Supreme Court dismisses appeal allowing striking out of inadmissible hearsay and Tribunal inquiry reports in director disqualification proceedings.

THE SUPREME COURT

Denham J 25 & 26/2008

Hardiman J.

Fennelly J.

Macken J.

Finnegan J.

IN THE MATTER OF

BOVALE DEVELOPMENTS

IN THE MATTER FOR THE COMPANIES ACTS

1963 to 2006

IN THE MATTER OF AN APPLICATION PURSUANT TO S.160(2) OF THE COMPANIES ACT, 1990

BETWEEN:

THE DIRECTOR OF CORPORATE ENFORCEMENT

APPELLANTS/RESPONDENTS

AND

MICHAEL BAILEY AND THOMAS BAILEY

RESPONDENTS/APPELLANTS

JUDGMENT of Mr. Justice Hardiman delivered the 14th day of July, 2011.

This case features an application, brought by Notice of Motion dated the 8th August, 2006, seeking a disqualification order pursuant

to the Companies Act, 1990 against Michael Bailey and Thomas Bailey, which would preclude them inter alia from acting as Directors

of a company. The grounds of this application were set out in affidavits sworn by Peter Lacey, a partner in PricewaterhouseCoopers

and by Dermot Madden, an accountant in the office of the Director of Corporate Enforcement.

The applicants brought a Notice of Motion dated the 22nd November, 2006, seeking an order striking out various paragraphs of the

said affidavits and were in part successful in this in the High Court. The Baileys’ appealed this order which refused them relief on eight

specific grounds, set out in the judgment of Denham J. in the present case and the Director of Corporate Enforcement filed a Notice

of Cross-Appeal on the grounds also set out in the judgment of Denham J. The two appeals were heard together.

In relation to the contentions raised in the Baileys’ appeal, I am in agreement with the judgment of Denham J. and need say no more

about it. I am also in agreement with the order proposed by Denham J. in relation to the Cross-Appeal but I desire to give my own

reasons for this.

The Tribunal Issue.

The Director of Corporate Enforcement appealed, inter alia, those parts of the judgment of the High Court which ruled that:

- The Director of Corporate Enforcement could place no reliance on hearsay evidence in his grounding affidavits in the

disqualification proceedings.

- The report of a Tribunal of Inquiry has no evidential value in disqualification proceedings but can merely be used as a

source to assist in the finding of other evidence.

The Baileys were the subject of serious allegations made against them before a Tribunal of Inquiry, namely the Mahon Tribunal

formerly the Flood Tribunal. Certain of the findings of the Tribunal were set out or summarised in the Affidavits filed in the

disqualification proceedings, and the Baileys took exception to this. This objection is based very largely on the characterisation of the

Tribunal of Inquiry as a legal entity contained in the judgments in the High Court and in this Court in the leading case of Goodman

International and Lawrence Goodman v. The Honourable Mr. Justice Liam Hamilton, Ireland and the Attorney General [1992] 2 IR

542.

Significance of Goodman.

I wish to repeat what I said in the course of my judgment in Murphy and Ors. v. Flood (Supreme Court, unreported 21st April, 2010)

in relation to the context and significance of Goodman:

“… certain persons have in the past been heard to complain, and to take their complaint to the courts, that the enormous

prerogatives of a Tribunal of Inquiry is capable of destroying them, financially and in terms of reputation, much more

obviously than even a criminal court could do, but that the tribunal’s procedures afford them few or none of the

protections which would be available to them in the court forum. This contention has always been rejected. It was

rejected in strong terms by this Court in Goodman v. Hamilton. This decision is now the foundation, in Irish law, of the

constitutionality of the Tribunal of Inquiry, as known in our law. But since that judgment was given, the nature of

tribunals in themselves has been altered by legislation, by parliamentary resolution… and by the exponential, and wholly

unpredicted, expansion in the length of Tribunals of Inquiry and in the costs of them. It would be wholly unrealistic not to

acknowledge that these costs can only be described as truly enormous”. (Emphasis added)

