High Court of Ireland Decisions

1. This is an application brought by the Official Liquidator of Ashclad Limited ("the Company") for a number of specific reliefs against the Respondents and each of them. Effectively the reliefs comprise the following:

(1) A declaration under Section 204 of the Companies Act, 1990 that the Respondents should be made personally liable for all of the debts of the Company.

(2) An Order directing the Respondents to pay to the Applicants such sum as this Court finds them liable to pay.

(3) As against each of the Respondents an Order under Section 230 of the Companies Act, 1963 directing him to deliver up to the Official Liquidator, Mr Forrest, any property of the Company which is in the hands or under the control of such Respondent and specifically seeking an Order for the return of a gantry crane, a bending machine and the title deeds of certain premises, 73 Baldoyle Industrial Estate, Baldoyle, Dublin 13.

(4) An Order pursuant to Section 150 of the Companies Act, 1990 declaring that the Respondents shall not for a period of five years be appointed or act in any way whether directly or indirectly as a director or secretary or be concerned or take part in the promotion or formation of any company unless it meets the requirements set out in Section 150(3) of that Act.

5. Some further consequential Orders.

For a proper understanding of the relief sought under Section 204 of the Companies Act, 1990 it is desirable that I should set out sub-sections (1) and (4) of the Section. Sub-section (1) reads as follows:-

"Subject to sub-section (2), if --

(a) a company that is being wound up and that is unable to pay all of its debts has contravened Section 202, and

(b) the Court considers that such contravention has contributed to the company's inability to pay all of its debts or has resulted in substantial uncertainty as to the assets and liabilities of the company or has substantially impeded the ordinary winding up thereof

The Court, on the application of the liquidator or any creditor or contributory of the company, may, if it thinks it proper to do so, declare that any one or more of the officers and former officers of the company who is or are in default shall be personally liable, without any limitation of liability, for all, or such part as must be specified by the Court, of the debts and other liabilities of the company".

Nothing turns in this case on the provisions of sub-section (2).

Sub-section (4) reads as follows:-

"The court shall not make a declaration under sub-section (1) in respect of a person if it considers that --

(a) he took all reasonable steps to secure compliance by the company with Section 202, or

(b) he has reasonable grounds for believing and did believe that a competent and reliable person, acting under the supervision or control of a director of the company who has been formally allocated such responsibility, was charged with the duty of ensuring that that section was complied with and was in a position to discharge that duty.

At all material times the Respondents were in control of the Company. Following on his appointment as Official Liquidator Mr Forest wrote to Mr Harrington, the first-named Respondent, requesting him:

"(a) to disclose all the property of the company (whether real or personal) and as to how and to whom and for what consideration and as to when any part of it might have been disposed of

(b) delivery to me of all real and personal property of the company; (c) delivery to me of all of the books and papers of the company; (d) delivery up of the seal, minute book, and any other statutory books and records of the company.

Further letters followed requesting a Statement of Affairs etc and on the 19 May, 1998 the Liquidator's Solicitors received a response from Mr Harrington in which he claimed that on the instructions of the Master of the High Court all the books, records and Statement of Affairs of the Company were handed to Porter Morris & Co, Solicitors, in June 1997 and that no books or records were in his possession. Similar letters were written to Mr Culleton.

Following on receipt of the letter from Mr Harrington the Liquidator made contact with Porter Morris & Co who on behalf of a creditor had had Mr Harrington examined before the Master under the Debtors' Act (Ireland) 1872. The Official Liquidator was given a transcript of that examination. It emerged from the transcript that for the purposes of the examination Mr Harrington had produced a Statement of Affairs dated the 31 December, 1996. He claimed that the Company did not have any machinery and that it had carried on business from premises which were leased personally from him at a nominal rent. He claimed that the Company employed six or seven people but that they were all now employees of another Company. He was asked about a gantry crane and a bending machine which were shown on the Company's books as having been purchased by the Company and Mr Harrington had said that he did not remember whether these machines had been purchased with Company money or not. Most importantly of all it appeared from the transcript that Mr Harrington confirmed that in 1995 payments were made out of the Bank accounts of the Company in the sum of £309,600.00 of which £117,200.00 was paid in cash which Mr Harrington claimed was used to pay wages. I will return to the subject of these monies later on in the judgment.

