured creditors voted to accept the scheme.

4 An issue arose in the course of the protection period relating to the fixed charge over the company's book debts to which the Bank claims to be entitled. The High Court decided that the fixed charge did not capture the book debts. On appeal the Supreme Court held that it did. But section 15 of the1986Finance Act enables the Revenue Commissioners to recover those book debts in priority to the Bank. As they propose to operate the section, this means that the Revenue Commissioners will become entitled to a payment of £92,317 or about 31 per cent of the total tax due on 13th January 1992. Notwithstanding this improvement, the Revenue Commissioners maintain their objections.

5 Having carefully considered the scheme (and the suggested amendments to it proposed during the hearing) and the submissions made, I have come to the conclusion that I should not confirm it (a) because the evidence discloses that there was an abuse of the processes of the Court at the time of the original application for protection on 13th January 1992; (b) because confirmation is conditional on orders being made relating to certain taxation issues which I do not think I should make; (c) because there are defects in the scheme which the examiner negotiated with the new investor of such a nature which preclude its confirmation.

6 The petition was presented in the Central Office on 19th December 1991 by the company itself. The petition set out in summary form the company's balance sheet. This showed that the company's principal creditors were (a) the Bank at £430,000, (b) the Revenue Commissioners at £124,000 and (c) the directors at £100,000. Its total assets were shown as £1,026,000, its total liabilities at £1,364,000, leaving a deficiency of £338,000. The truth of the statements in this petition were verified by the affidavit of Mr Brian Waldron sworn on 18th December 1991.

7 Section 14 of the Act requires the directors after an appointment of an examiner to swear an affidavit giving particulars, inter alia, of the company's assets, debts and liabilities. The examiner was appointed on 13th January 1992. Complying with section 14, the directors swore an affidavit shortly afterwards which disclosed a situation considerably and materially different to that shown in the petition and which had been verified by an affidavit of one of the directors of the company. The new balance sheet showed a deficit of £776,578. The examiner's view was that the discrepancy between the two balance sheets arose because the assets had been overstated by £151,000 and the liabilities understated by £287,000 in the December petition. Of most significance, however, was that the section 14 affidavit disclosed that the debt due to the Revenue Commissioners had been undervalued in the petition by £180,000 approximately. This undervalue was not due to any book-keeping or accounting error. The undisclosed debt to the Revenue Commissioners was made up of approximately £111,000 for PAYE and PRSI due on wages paid by the company to its employees and not disclosed to the Revenue, and interest on arrears of tax (mainly in respect of PAYE and PRSI liabilities) and £10,000 in respect of other liabilities. Furthermore, in his section 15 report the examiner concluded that the deficit shown in the section 14 affidavit was itself understated. According to him, the true deficiency was £973,294 (not £776,578) on 13th January 1992.

I am satisfied

8 (1) that the failure of the company to pay the sums due to the Revenue Commissioners in respect of PAYE and PRSI was a deliberate and conscious decision known to at least two of its directors;

9 (2) that at least two of the directors must have known that the petition filed by the company contained information that was incorrect and that the verifying affidavit contained a deliberate untruth relating to the debt due to the Revenue Commissioners;

10 (3) that had the Court been informed of the company's true position, namely, that the company's deficit was £973,294 (or even that it was £776,578) and that the directors had for some time been consistently defrauding the Revenue Commissioners, the Court would not have made the protection order on 13th January last and the company would now be in liquidation.

11 When an application is made by a company for a protection order under the 1990 Act, it seems to me that the directors and all those associated with the application (including their professional advisers) are obliged to exercise the utmost good faith and that such a duty exists not just on an ex parte application to appoint an interim examiner but also on the application itself. This is because (a) of necessity, the Court must depend to a considerable extent on the truth of what it is told by the company and (b) because of the potential injustice involved in the making of a protection order when the proper course is to wind up the company. This duty involves an obligation to disclose all relevant facts material to the exercise by the Court of its discretion. A fortiori, it involves a duty not to deliberately mislead the Court by false evidence.

12 Not every breach of duty to exercise good faith will amount to an abuse of the Court's processes. But where an application for a protection order is made on evidence which is known to be false this amounts to an abuse of process. And when an application is made for an improper purpose, this also amounts to an abuse of the processes of the Court.

13 In this case I must conclude that the evidence used to obtain the order must have been known to be false by at least two of the directors. Apart from any other aspect of the statement of affairs, the directors knew that the debt due to the Revenue Commissioners was grossly understated and that the true deficit was much greater than that shown in the petition. Furthermore, I think it...