I also said, and also wish to reiterate, from my judgment in the Murphy case the following:

“Goodman is a decision of this Court, a case of high authority which we have not been asked to disapprove and which I

propose to follow. It is true to say that Mr. Michael Collins S.C. who appeared for the Tribunal on this appeal said he

would ask the Court “if necessary” to depart from Goodman. I take it however, that this is a reference solely to the

dictum of McCarthy J. to be discussed below and not to the principal thrust of Goodman, which has been for almost

twenty years every Tribunal of Inquiry’s title to constitutionality. No argument was directed against any finding in

Goodman except the dictum of McCarthy J. Nevertheless, it must be acknowledged that, in distinguishing the findings of a

tribunal from the verdict of a court, the judges were obliged to make some rather subtle distinctions which one may take

leave to doubt would count for much in the minds of ordinary people. I have to some extent explored this topic in my

judgment in Maguire v. Ardagh [2002] 1 I.R. 385 at 669”.

Despite these acknowledgments of the canonical status of Goodman, it must equally be recorded that this is the second attempt in

just over a year, Murphy being the first, to gloss, or to relegate to the status of mere obiter, or if necessary to overrule a portion at

least of the findings of Goodman. In the Murphy case, this portion was a dictum of McCarthy J. in relation to the Tribunal’s powers to

award costs. In the present case it is a portion of the judgment of Finlay C.J., to be considered below.

In Goodman, the former Chief Justice said at p.590:

“With regard to the suggestion that the findings of the Tribunal if not an impermissible administration of justice by a body

other than a court, is a usurpation of the activities of courts in cases where either civil cases are pending or may be

instituted, it seems to me that again this submission arises from a total misunderstanding of the function of the Tribunal.

A finding by this Tribunal, either of the truth or of the falsity of any particular allegation which may be the subject matter

of existing or potential litigation, forms no part of the material which a court which has to decide that litigation could rely

upon. It cannot either be used as a weapon of attack or defence by a litigant who in relation to the same matter is

disputing with another party rights arising from some allegation of breach of contract or illegal conduct or malpractice. I

am, therefore, satisfied that the submission under Article 34 must fail”. (Emphasis added)

The Director of Corporate Enforcement says that in so holding, especially in the emphasised passage, Finlay C.J. went further than

was necessary. He said that the passage was obiter on the basis that it was not necessary to go that far to decide the case. He

said it was not necessary to overrule the judgment as a whole but it should be distinguished on the basis that it is not sought here to

usurp the Court’s functions.

What the Director wishes to do.

The Director of Corporate Enforcement first relied on the Tribunal material referred to in the affidavits filed on his behalf in general

support of his application to disqualify the Baileys. Subsequent to the High Court decision, and just before the hearing of this appeal,

by letter of the 24th March, 2011, the Director informed the Court that he was restricting the ambit of his cross-appeal in a particular

way. Essentially, the Director informed the Court that he was no longer seeking to rely at all on substantial parts of the Tribunal

material referred to in his affidavits and that in relation to other parts (being paragraph 18.09 of the Second Interim Report of the

Tribunal) and paragraphs 7.08 and 7.09 of the Third Interim Report of the Tribunal, he appears to limit his contention to the

proposition that this material is relevant to the Court’s determination of the fitness of the applicants’ to be concerned in the

management of a company on the basis that it should be admitted as prima facie evidence in the disqualification proceedings.

This, it will be observed, is a considerable restriction of the scope of the Director of Corporate Enforcements contentions and clearly

represents a significant rethinking of the Director’s position. But that position is still an extremely novel and far reaching one. At least

absent a specific statutory provision, a matter of fact requiring to be established before a court must be established by admissible

evidence which is open to cross-examination and contradiction, and is given publicly before the Court. It is not normally an admissible

form of proof to produce a statement by a third party whether a policeman, a government minister or a Tribunal of Inquiry and to

claim that that has evidential effect, prima facie or otherwise. An exception to this arises, of course, where there is an issue which,

by virtue of a decision of a court of competent jurisdiction, is res judicata between the parties; but such a decision of a court will

itself have been reached on admissible evidence duly adduced in a hearing which observes all the parties’ procedural rights.

