Red Sail Frozen Foods Ltd ( In Receivership) -v- Companies Act, [2006] IEHC 328 (2006)

Docket Number:2005 292 COS
Party Name:Red Sail Frozen Foods Ltd ( In Receivership), Companies Act
Judge:Laffoy J.
 
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THE HIGH COURT

2005 No. 292 COS

IN THE MATTER OF:

RED SAIL FROZEN FOODS LIMITED (IN RECEIVERSHIP)

RED SAIL KILMORE LIM ITED (IN RECEIVERSHIP)

RED SAIL EXPORTS LIMITED (IN RECEIVERSHIP)

AND IN THE MATTER OF AN APPLICATION FOR DIRECTIONS

UNDER SECTION 316 OF THE COMPANIES ACT, 1963-2003

TOM GRACE, RECEIVER

APPLICANT

Judgment of Miss Justice Laffoy delivered on 20th October, 2006.

The application

The applicant (the Receiver) is receiver and manager of the companies named in the title by virtue of the following appointments:

(1) In the case of Red Sail Frozen Foods Limited (Frozen Foods), an appointment dated 10th January 2002 by Ulster Bank Ireland Limited (the Bank) pursuant to the powers contained in the following security documents:

(a) a debenture dated 21st February, 1978 given by Frozen Foods to the Bank;

(b) a mortgage dated 4th October, 1978 made between Frozen Foods of the one part and the Bank of the other part of unregistered land at Clogherhead, County Louth;

(c) a supplemental charge (on book and other debts) dated on 18th February, 1985 made between Frozen Foods of the one part and the Bank of the other part.

(2) In the case of Red Sale Kilmore Limited (Kilmore), an appointment dated 10th January, 2002 by the Bank made pursuant to the powers contained in the following security documents:

(a) a debenture dated 21st February, 1978 given by Kilmore to the Bank;

(b) a charge over registered land in County Wexford dated 11th September, 1978 executed by Kilmore in favour of the Bank; and

(c) a supplemental charge (on book and other debts) dated 18th February, 1985 made between Kilmore of the one part and the Bank of the other part; and

(3) In the case of Red Sail Exports Limited (Exports), an appointment made on 11th January, 2002 by the Bank pursuant to the powers contained in a debenture dated 1st February, 1982 given by Exports to the Bank.

By virtue of a guarantee dated 16th October, 1990 the indebtedness of Frozen Foods to the Bank was guaranteed by, inter alia, Kilmore and Exports. By virtue of a guarantee of the same date the indebtedness of Kilmore to the Bank was guaranteed by, inter alia, Frozen Foods and Exports.

The receivership is nearing completion. Frozen Foods and Kilmore are insolvent. On this application the Receiver has sought the directions of the court pursuant to s. 316 of the Companies Act, 1963 (the Act of 1963) on three discrete unrelated issues. I will deal with each issue separately.

The first issue

The Receiver seeks directions as to whether it is lawful for the Receiver to pay the preferential claims made by the Minister of Enterprise, Trade and Employment (the Minister) through his department (the Department) and by employees of Frozen Foods and Kilmore under s. 285 of the Act of 1963 in circumstances where there was a pre-receivership practice in Frozen Foods and Kilmore of making payments to employees without deduction of PAYE and PRSI. Both the subrogated claims of the Minister/Department and the residual employees' claims are made in respect of payments where PAYE and PRSI deductions were properly operated.

Exports had no employees.

In dealing with this issue, it is important to stress at the outset that the Receiver sought directions as to service of the originating notice of motion. In consequence of directions given by the court, notice of the proceedings was given to the following:

(1) The Minister and the Department;

(2) the Revenue Commissioners; and

(3) employees of Frozen Foods and Kilmore with residual claims in excess of 1,000.

None of those notice parties participated in the proceedings. Notice of the proceedings was also served on Frozen Foods, Kilmore and Exports (collectively referred to as "the Companies"), who participated in the proceedings. The Bank also participated, but in relation to the third issue only.

