Wallace v Cassidy
| Jurisdiction | Ireland |
| Judge | Mr. Justice David Keane |
| Judgment Date | 02 December 2016 |
| Neutral Citation | [2016] IEHC 689 |
| Court | High Court |
| Docket Number | [2011/219 MCA] |
| Date | 02 December 2016 |
[2016] IEHC 689
THE HIGH COURT
Keane J.
[2011/219 MCA]
IN THE MATTER OF CUSTOM HOUSE CAPITAL LIMITED (IN LIQUIDATION)
AND IN THE MATTER OF AN APPLICATION PURSUANT TO REGULATION 166 OF THE EUROPEAN COMMUNITIES (MARKETS IN FINANCIAL INSTRUMENTS) REGULATIONS 2007 ON THE APPLICATION OF THE CENTRAL BANK OF IRELAND
AND IN THE MATTER OF THE COMPANIES ACTS 1963–2012 AND THE MATTER OF SECTIONS 150 AND 160(2) OF THE COMPANIES ACT 1990 AND SECTION 56 OF THE COMPANY LAW ENFORCEMENT ACT 2001
and
Company – S. 160 of The Companies Act 1990 – Disqualification of Directors – Breach of duty – Misconduct – Liquidation – Reg. 172(1) of MiFD Regulations
Facts: The applicant being the official liquidator of the company sought an order for disqualification of the directors of the company under s. 160 of The Companies Act 1990. The applicant contended that the respondents were guilty for the misapplication of client's funds and were in breach of their duty towards the company's affairs.
Mr. Justice David Keane granted an order for the disqualification of the directors and reduced the number of years of disqualification for each respondent. The Court was satisfied that the company had permitted defalcation of the client's fund. The Court applied the two-stage injury test of jurisdictional triggers and the exercise of the Court's discretion for the disqualification. The Court identified and applied the principles as observed in Re Ansbacher?Dir. Of Corp. Enforcement v. Collery [2007] 1 I.R. 580 at 589 for the period of disqualification under s. 160, sub-s.2 of The Companies Act, 1990 to the effect that the period of disqualification should correspond to the gravity of the conduct of the respondents.
This is an application for a disqualification order under s. 160, sub-s. 2 of the Companies Act 1990 (“the 1990 Act”) against each of the respondents because of the conduct alleged against each as a director of Custom House Capital Limited (“the company”). In the alternative, the applicant seeks a declaration of restriction against each under s. 150 of the 1990 Act. The company is now in liquidation and the applicant is its official liquidator.
The company was incorporated on the 28th July 1997. It commenced trading on the 30th July of that year. Between the 15th January 1998 and the 1st November 2007, it was authorised to conduct business under the Investment Intermediaries Act 1995. From then on, the company was regulated under Regulation 11 of the European Communities (Markets in Financial Instruments) Regulations 2007 ( S.I. No. 60 of 2007) (“the MiFID Regulations”).
The company's principal activity was the provision of financial services, including investment fund management, and the setting up and managing of approved retirement funds, pension funds and personal retirement savings accounts. Investment vehicles established and managed by the company for collective investment by clients included exempt unit trusts, qualifying investor funds established under the laws of Ireland and companies (not being subsidiaries of the company) that were established under the laws of various European states, principally Luxembourg and Denmark, for holding property investments. The company provided property asset management services to such companies.
On the late evening of the 15th July 2011, on the ex parte application of the Central Bank of Ireland (“the Central Bank”) under Regulation 166 (2) of the MiFID Regulations, the High Court (Hogan J.) appointed two senior officials of the Central Bank, George Treacy and Noel Thompson, as inspectors on an ad interim basis to investigate the affairs of the company. A final order to that effect was made on the 20th July 2011; see Re Custom House Capital Ltd. [2011] 3. I.R 323.
The inspectors produced their final report (“the report”) to the High Court on the 19th October 2011. Two days later, after a full inter partes hearing, the Court made an order under Regulation 172 (1) of the MiFID Regulations for the winding up of the company with immediate effect; see Re Custom House Capital Ltd. (No. 2) [2011] IEHC 399. The applicant was appointed as official liquidator and, by operation of s. 33A of the Investor Compensation Act 1998, as amended, as administrator of the company.