Powers of a Tribunal of Inquiry.

It has frequently been observed, specifically in the Murphy case cited above and in O’Callaghan v. Mahon [2008] 2 IR 514, that the

power of the modern Tribunal of Inquiry is truly awesome. The duration of some modern tribunals is nothing less than appalling: a

recent tribunal has ended after about thirteen years and another seems likely to exceed even this enormous total. As a result, the

expense of the participation in a tribunal of inquiry is nothing less than grotesque, beyond the means even of individuals or

corporations who would normally be considered rich. Furthermore, Tribunals have now taken to sitting for very long periods in private

so that the material which they gather is normally known only to themselves, except on these all too frequent occasions when portion

of the material is leaked. This accumulation of material in secret has on a number of occasions created major injustice where material

damaging to the account of an accusing witness has been quite deliberately withheld from the parties whom he accuses: see Murphy

and O’Callaghan. I will not expand further on the characteristics, enormous expense and dramatic effects of tribunals since they have

already been amply discussed by me in the cases mentioned and in Maguire v. Ardagh [2002] 1 IR 385.

Legal issues affecting Tribunals.

Because of the matters just mentioned the Tribunal of Inquiry, especially in its modern form, has frequently been the subject of legal

challenges by individuals and even by the government itself. These aspects do indeed give rise to very serious legal and constitutional

issues. By reason of the provisions of the Constitution, justice is to be administered by judges in public, in Courts established under

the Constitution. But a simulacrum of the administration of justice often appears to take place in tribunals and people are prejudiced

by the findings of tribunals at least as much as by the judgment of a court. There is manifest scope for conflict between a tribunal

and the constitutional rights of the citizens especially in relation to the administration of justice, civil or criminal, and the trial of

offences.

The learned editors of Kelly on the Irish Constitution (4th edition, Dublin 2003) at p.1040 say:

“Article 38.1 is plainly referable to the trial of offences, but the novel question of whether the Oireachtas is free to

establish parallel procedures providing for the investigation of alleged criminal (or potentially criminal) conduct was

examined by the Supreme Court in Goodman v. Hamilton”. (Emphasis added)

That, indeed, is the essence of the challenge mounted in Goodman. In that case Mr. Seamus McKenna S.C., leading counsel for Mr.

Goodman, had previously put the issue in much the same way:

“The issue of the right of the Tribunal to investigate the truth or otherwise of allegations of criminal conduct or illegal

activities, or fraud, is the core and fundamental constitutional question in this case”.

Against the background of this very powerful attack, the decisions of the High Court and of this Court in Goodman preserved the

constitutionality of the Tribunal of Inquiry, but only by characterising and defining the legal nature of a tribunal in a very specific way.

The details of this will shortly be discussed. The fundamental flaw in the argument that the passage cited above from the judgment of

Finlay C.J. is obiter, because it goes further than is necessary, is that the argument fails to appreciate that the passage in question

is a clear, obvious and unavoidable corollary of the characterisation of the legal nature of a tribunal whereby alone the

constitutionality of the institution was preserved.

The core of the challenged passage.

There is no doubt that the core of the passage from Finlay C.J. to which the Director of Corporate Enforcement objects is the

statement that:

“[the finding of a tribunal] either of the truth or the falsity of any particular allegation which may be the subject of

existing or potential litigation, forms no part of the material which a court which has to decide that litigation could rely

upon. It cannot either be used as a weapon of attack or defence by a litigant who in relation to the same matter is

disputing with another party rights arising from some allegation of breach of contract or illegal conduct or malpractice”.

It is that passage, quite specifically, which prevents the deployment of the Tribunal’s findings as a weapon of attack in the hands of

any litigant, here the Director of Corporate Enforcement.

Legal nature of a tribunal.