Following his appointment the Receiver discovered that prior to the receivership "under the counter" payments had been made to employees of Frozen Foods and Kilmore. Payments were made in cash and no PAYE/PRSI were deducted. The payments were recorded in the books of the Company as the purchase of fish. The Receiver informed the Department of the practice and of his concerns as to the impact the practice might have on employment contracts. He raised the question of the consequential uncertainty as to the status of any subrogated claims the Department would have based upon payments made by it to the employees of Frozen Foods and Kilmore. It was agreed between the Receiver and the officials of the Department that the claims which would be confirmed by him, as employers' representative, in respect of employee entitlements the subject of claims against the Department would exclude payments in respect of which the appropriate PAYE/PRSI deductions had not been made. Subsequently, when submitting the relevant forms to the Department, the Receiver reminded the Department of the pre-receivership practice and confirmed that the forms covered amounts for employees' wages and salaries in respect of which the relevant PAYE/PRSI was paid. Further, the Receiver made it clear that he was not making any determination as to whether the relevant employees had enforceable contracts of employment notwithstanding the cash payments and that he was not admitting any future subrogated claim by the Department in respect of any payment which it would make to the employees.

Subsequently, the Department made payments to employees of Frozen Foods and Kilmore in respect of -

(i) arrears of wages,

(ii) holiday pay,

(iii) minimum notice, and

(iv) unfair dismissal.

The Department claims that it has a preferential claim in respect of the amounts which were so paid against Frozen Foods and Kilmore.

The Receiver's concern is whether, having regard to the manner in which the employment contracts of employees of Frozen Foods and Kilmore were operated in practice, as a matter of law, the employees' claims under the Minimum Notice and Terms of Employment Act, 1973 (the Act of 1973), the Unfair Dismissals Act, 1977 (the Act of 1977) and the Protection of Employees (Employers' Insolvency) Act, 1984 (the Act of 1984) were enforceable and whether the Department's claim to be subrogated is valid. It is regrettable that the Department was not represented before the court to argue for the enforceability of the claims, which it in fact discharged, and the validity of its claim to subrogation. The Receiver had envisaged that the issue would be argued as between the Minister/Department, on the one hand, and Frozen Foods and Kilmore, on the other hand. However, in the absence of the Minister, counsel for the Receiver set out the relevant legal principles for consideration by the court.

There is authority in this jurisdiction for the proposition that, where it is a term of a contract of employment that it will be implemented in a manner which defrauds the Revenue Commissioners, the contract is illegal and wholly unenforceable. That is the decision of this Court (Barron J.) in Hayden v. Sean Quinn Properties Limited (unreported, 6th December, 1993). On the facts of the case Barron J. held that there had been a breach of the plaintiff's contract of employment. However, on the basis that the contract had provided for a basic salary to which there was added a sum by way of "non-taxable allowance to cover expenses", he held that the contract itself was an illegal one. In dealing with the consequences of that, he referred the decision of the Court of Appeal of England and Wales in Napier v. National Business Agency Limited [1951] 2 All E.R. 264, stating that the facts in that case were almost identical to the facts in the case under consideration by him. He quoted the following passage from the judgment of Sir Raymond Evershed M.R. (at p. 266):

It must be that, by making an agreement in that form the parties to it were doing that which they must be taken to know would be liable to defeat the proper claims of the Inland Revenue and to avoid altogether, or at least to postpone, the proper payment of income tax. If that is the right conclusion, it seems to me equally clear … that the agreement must be regarded as contrary to public policy. There is a strong legal obligation placed on all citizens to make true and faithful returns for tax purposes, and, if parties make an agreement which is designed to do the contrary, i.e. to mislead and to delay, it seems to me impossible for this court to enforce that contract at the suit of one party to it.

Barron J. recorded that the Master of the Rolls then went on to consider whether or not the fraudulent part of the agreement could be severed and he held that it could not. The plaintiff's claim was dismissed on the ground that the contract was unlawful and so unenforceable. Concluding his judgment, Barron J. stated as follows:

In my view that case would have been decided in the same way and upon the same grounds in this jurisdiction at that date. Notwithstanding the very great changes that have occurred in society in this country since then I do not believe that public policy on this issue would have changed in any way. The plaintiff allowed himself to agree to something which would benefit the defendant at the expense of the Revenue. Such an agreement is unenforceable and the plaintiff's claim must therefore fail.

Similarly, in a statutory claim for unfair dismissal under the Act of 1977 and a claim under the Act of 1973, the Employment Appeals Tribunal determined that the claim should be dismissed due to the illegality of the contract of employment, which had the effect of rendering the contract unenforceable and depriving the claimant of the basis on which to establish that he was an employee as required by the Act of 1977, where the facts were that part of the claimant's salary was treated in the employer's books as an expense: Lewis v. Squash (Irl) Limited [1983] I.L.R.M. 363. That decision predated the amendment of the Act of 1977 by the Unfair...

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