In making that Order, Hogan J. described the inspectors' report as “comprehensive and most impressive” before summarising the inspectors' findings in the following terms:
“8. The Inspectors” findings make for grim and disturbing reading. They concluded that in almost every respect there has been systematic abuse of client funds for improper purposes and that this misconduct was pervasive within [the company]. [The company's] core activities related to the purchase of investment properties, principally in countries such as France, Switzerland and Germany. But many of the investors were unaware that their cash funds were being used for this purpose. In other cases, money was taken from accounts where there were positive cash balances in order to meet the redemption call amounts due on other accounts.
9. In fact, the reports describe a long litany of general misfeasance and wrong-doing, ranging from the systematic, deliberate misuse of funds, gross impropriety, corporate misfeasance and false accounting and trading in a fraudulent manner. Under ordinary circumstances the contents of this report would be regarded as deeply shocking, save that, sadly, our capacity to be shocked by nefarious conduct in the financial world has been diluted by incredible and remarkable events over the last three years both at home and abroad, of which the Madoff scandal is only perhaps the most notorious international example. It was, nevertheless, in its own way telling that Ms. McGrath, counsel for [the company], expressly stated that the company did not dispute the inspectors' findings and conclusions.'
Although it is not material to the application under s. 160, sub-s. 2 of the 1990 Act, the uncontroverted evidence before the Court is that each of the respondents was a director of the company at the date of, or within 12 months prior to, the commencement of its winding up; that, as the applicant certified on the 9th April 2014, the company was then, and has remained at all times since then, unable to pay its debts within the meaning of s. 214 of the Companies Act 1963; and that the Director of Corporate Enforcement has not relieved the applicant of the obligation under s. 56 of the Company Law Enforcement Act 2001 to make an application for a declaration of restriction against each of the respondents. Thus, the necessary proofs are in order to require the Court to make a declaration of restriction against each of the respondents under s. 150, sub-s. 1 of the 1990 Act, unless satisfied that one of the grounds of exemption under s. 150, sub-s 2 of that Act is made out.
Based on the evidence available to him, the applicant has chosen to seek s. 160 disqualification orders instead. As required by s. 160, sub-s. 7 of the 1990 Act, the applicant wrote to each of the respondents on the 14th October 2013, giving the requisite ten days' notice of his intention to bring that application. Notice of the present motion issued on the 11th April 2014.
Each of the respondents was appointed a director of the company on the 5th April 2001.
Mr Harry Cassidy was the chief executive officer of the company. He resigned on the 13th July 2011.
Mr John Whyte was an executive director variously described as “investment director” and “head of private clients.” He continued as a director until the company entered liquidation.
Mr John Mulholland was a non-executive director and also continued as a director until the company entered liquidation.
The applicant relies on Regulation 175 of the MiFID Regulations. It provides:
“A document purporting to be a copy of a report of an inspector appointed under these Regulations shall be admissible in any civil proceedings as evidence-
(a) of the facts set out in the document without further proof, unless the contrary is shown, and
(b) of the opinion of the inspector in relation to any matter contained in the report.”
The inspectors found that there was a practice in the company of effecting transactions on behalf of clients in a way that those clients could not have envisaged and for which they had provided no mandate or authorisation to the company. In many cases those transactions were not only unauthorised but also improper. The inspectors identified improper transfers of client funds to the value of €56.15 million. Separately, the company invested the assets of clients in a so-called bond fund of its own creation, known as the Mezzanine Bond Fund, without proper authority from all of the relevant clients and without properly considering their interests or the suitability of that investment for them, while furnishing misleading information about the bond to both those clients and the Central Bank. Clients who invested in the Mezzanine Bond Fund were owed €10.4 million (exclusive of interest) when the inspectors produced their report. Thus, the potential losses to the pension holders and investors who were clients of the company then stood at €66.55 million.
How did this disgraceful situation come about? The concluding section of the inspectors' report explains (at p. 195):
“There was a systematic and deliberate misuse of assets and cash belonging directly or indirectly to clients of [the company]. This misuse was deliberately disguised by [the company] through the use of false accounting entries and the issue of false and misleading...
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