In the words, not of Finlay C.J. but of Costello J. (as he then was) who gave the judgment of the High Court in Goodman, the finding

of a Tribunal of Inquiry is:

- not imposing any liabilities or effecting any rights (p.557),

- its conclusions merely have the status of opinion and “this opinion is devoid of legal consequences” (p.557),

- a body whose findings are “sterile of legal effect” 562 and

- whose purpose is “merely to enquire and report” (ibid).

Elsewhere it is found that the function of a tribunal of inquiry is:

“To make a finding of fact, in effect, in vacuo and to report it to the legislature (590)”.

The dangers and conceptual difficulties to which a tribunal which lacked these characteristics would give rise are amply considered in

an Australian case referred to by several of the judges, in Goodman, viz: Victoria v. Australian Building Construction Employees

Federation (1982) 152 CLR 25. I wish to emphasise my agreement with the whole of the citation from the judgment of Murphy J. in

that case, which is set out in the judgment of Hederman J. in Goodman. He said, in particular:

“The authority given to the Commissioner to exercise such an important ingredient of judicial power as finding a person

guilty of ordinary crimes, is itself an undermining of the separation of powers. It is a fine point to answer that the finding

is not binding and does not of itself make the person liable to punitive consequences. It is by fine points such as these

that human freedom is whittled away”.

I conclude, accordingly, that the decisions in Goodman provide the only conceivable basis on which the constitutionality of a tribunal

of inquiry could be preserved. All the constitutional guarantees in relation to the administration of justice and fair procedures would be

vain if it were possible for the government to set up simulacrum or a “parallel process” which would have all the consequences of

criminal conviction other than actual imprisonment.

I repeat that the passage from the judgment of Finlay C.J. to which exception is taken is in my view entirely unexceptionable. So far

from going further than is necessary, so as to be a mere obiter, the entire of the passage is, as I have said, the inescapable corollary

of the findings that a tribunal operates “in vacuo” that it is “sterile of legal effect” and that its report is simply an opinion and is

“devoid of legal consequences”. If the report could be used, on a prima facie basis or otherwise, as a weapon or a shield in the hands

of a litigant it would manifestly not be “devoid of legal consequences” or “sterile of legal effect”.

Whether a body which is so “sterile” is worth having in the first place is a question for the judgement of those who establish tribunals,

and not for the Court. But once established it is established with those qualities, and not otherwise.

It is worthy of note that the Attorney General did not support the contention of the Director of Corporate Enforcement but

supported, as I understood it, the “sterility” of the Tribunal’s findings. Though the findings in this case were adverse to the Baileys,

the report of any particular tribunal might be adverse to any party at all, or even to the State itself. In such circumstances the State

would be entitled to take the point now taken by the Baileys, and to the same extent, neither greater nor less.

Ex post facto

There is another point which in my view is absolutely fatal to the contentions of the Director of Corporate Enforcement in the present

case. Through all the long years of the Baileys involuntary interactions with this Tribunal of Inquiry, as a result of which they incurred

expense which would have crippled poorer men, they did so on the basis that the nature of a tribunal of inquiry was that set out in

Goodman, a decision of the country’s Court of Final Appeal, unchallenged throughout their very prolonged appearances before the

Tribunal.

In those circumstances it is simply not open, in my view, to the State or any emanation of the State to execute a complete change

of front and declare that now, so far from being “devoid of legal consequence” or “sterile of legal effect” the findings of the Tribunal

are prima facie evidence against them in the present disqualification proceedings in which serious allegations are made against them.