For the purposes of the examination Mr Harrington was required to provide to Porter Morris & Co copies of the company's books and records. He purported to provide them and they comprised the following:-

(a) Some bank statements,

(b) Purchases Ledger,

(c) Sales Ledger,

(d) Cheques Journal,

(e) Wages Cards,

(f) Audited Accounts for the Company for the years ended 31 December, 1991, 31 December, 1992, 31 December, 1993 and the 31 December, 1994.

(g) Value Added Tax Records.

In his first grounding Affidavit Mr Forrest deals with each of these items in turn. In relation to the bank statements Mr Forrest points out that they relate to the period January 1995 to March 1997 in respect of a No 1 account, then there was another bank statement for a No 2 account which was dated 12 October, 1995 and showing an overdraft balance of £10.00. No bank statements were made available for the period from the date of incorporation of the Company on the 17 August, 1990 to December 1994 or from the 18 March, 1997 to the date the Company ceased trading. The accounts for these periods have still not been made available.

The Purchases Ledger related to the period February 1991 to November 1996 and there was no Purchases Book from the date of incorporation of the Company (17 August, 1990) to February 1991 or for the period from November 1996 to the date of liquidation on the 20 April, 1998.

In the case of the Sales Ledgers they did appear to be written up from January, 1991 to October, 1996 but records for the months of January and February 1995 were missing. It appeared to the Official Liquidator from his review of the Sales Ledger that the Directors operated a system based on cash receipts rather than Invoices. It appears that the Sales Ledger was also incomplete insofar as lodgments to the Company's Bank Account from October 1996 to December 1996 had not been entered.

The Cheques Payment Book which was furnished related to the period January 1995 to December 1996 but no Cheque Payments Books have been provided in respect of the period 17 August, 1990 to January 1995 or for any period after December 1996. The Official Liquidator made out and exhibited a summary of the Cheques Payment Book which he said on Affidavit had a separate column for wages, and beside this column there was a column headed "Cash". The evidence given before the Master was confirmed in that under the heading "Cash" there was a sum of £117,367.70 which was paid out to cash by the Company in 1995, but it appeared that a further sum of £107,610.90 was paid out to cash in 1996. The total paid out to cash therefore during the calendar years 1995 and 1996 was £224,978.60. These cash payments are unaccounted for. It appeared also that more than 35% of the cheque payments were paid out to cash. Mr Forrest says that in his experience as a Chartered Accountant this is unprecedented. He further goes on to observe that from his review of the records the cash paid out could not be said to relate to wages as there was a separate wages column. I am not sure that that necessarily follows but this was not a company with a large number of employees and there was a column dealing with wages. No matter what tax evasion tactic might be adopted it seems unlikely that more than a small amount of the unaccounted for cash payments could be attributable to wages. There were no proper books recording the destination of the cash payments. It appeared also that a direct debit was paid in favour of Mr Harrington at the rate of £250.00 per week in 1995 and 1996 and that direct debits were paid on a regular basis to Smurfit Finance and Custom Finance, but there is nothing in any books or records to explain what these debits related to.

Turning now to the wages cards it appeared that no records were kept of PAYE or PRSI in relation to the employees or that deductions were ever made in respect of those items. The official wages cards stated that the net amount paid to employees for the period January 1995 to December 1996 was the sum of £103,768.20 of which £70,954.00 was paid by cheque (as recorded in the wages column) and £23,750.00 was paid by direct debit. The total paid by cheque and direct debit was therefore £94,704.00. This leaves a balance of 19,064.20 to make up the amount shown in the cheque payments book as having been paid out by way of wages in the same period. As Mr Forrest points out even if this was paid out in cash there would be still a balance of £215,914.30 unaccounted for.

The only audited accounts for the Company are for the years 1991-1994. There are no such accounts available for the years 1995 or 1996. The accounts showed the Company as having a small operating profit in each of the years 1991-1994 inclusive and in each of those years the Company is shown as having assets which match the amount due to creditors. As the Official Liquidator points out this position is in marked contrast to what is revealed in the Directors' Statement of Affairs of the 20 April, 1998. I will be coming to that in due course.

There were no value added tax records indicating that the Company had paid tax in relation to sales or purchases. Because there are no proper records of sales and purchases it is impossible for the Official Liquidator to calculate any tax liability.

