Supreme Court dismisses winding-up petition where company's cross-claim against petitioner outweighs petitioner's debt.

[2003] IESC 4

THE SUPREME COURT

304/01

Murray J

McGuinness J

McCracken J

IN THE MATTER OF WMG (TOUGHENING) LTD

AND

IN THE MATTER OF THE COMPANIES ACTS 1963-1999

Judgment of Mr Justice McCracken delivered the 29th day of January 2003.

1. This is an appeal from the decision of Mr Justice Roderick Murphy dismissing the petition of Oliver Brady to wind up WMG

(Toughening) Ltd (hereinafter called “the Company”).

2. WMG Group Ltd (hereinafter called “Group”) is the holding Company of a Group of companies who import and distribute glass and

manufacture double-glazed units. In the middle 1990s Group decided to set up a Company which would carry out the specialist job of

toughening glass and in due course the Company was formed on 15th February 1995. Group was unable to finance the new Company

itself, and organised that the capital be provided through a business expansion scheme. Group retained 21% of the shares in the

Company and further capital was raised by funding from An Forbairt and a loan of £138,000 from Elgrove Ltd, £100,000 of which was

subordinated to all the other obligations of the Company. In due course the debt of £138,000 owing to Elgrove Ltd was assigned to

the petitioner. While some questions have been raised about the validity of the assignment, I am quite satisfied that for the purposes

of the legal arguments in this case it can be assumed that the assignment was valid, and there is no doubt that the petitioner did

discharge the £138,000 to Elgrove Ltd.

3. While the Company is not a subsidiary of Group, nevertheless commercially it was totally dependent on Group. It operated within

premises owned by Group and it would appear that many of the overheads were common to some or all of the companies controlled

by Group. This becomes of considerable significance because there was an arrangement whereby the Company would be charged a

proportionate percentage of overheads by Group, which practice has led to one of the disputes which have now arisen. The Company

did not operate independently of Group, and was totally dependant on Group for its business.

4. Prior to 1998 Group was owned as to 80% by Mr James Barber, who was a chartered accountant and who had been responsible for

obtaining the business expansion scheme financing, largely from his own clients. By an agreement of 21st June 1998, he agreed to sell

his shareholding in Group to Mr Don O’Gorman. Subsequently, the petitioner replaced Mr O’Gorman as the purchaser of the shares and

the sale of the shareholding was completed on 9th July 1998.

5. On the same date, a side letter was signed by Don O’Gorman and the petitioner and addressed to Mr Barber. It provided, inter

alia:-

“We the directors of WMG (Toughening) Ltd (WMGT) and WMG Group Ltd (WMG) and being the shareholders of WMG are

putting in place a sinking fund in WMGT to ensure that funds shall be available to comply with the redemption of the BES

investors at the due times.”

6. The letter then set out the amounts and dates of the proposed funding and then continued:-

“Such funding is dependent on WMGT being sufficiently profitable.

We shall be leaving the current financial parameters in place as heretofore.”

7. The reference to the current financial parameters clearly means the then current arrangements between Group and the Company,

including the allocation of overheads to the Company. The petitioner is and was at all relevant times the chairman of the board of

directors of Group and of its subsidiary companies as well as being an 80% shareholder, and clearly is in a position to direct the policy

of Group and its subsidiaries.

8. Under the Business Expansion Scheme the first tranche of shares issued under that scheme were due to be repurchased on 30th

April 2000, and a meeting of shareholders took place on 4th April 2000, at which they were informed by Mr O’Gorman that their shares

were worth 18 pence each, a figure with which those shareholders were highly dissatisfied. A few days later Mr O’Gorman offered to

purchase the shares at a price of 50 pence each, which offer was rejected.

9. On 13th April 2000, the petitioner’s solicitors sent a letter by facsimile to the secretary of the Company. The petitioner also alleges

that the letter was sent by post as well, although this is denied by Mr Barber. In any event, the letter constituted a demand pursuant

to s.214 of the Companies Act 1963 for the sum of £138,000, being the debt which the petitioner had purchased from Elgrove Ltd.

10. On 17th April 2000, Group terminated all commercial arrangements between Group and the Company on three months notice.

There is no doubt that the effect of this was to effectively put an end to the business of the Company.

11. In due course, the petition herein was presented on 14th June 2000, on the basis that more than three weeks had passed since

the demand for payment was made by the petitioner and the Company was insolvent and unable to pay its debts. The petitioner also

stated that “In the circumstances, it is just inequitable that the Company should be wound up”. However, no facts were pleaded in

the petition to support this other than the failure of the Company to make the payment pleaded.

12. The Company are opposing the petition on the basis that the debt referred to therein is the subject matter of a bona fide dispute,

and that the Company has a cross-claim against the petitioner for monies in excess of the amount claimed by him. This cross-claim is

based on alleged breaches by the petitioner of the undertaking given in the letter of 9th July 1998, that the then current financial

parameters would be left in place.

13. There is no real dispute between the parties as to the proper test to be applied by the Court in the circumstances. That test is

set out in the judgment of Buckley LJ in Stonegate Ltd .v. Gregory [1980] 1 All ER 241 (at page 243), and has already been approved

by this Court in Pageboy Couriers [1983] ILRM 510. The passage reads:-

“If the Company in good faith and on substantial grounds disputes any liability in respect of the alleged debt, the petition

will be dismissed, or if the matter is brought before a court before the petition is issued, its presentation will in normal

circumstances be restrained. That is because a winding up petition is not a legitimate means of seeking to enforce

payment of a debt which is bona fide disputed.”