It is not open to a party, and particularly a party in a dominant position such as the State, to “approbate and reprobate”, as the old

phrase, originating in a different context, has it. I take this to mean, in more contemporary language, the State cannot bring about or

permit a particular state of the law and then, without notice, to take up an entirely different posture and to seek to deprive a person

of property or other advantage acquired under that state of the law by declaring that it never existed at all, or was it wrong, or

mistaken, or by changing it in a manner inimical to a course of conduct lawfully and prudently followed under the law as it stood. This

is certainly the case in relation to property rights. In Cox v. Ireland [1992] 2 IR 503, the plaintiff challenged the provision of an act of

1939 whereby, as a public servant, he could on conviction of a scheduled offence in the Special Criminal Court forfeit his employment,

be disqualified from the like employment for seven years and be disqualified from being granted out of the central fund any pension,

superannuation or allowance in respect of service rendered by him before the date of such conviction. In finding the Section

unconstitutional, this Court held that:

“It is clear that the provisions of s.34 of the Act of 1939, when it becomes applicable to any person convicted of a

scheduled offence in a Special Criminal Court, potentially constitutes an attack, firstly on the unenumerated constitutional

right of that person to earn a living and, secondly, on certain property rights protected by the Constitution, such as the

right to a pension gratuity or other emolument already earned, or the right to the advantages of a subsisting contract of

employment… the unilateral variation and suspension of contractual rights, including rights which may involve the

entitlement to a pension to which contribution over a period has been made, constitutes a major invasion of those

particular property rights”.

I respectfully agree with the foregoing and see no reason why the prohibition against tampering with entitlements previously available

should be confined to rights in the nature of property rights. Indeed, as can be seen, the judgment of the Supreme Court in Cox also

extended to an unenumerated rights such as the right to earn a living. To be disqualified from being a Director or participating in the

management of a company plainly tranches on such a right especially in relation to people who have been Company Directors for a

lengthy period. That is not to say that they may not lose such a right: obviously they can. But it is emphatically to say that they

cannot lose such a right on the basis wholly or partly of “evidence”, prima facie or otherwise, which they had previously been entitled

to believe would not be available as evidence against them, and would be “devoid of legal consequences, sterile of legal effect”.

The hearsay issue.

The Director of Corporate Enforcements also wanted to rely in evidence on two different types of material which were undoubtedly in

the nature of hearsay. These were, firstly, two memoranda from the Company’s auditor and secondly, information which he had

obtained from the Revenue Commissioners. He did this largely on the basis of various English authorities which are referred to in the

judgment of Denham J. to the effect that hearsay evidence should be admissible in the disqualification procedures “in the initial stages

of the application”.

The point is well taken by Denham J. that the material in the English cases was all material arising out of statutory proceedings and

fitting into a statutory scheme. In Secretary of State v. Aaron [2008] EWCA 1146, Thomas L.J. stated, having referred to earlier

authority:

“… the whole basis for the rationalisation in the cases is the statutory scheme. I cannot see any reason to hold that

anything relied on by the Secretary of State is admissible in disqualification proceedings; the rationale for relying on the

reports and other material fits into the statutory scheme, but there is nothing to suggest that the Secretary of State can

go outside this scheme. If he could, it would be difficult to see what limits there could be to the materials to be relied

upon. There is also good sense in restricting the material relied upon to material produced through the statutory scheme

for investigation; this is understood by everyone and the procedure clear”.

It is, therefore, quite clear that the United Kingdom cases depend entirely on the existence of a statutory scheme which is absent

here and that even in that context it does not open the door to the admission of anything at all which the applicant, here the

Director of Corporate Enforcement, thinks relevant.

In my view, in Ireland with its distinctive legal system and in particular the distinctive structure of rights arising out of the

constitution, the position is still clearer.

I wish to make it clear that in my view the fundamental objection to the admissibility of hearsay evidence in proceedings before a

court is that, to the extent that it is admitted it deprives the applicant of his right to cross-examine. This case, like many of these

applications, features allegations of a kind which, if they could be stood up in evidence, would amount to conduct disgraceful in a

businessman and company director and would be gravely damaging to his reputation and his ability to earn a livelihood. Persons,

official or otherwise, who makes such allegations must be prepared to stand them up in direct evidence. The person against whom

they are made, if he contests them as the Baileys clearly do, is entitled to the rights identified in Re Haughey [1971] IR 217 including,

vitally a right to confront and cross-examine the witnesses against him. This is not a technicality but the exercise of a right which, as

I have observed elsewhere, has been the means of the vindication of innocent people.