There were no further books and records made available to the Official Liquidator and he sets out the gaps and defects in the books and records which he did receive in paragraph 35 of his first Affidavit. He goes on to say in paragraph 6 that the books of account of the Company were not kept on a continuous and constant basis. The books of account failed to show daily records of all sums of money received and expended by the Company and the matters in respect of which such receipts and payments took place, nor do the records of the Company contain statements of the stock held by the Company for any of the years in which the Company traded. As a consequence of the gaps and deficiencies Mr Forrest says in paragraph 37 of that Affidavit, that he is unable:-

"(a) To determine the financial position of the company with any reasonable accuracy;

(b) to determine the identities of the suppliers of goods or services to the company;

(c) to identify the quantities of goods or services supplied to the company;

(d) to identify the use to which monies of the company were put, and in particular the use to which payments made to cash were put;

(e) to identify the recipients of the cash payments;

(f) to identify the whereabouts of or the extent of the assets and liabilities of the company (the books and records do not record the assets and liabilities of the company to enable me to do so);

(g) to form any judgment as to the sums of money received and expended by the Company or the matters in respect of which the receipts and expenditure took place".

As a consequence of these deficiencies there is quite obviously substantial uncertainty as to the assets and liabilities of the Company and its orderly winding up is being impeded. The Official Liquidator estimates that eighty per cent of the time spent by him and his staff in the liquidation up to the date of the swearing of his first Affidavit related to his efforts to assess the books and records of the Company and overcome the deficiencies. He expresses the view with which I agree that he has received no assistance from the Directors.

From the Statement of Affairs made by the Respondents on the 6 July, 1998 the Company is shown as having no assets with which to satisfy the claims shown to amount to £165,454.00. In fact there are other debts as set out in the Affidavit of the Official Liquidator. There are Judgment debts for £5,885.59 and £13,008.08 respectively. Furthermore there are unknown liabilities due to the Revenue Commissioners in respect of unpaid PAYE, PRSI and VAT. Mr Forrest has estimated that a reasonable sum to cover the cost of himself and his staff in trying to remedy and overcome the deficiencies would be £12,000.00.

The replying Affidavits are to say the least unimpressive. Broadly I agree with the criticisms made by the Official Liquidator and the reasonable inferences which he has drawn. Not only are the Affidavits in reply not impressive but the evidence given orally at the examination before the Master under the Debtors (Ireland) Act was equally unimpressive. As far as the Affidavits are concerned they are to a large extent more like pleadings in which formal denials are made and also to a large extent Mr Culleton in his Affidavits is merely repeating the evidence given by Mr Harrington. With regard to unaccounted for payments out of the Company I think it helpful to cite in full paragraph 15 of Mr Forrest's first Affidavit, paragraph 5 of Mr Harrington's first replying Affidavit and paragraph 6 of the second Affidavit of the Official Liquidator. Paragraph 15 of Mr Forrest's first Affidavit reads as follows:

"Furthermore, at page 13 of the transcript, Mr Harrington confirmed that in 1995, payments were made out of the bank accounts of the company in the sum of £309,600.00 of which sum £117,200.00 was paid in cash which Mr Harrington claimed was used to pay wages. However from my review of the books and records of the company it appears that no PAYE or PRSI was deducted in relation to any of the said payments by way of cash. (I deal with the questions of PAYE/PRSI and the books and records of the company below)".

Paragraph 5 of Mr Harrington's first replying Affidavit reads as follows:-

"I refer to paragraph 15 of the Affidavit of Barry Forrest and I beg to refer to a copy of a letter forwarded by the Auditors of Ashclad Limited namely John Deane and Company dated 8 May, 1997 to the Office of the Inspector of Taxes, upon which and marked with the letter 'A 'I have signed my name prior to the swearing of this Affidavit. I say that the contents of the said letter are self explanatory and deal adequately with the points raised by Mr Forrest at paragraph 15 of his Affidavit and various other points raised by him thereafter in his Affidavit".

Paragraph 6 of Mr Forrest's second Affidavit reads as follows --

"With regard to paragraph 5 of Mr Harrington's Affidavit it is worth reiterating what I said in paragraph 15 of my first Affidavit. I drew attention to the fact that Mr Harrington had confirmed under cross-examination that in 1995, payments were made out of the bank accounts of the company in the sum of £309,600.00 (of which sum of £117,200.00 was paid in cash). He purports to provide an answer by referring to a letter dated the 8 May, 1997 from the Company's Auditors John Deane and Company to the Inspector of Taxes (this is exhibit 'A' to his Affidavit). However the letter to the Inspector of Taxes is in relation to PAYE/PRSI for the period from the 6 April, 1995 to 13 December, 1996. Paragraph 15 of my Affidavit dealt with 1995 only. The letter of the 8 May, 1997 provides no explanation in relation to the payment of £117,200.00 in cash. The letter to the Inspector of Taxes states that net wages for the two years 1995/1996 and 1996/1997 amounted in total to £115,898.00. This sum relates to payments over a period of two years. It provides no explanation as to how the sum of £117,200.00 was paid out in 1995 alone".