14. It is also accepted by the parties that the subject matter of the bona fide dispute may in fact not be the debt itself but rather be

a cross-claim by the Company against the petitioner. The issue therefore is whether the Company’s claim in the present case is a

claim made in good faith and on substantial grounds. It is very clear that the issue is not whether the Company will succeed in its

claim, but whether it is a bona fide dispute which should be determined by the courts in the normal way without putting the

Company’s existence at risk.

15. In the present case the Company alleges three matters which constitute breaches of the petitioner’s undertaking. The first of

these is that there was over-invoicing in relation to transactions between the Company and Group, the second is that the basis of

allocating the cost of insurance between the companies was changed to the detriment of the Company and the third is that the

allocation of costs of moving the location of the business was not in accordance with the existing parameters. In relation to the over-

invoicing claim I find it difficult to see how this could be enforced as a claim against the petitioner rather than against Group,

assuming it is a valid claim. It does not seem to me that it involves any alteration of the existing parameters or comes within the

undertaking given by the petitioner.

16. The position in relation to the other two claims, however, is very different. There is no doubt that the proportion of the insurance

costs which the Company was asked to bear changed quite dramatically after July 1998. The petitioner, possibly correctly, argues

that as 50% of the claims against the various companies were against the Company, therefore the Company should commercially pay

50% of the premiums. Similarly, it is sought to justify the proportion of the removal costs allocated to the Company on the basis of

good commercial practice. However, the claim which the Company seeks to make against the petitioner is not related to good

commercial practice, but is based on a specific undertaking given by him effectively as part of the consideration for the sale of the

shares in Group to him. While no doubt the petitioner will dispute his legal liability under the undertaking, nevertheless I am quite

satisfied that there are substantial grounds for making the claim. It think it is quite clear from the context in which the undertaking

was given that Mr Barber required this undertaking, not for any benefit to himself, but for the protection of the Business Expansion

Scheme shareholders. The undertaking was twofold, firstly to put aside a sinking fund to ensure that the shareholders got paid,

provided there were profits to do it, and secondly to ensure that the relationship between the various companies, and particularly

between the Company and Group, remained as they had been theretofore. In other words, the purpose was to ensure that Group did

not arrange the financial affairs of the various companies so that the profits could be taken in one of the other companies. The

Company complains that this is exactly what happened, and is a clear breach of the agreement. In my view not only are there

substantial grounds for this case, but I can see no real basis on which it could be said that it is not made in good faith. In fact, if the

claim is true, then one could even argue that the Company owes a duty to the Business Expansion Scheme shareholders to pursue

the claim, which basically would be pursued for their benefit. Accordingly, I am quite satisfied that the cross-claim by the Company is

made in good faith and on substantial grounds, and there is no doubt that if the claim succeeds, it will more than wipe out the

petitioner’s claim. There are however three submissions put forward by the petitioner which do call for comment.

17. Firstly, in his judgment the learned trial Judge commented on the duty of care owned by a chairman and director of Group “to a

subsidiary Company”. Of course, the Company is not a subsidiary Company of Group within the meaning of the company legislation,

and the learned trial Judge was unfortunate in his choice of language. However, while the Company may not have been a subsidiary in

law of Group, it was commercially very much under the control of Group and the comments of the learned trial Judge appear equally

applicable to that situation.

18. Secondly, it is said that two of the four directors of the Company agreed to the reallocation of the insurance and moving costs.

This appears undoubtedly to be true, but there never was a board resolution to that effect, and certainly Mr Barber, who remained

one of the other directors, would not have approved such reapportionment, and as the fourth director was Mr Barber’s wife, it is quite

probable that had there been a board meeting and a board resolution, the board would have been evenly split on the point. The fact

remains there was no resolution, and an agreement between two out of four directors cannot bind the Company.

19. The third point is that, as the Company cannot now continue in business, because its arrangement with Group has been

terminated, therefore the Company has no business to protect, and any proceedings against the petitioner may just as easily be

taken by the liquidator. In reply, the Company pointed to the passage in the judgment of McCarthy J in Bula Ltd [1990] 1 IR 440 (at

page 450) where he said:-

“It is inevitable that a liquidator, court appointed, with all the independence of action and professional integrity that

would be at his command would lack the enthusiasm and momentum that would be second nature to the guarantors, who

presently control the progress of the action.”

20. In my view it is not only lack of enthusiasm or momentum which might restrict a liquidator from pursuing the claim, but more

particularly lack of funds. The total assets of the Company amount to about €130,000, and an action of this nature could well eat up

the entire funds if it were lost. It would appear from the evidence that the primary beneficiary from that €130,000 in a winding up

would be An Forbairt, and a liquidator would be obliged to apply to the Court for directions as to whether to issue proceedings, and

An Forbairt might well oppose any such application. In such circumstances, a court might well refuse leave for the liquidator to issue

proceedings on the basis that the risk to the existing assets of the Company would not be justified.

21. There were certain other matters argued before the Court, but it is not necessary to deal with them in this judgment. I am quite

satisfied that the learned trial Judge was correct and that the petition should be dismissed.