The Director argued that he must, even in the case of a contested case, first make some showing in affidavits; that he cannot

compel any person, such for example the auditors or the revenue staff to swear an affidavit; and therefore he should be able to rely

on these reports at least at an early stage. He did not say that any particular person had, in fact, refused to swear an affidavit.

Certainly it is true that people against whom disgraceful allegations of the sort the Director is making here are entitled to notice of

the nature of the allegations and the evidence which is said to support them. But, on the basis of Re Haughey, they are entitled to

have these allegations made viva voce and to cross-examine those who make them. Paper does not refuse ink; and for that reason it

would be disgraceful in the Director to put on affidavit, on the basis of hearsay, an allegation which he lacks a witness to stand up,

and I am sure he would not do so. But the nature of the evidence can be notified without putting it on affidavit on the basis of

hearsay and it is wrong that evidence which may be wholly exploded in cross-examination should go on to enjoy a malign half life in

hearsay affidavit form. There is in my view no reality in the Director’s repeated suggestions that he would be in some way at a

disadvantage if he could not put these allegations on affidavit: he would not and he can easily notify the persons against whom he is

making accusations of the nature and substance of them in all necessary detail even though he cannot force such persons to make

an affidavit.

I am of the opinion that, in the absence of the Haughey rights, a person, a company director or not, simply cannot be put to answer.

His right to have only admissible evidence deployed against him does not depend on what answer he makes to an ex parte statement

of the case against him, made on the basis of hearsay.

Procedural issues.

Some of my colleagues have expressed understandable concerns about the procedures adopted in this case, and specifically about

the bringing of an interlocutory motion to strike out certain evidence filed on behalf of the moving party.

I wish to say that, in the most unusual circumstances of this case, I do not share these concerns. It is notable that the evidence

which is the subject of the present appeal was clearly and manifestly inadmissible evidence. Portions of it were rank hearsay, other

portions consisted of an attempt to deploy in litigation, as a weapon of offence, portions of the findings of a Tribunal of Inquiry. This

is legally impossible by reason of a decision of this Court of the highest authority. In those circumstances, I would be extremely sorry

to think that a person against whom this inadmissible evidence was sought to be deployed could do nothing about it until the trial of

the action. If this were so, I believe it would confer a wholly unmerited tactical advantage on the party deploying evidence which he

knows to be inadmissible. Firstly, the evidence would be on the record of the Court publicly available. Secondly, the person against

whom it was deployed would have no certainty until the trial as to how the issue of its admissibility would be resolved. From this it

follows that he would have to make his tactical and evidential preparations for the trial on the basis that the evidence to which he

objected might nonetheless be admitted. This in turn might easily (and in the present case in my view would probably) involve him in

answering material not properly deployed against him and perhaps in committing himself on matters which do not properly arise at all.

It would add to the length and therefore to the expense of the hearing.

I entirely agree with the finding of the learned trial judge that:

“It is clear that the evidence supporting any alleged wrongdoing at a hearing which is dealt with on affidavit must be just

as inadmissible as evidence which would be given in court by a witness at an oral hearing”.

Equally, regard must be had to the provisions of Order 40, Rule 4:

“Affidavits shall be confined to such facts as the witness is able of his own knowledge to prove, and shall state his means

of knowledge thereof, except on interlocutory motions…”.

In this case, the Director of Corporate Enforcement filed affidavits which manifestly contain factual material which the witness is not

able of his own knowledge to assert. He did this, quite clearly, for some litigious advantage to himself to which in my view he is not

entitled.

I consider it would be a considerable injustice to the respondents in the underlying action if there were no machinery for the excision

of material which is clearly hearsay or otherwise clearly inadmissible, and I find sufficient warrant for the relief that this Court can

entertain such an application in Order 40, Rule 4.

I too would dismiss the appeal and the cross-appeal.