The arguments put forward by Mr Forest in paragraph 6 of that Affidavit were never satisfactorily answered thereafter and I conclude that as a matter of probability sums amounting to at least £100,000.00 were wrongly withdrawn from the Company and appropriated for other purposes. I have read and considered the Judgment of Shanley, J in Mehigan v Duignan [1997] 1 IR 341. I broadly accept the approach which he adopted and the principles which he said had to be applied particularly having regard to the Constitution. To some extent he lays down quite a strict onus of proof in relation to causality. But the facts of that case are not the same as the facts of this case and I am satisfied that as a matter of probability the liabilities of the Company were very substantiality affected by cash withdrawals which were not for the benefit of the Company. Giving the Respondents every benefit of the doubt I think that the figure of £100,000.00 which I have suggested is not unreasonable. There would have to be added to that the expense of the Official Liquidator in the sum of £12,000.00 in trying to ascertain the assets and liabilities as a consequence of the failures to comply with Section 202 of the 1990 Act. I am therefore satisfied that the Official Liquidator has discharged the necessary proofs to obtain a Declaration under Section 204 of the Companies Act, 1990.

In relation to the first relief sought in the originating Notice of Motion therefore I will make a declaration that the Respondents should be made personally liable to the extent of £112,000 for the debts of the Company on the grounds that the Company failed to keep proper books of account as required by Section 202 of the Companies Act, 1990 and that such contravention of Section 202 has resulted in substantial uncertainty as to the Company's assets and liabilities and/or has impeded the orderly winding up of the Company and/or has contributed to the Company's inability to pay all of its debts. For the purposes of enforcing that declaration I will make an Order under paragraph 2 of the Notice of Motion directing the Respondents to pay £112,000 to the Applicants.

I now turn to deal with the two reliefs sought at paragraphs 3 and 4 of the originating Notice of Motion. Those are the Orders for delivery up of the gantry crane, the bending machine and the title deeds of the premises 73 Baldoyle Industrial Estate. The argument about the ownership of the two machines seems to have been finally resolved as a consequence of the information obtained by Mr Forrest and contained in his fourth Affidavit. It appears that the crane was the subject matter of a lease agreement between Harrington Roofing Limited and Custom Finance Limited which was executed on the 12 October, 1989 and taken over by the Company in September, 1992. After rental payments amounting to £65,448.00 had been paid in the period October 1992 to November 1996 Custom Finance Limited sold the crane together with the bending machine (otherwise known as a batching plant) to Mr Harrington for £121. The bending machine was also the subject of a lease between Custom Finance Limited and Harrington Roofing Limited and was also taken over by the Company in September 1992. Clearly both of these machines were obtainable for the lessee for £121 and in the ordinary way it would have been the lessee which would have acquired those machines for that sum. However, Mr Harrington claims because he personally paid the £121, he is personally the owner. I do not think that this is correct in law and I think that the Official Liquidator's view that Mr Harrington was under a fiduciary duty to the Company at the time that he paid the £121 is correct. In my view, he is a trustee of the machines for the Company. I will make an Order under paragraph 3 of the Notice of Motion confined to those two machines and will specifically order that the said machines vest in the liquidator by his official name. I will not make any Order in relation to the machines against Mr Culleton. As far as the title deeds to the Baldoyle property is concerned I do not think that the evidence properly establishes that that property belongs to the Company. I will accordingly refuse the reliefs sought against both Mr Harrington and Mr Culleton in respect of that property.

I have no hesitation in making an Order under paragraph 5 of the Notice of Motion pursuant to Section 150 of the Companies Act, 1990 declaring that the Respondents shall not for a period of five years be appointed or in any way whether directly or indirectly act as a director or secretary or be concerned or take part in the promotion or formation of any company unless it meets the requirements set out in sub-section (3) of Section 150 of the 1990 Act. It has not been established before this Court that either of the Respondents has acted honestly and responsibly in relation to the conduct of the Company's affairs. The various Orders as indicated will be made accordingly.