Supreme Court dismisses appeal against liquidator's strike-out application for director disqualification under Companies Act 1990.

THE SUPREME COURT

No 242/00

Murray J.

Hardiman J.

Fennelly J.

IN THE MATTER OF VERIT HOTEL & LEISURE (IRELAND) LIMITED (IN RECEIVERSHIP AND LIQUIDATION)

AND IN THE MATTER OF THE COMPANIES ACTS 1963-1990

BETWEEN

VINCENT DUIGNAN

RESPONDENT/APPLICANT

AND

JOHN CARWAY STEPHEN CARWAY ELAINE CARWAY AND

LETCANE INVESTMENTS

APPELLANTS/RESPONDENTS

JUDGMENT of the Court delivered the 31st day of July, 2001 by FENNELLY J.

This appeal is taken against the refusal of O’Donovan J to strike out, on the ground of delay, an application brought by a

liquidator of an insolvent company, pursuant to section 150 of the Companies Act, 1990, for an order restricting the rights of its

directors from acting as director or secretary or otherwise participating in the promotion of a company for a period of five years.

Section 150(1) in Part VII, Chapter I of the act provides as follows:

"The court shall, unless it is satisfied as to any of the matters specified in subsection (2), declare that a person to

whom this Chapter applies shall not, for a period of five years, be appointed or act in anyway, whether directly or

indirectly, as a director or secretary or be concerned or take part in the promotion of formation of any company unless

it meets the requirements set out in subsection (3); and, in subsequent provisions of this Part, the expression "a person

to whom section 150 applies" shall be construed as a reference to a person in respect of whom such a declaration has

been made."

That section applies, by virtue of section 149, to any company shown to be unable to pay its debts either at the

commencement or during the course of its winding-up and to any person who was a director at the date of or within twelve

months prior to the winding-up. It can be assumed, for the purposes of this appeal, that the section applies.

The most material potential relieving provision is that in section 150 (2)(a) permits a court to decline to make a declaration if it

is satisfied by a director that he “ has acted honestly and responsibly in relation to the affairs of the company and that there

is no other reason why it would be just and equitable that he should be subject to the restrictions imposed by this section.”

Furthermore, the severity of the restrictions mandated by the section is significantly ameliorated by section 150(3). They do

not affect participation in any public company with an allotted share capital paid up in cash of £100,000. In the case of other

companies, the qualifying figure is £20,000.

The liquidator, in the present case, (the Applicant, Respondent on the appeal) having brought the application required by the

section allowed it to lie in abeyance for more than five years, before reactivating it. I will refer to him as the liquidator.

Accordingly, a chronology of the relevant facts is essential to an appreciation of the present application.

On 10th August 1994, Verit Hotels and Leisure (Ireland) Limited (the company), was ordered to be wound up and the High Court

and the Applicant was appointed official liquidator.

On 10th November 1994, the applicant wrote to each of the respondents (whom I will call the directors) stating that it

appeared that the company was insolvent and that they might wish to consider their position having regard to Part VII of the

act.

The liquidator, by Notice of Motion dated 6th December 1994 returnable for 16th January 1995, gave notice to each of the

directors of his intention to ask the High Court to make an order pursuant to section 150. In his grounding affidavit, he certified

the insolvency of the company pursuant to section 149(1)(b) of the act.

The application did not proceed in 1995. Two sets of legal proceedings between the parties supervened.

Firstly, the directors mounted a constitutional challenge to the relevant legislation and in particular the power of the liquidator

to certify insolvency. This was done by means of a motion within the liquidation. In November 1995 an order was made for the

trial of this issue which was heard by Carroll J on 18th June 1996 and was determined by her against the directors in her

Judgment dated 3rd July 1996. (See Carway v Attorney General [1996] 3 I.R. 300.)

Secondly, the liquidator brought proceedings against the directors described variously as being based on a fraudulent

preference and for mismanagement of the company (which I will call the damages claim). At any rate, these proceedings were

clearly serious. They were also protracted and appear to have involved several interlocutory motions and appeals to the

Supreme Court. They were compromised on the agreement of the directors to pay £500,000 and the costs of the proceedings

to the liquidator. The implementation of the settlement led to some further difficulties which were not fully resolved until May

1999.

The liquidator gave notice on 10th March 2000 of re-entry of the Notice of Motion of 6th December 1994. The directors brought

the present motion on 21st March 2000 Regulations to have that motion dismissed on the ground of excessive delay, by the

liquidator. There was no reason for the delay after the judgment of Carroll J in July 1996 and the liquidator had given no

satisfactory explanation for his subsequent delay of three years and nine months. They also said that they had assumed that

the matter of the declaration was no longer being pursued especially after the December 1998 settlement.

O’Donovan J noted that the directors accepted that the delay during the currency of the constitutional proceedings was

excusable. He also held that the delay during the period of processing of the damages claim was totally reasonable. If the

directors had successfully defended those proceedings, they would probably have succeeded also in resisting the section 150

motion.

The directors have not contested that aspect of the decision of O’Donovan, J. Thus the crucial period is that between the

conclusion of the damages claim and the notice of re-entry. In this respect, the liquidator accepted that the delay was

inexcusable, but said that it was not inordinate. The learned trial judge disagreed. He held that this period of delay was both

inordinate and inexcusable. The liquidator has not challenged that conclusion.

The learned trial judge cited the decision of this Court in Primor plc v Stokes Kennedy Crowley [1996] 2 I.R. 459 to the

effect that “even where the delay has been both inordinate and inexcusable the court must exercise a judgment on

whether, in its discretion, on the facts the balance of justice was in favour of or against the case proceeding.” Pointing

out that this passage showed that he had to exercise a discretion which required him to take into account a number of

considerations relevant to where that balance of justice lay, he posed the question as to whether “the delay has given

rise to a substantial risk that it is not possible to have a fair trial or is likely to cause or has caused serious prejudice to

the Respondents.” In his conclusion on this issue, the learned trial judge noted the very general nature of the prejudice

relied upon by the directors and the public interest in seeing that unsuitable persons should not be directors of

companies. He did not consider the defendants right to a fair trial had been compromised and dismissed the motion.

The directors, in their appeal make two essential points:

1. The directors had a right, in particular by virtue of, or more probably by analogy with the provisions of the European

Convention of Human Rights and Fundamental Freedoms, to a fair trial, which encompasses the notion of a speedy trial.

2. There is prejudice to the directors in two respects: the fact of the pending application is itself of a character to affect

their reputations, so that the longer the period of delay the greater the prejudice; secondly, general prejudice should be

inferred from the delay, in the form of natural fading of memory, even without evidence of specific prejudice.

It is common case that, in an appropriate case, the Court has jurisdiction to dismiss an application of the sort at issue here on

the round of excessive delay. The criteria are those laid sown in Primor, and in particular in the following passage from the

judgment of Hamilton C.J. (Page 475):

"The principles of law relevant to the consideration of the issues raised in this appeal may be summarised as follows:-

(a) the courts have an inherent jurisdiction to control their own procedure and to dismiss a claim when the interests of

justice require them to do so;

(b) it must, in the first instance, be established by the party seeking a dismissal of proceedings for want of prosecution

on the ground of delay in the prosecution thereof, that the delay was inordinate and inexcusable;

(c) even where the delay has been both inordinate and inexcusable the court must exercise a judgment on whether, in

its discretion, on the facts the balance of justice is in favour of or against the proceeding of the case;

(d) in considering this latter obligation the court is entitled to take into consideration and have regard to

(i) the implied constitutional principles of basic fairness of procedures,

(ii) whether the delay and consequent prejudice in the special facts of the case are such as to make it unfair to

the defendant to allow the action to proceed and to make it just to strike out the plaintiff's action,

(iii) any delay on the part of the defendant - because litigation is a two party operation, the conduct of both

parties should be looked at,

(iv) whether the delay or conduct of the defendant amounts to acquiescence on the part of the defendant in the

plaintiff's delay,

(v) the fact that conduct by the defendant which induces the plaintiff to incur further expense in pursuing the

action does not, in law, constitute an absolute bar preventing the defendant from obtaining a striking out order

but is a relevant factor to be taken into account by the judge in exercising his discretion whether or not to strike

out the claim, the weight to be attached to such conduct depending upon all the circumstances of the particular

case,

(vi) whether the delay gives rise to a substantial risk that it is not possible to have a fair trial or is likely to cause

or have caused serious prejudice to the defendant,

(vii) the fact that the prejudice to the defendant referred to in (vi) may arise in many ways and be other than

that merely caused by the delay, including damage to a defendant's reputation and business."

It is right firstly, to point to the mandatory character of the court’s jurisdiction. (See the judgment of Murphy J in Business

Communications Limited v Keith Baxter and another, unreported 21st July 1995.) The use of the word, “shall” connotes an

obligation to make the declaration in the ordinary case, though the relieving provision of section 150(2) significantly qualifies

that. It was fairly and properly accepted on behalf of the directors at the hearing of the appeal that the section gives effect to

a public interest in seeing that persons should no longer enjoy the unqualified right to become involved in the formation of

companies, where they have been directors of companies which have failed due to insolvency. That public interest diminishes, it

was said, when there is excessive delay such as in the present case. That proposition was rejected on behalf of the liquidator.

Ultimately, it was accepted that the public interest in question may be outweighed if there is such delay as to put a just

hearing at risk. Whichever way it is put, I think the result is the same. There is a public interest represented by the section.

However, excessive delay may render it unjust to permit the liquidator to proceed with his application. As I have already said,

that does not arise on the facts of this case.

It cannot be contested that the directors have had at all material times a right to a fair and speedy trial of the issue as to

whether their normal rights to become directors and promote and take part in the formation of companies should be limited

restricted or taken away. It is unnecessary, in order to establish the existence of this right, to resort to the European

Convention, however undisputed the value of the rights guaranteed by that instrument at international level may be. It is

inherent in the notions of fair procedures guaranteed by the Constitution and identified in a long line of cases. (See, for

example, in the field of criminal justice, S.F. v Director of Public Prosecutions [1999] 3 I.R. 235.

In the present case, it appears to me that the real question is not the existence of the right but its violation. A court will not so

readily infer a violation of a right where its beneficiary had at his disposal the means for its protection and failed to avail of

them. This is apparent from several of the subheadings, in particular (d) of the passage quoted above from Hamilton. Litigation,

and more particularly civil litigation in our system of law is, as the learned Chief Justice said, “a two party operation.” It is

notorious that a defendant, in making the finely balanced decision as to whether he should bring a motion to dismiss, is

conscious on the one hand of the possible preference for “letting sleeping dogs lie” and, on the other, that he may be accused

of lack of vigilance in the protection of his own rights when he does so after a long delay. Finlay P, as he then was, said in his

judgment in Rainsford v Limerick Corporation (unreported judgment of July 1979, but now reported at [1995] I.L.R.M. 561]):

Delay on the part of a defendant seeking a dismiss of the action and to some extent a failure on his part to exercise his

right to apply at any given time for the dismiss of an action for want of prosecution may be an ingredient in the exercise

by the court of its discretion.”

When considering, in this context, decisions of the European Court of Human Rights, it is important to recall that the right of

the parties in our adversarial system to take the initiative to protect their rights may not have been taken into account in cases

arising from legal proceedings in contracting states outside the common-law tradition. For example, in Capuano v Italy [ 13

E.H.R.R. 271] a first instance court was considered responsible for a three year delay in the preparation of experts’ reports.

Nonetheless, where the relevant codes of civil procedure leave matters to the initiative of the parties, that will, in fact, be

taken into account by that court. (See Vernillo v France 13 E.H.R.R. 880 Reference) Needless to say, it is also important to

remember that the decisions of the European Court concern the responsibility of contracting states under the Convention. The

court has no power to decide whether particular proceedings should have been dismissed by reason of delay.

In the present case, the relevant period of delay is either from December 1998 or mid- 1999 to March 2000. The directors,

through the affidavit sworn by their solicitor, claim merely to have taken for granted that the matter was not being pursued.

They made no enquiry from the liquidator, who had been pursuing them for substantial damages for several years, as to whether

this was correct. They furnish no rationale fro this conclusion. Indeed, to the extent that any rationale can be applied to the

situation, it would seem to run strongly to the contrary of this argument. However, any comment on aspect of the matter

should be reserved so as not to prejudice the hearing of the motion. I am satisfied that this argument is without merit.

The other issue is prejudice. Only the most general prejudice is claimed. Firstly, the allegation of prejudice by reason of the

pendency of the proceedings seems contradicted by two matters. Firstly, during the greater part of the period, the liquidator

was pursuing serious claims for damages against the directors personally. That would appear, on the facts of this case, to be at

least as prejudicial as the effect of the pendency of the section 150 motion, indeed probably more so. In any event, the

prejudice from the pendency of the application is the inevitable result of the presumed obligation of the liquidator under the

section (admittedly the section is silent on this – see Murphy J in Business Communications, cited below ). It is only to the

extent that the application is pending for an excessively long period, that relevant prejudice can be invoked. In the present

case, that is the relatively self-contained period after the conclusion after the settlement of the damages claim. In respect of

that precise period, the directors have in fact said not that they were prejudiced but that they had assumed the application

was not proceeding.

The remaining matter is the claimed general prejudice necessarily occasioned by delay in any civil action and consisting of the

dimming of memories, the loss of evidence and any other elements tending to compromise the fairness of the hearing. Here, it is

notable that the directors enjoy the right to seek to persuade the court of their effective stewardship of the affairs of the

company – that hey acted “honestly and responsibly.” They may bring forward evidence to establish that fact. If they were

truly placed at a disadvantage in attempting to exercise that statutory right, that would be a most relevant consideration on

the hearing of a motion to dismiss the liquidator’s application, but it is clear from the cases that the burden of proof of that fact

lies on the applicant, in this case the directors. As is admitted they have produced no such evidence. That is not surprising.

The directors were on notice from an early date of the existence of the application. They were fully aware of its importance to

the extent of bring a constitutional challenge to the validity of the section. Furthermore, they were engaged for some four to

five years in protracted litigation with the liquidator about their management of the company. There is, in short, no basis fro

presuming prejudice. In my view, prejudice will not be presumed.

I believe that O’Donovan J. correctly stated the discretion he had to exercise and correctly exercised it.

I would dismiss the appeal