High Court refuses preliminary issue trial due to Bank's delay and failure to seek expedited determination.

[2016] IEHC 89

THE HIGH COURT

COMMERCIAL

[2014 No. 468 COS]

BETWEEN

AIDAN GARCIA (LIQUIDATOR) AND PANSHIRE LIMITED (IN LIQUIDATION)

APPLICANTS

AND

MARK KILKENNY, PATRICK ROONEY AND DANSKE BANK

RESPONDENTS

JUDGMENT of Mr. Justice Hedigan delivered on the 19th of February 2016

1 Introduction

1.1. In these proceedings, the third named respondent (“the Bank”) seeks the trial of one preliminary issue:

“Whether the security held by the Third Named Respondent ranks in priority to any claims, rights or interests asserted by

the Applicants in respect of the Clearstream Development and/or related sale proceeds?”

1.2. By notice of motion dated 19th October, 2015, the Bank seeks the following reliefs:

“1. An order pursuant to Order 63A Rule 5 of the Rules of the Superior Courts (“RSC”) and/or Order 63AQ Rule 6(1)(ii) RSC

and/or the inherent jurisdiction of this Honourable Court fixing the following issue to be determined by way of preliminary

issue (the “Preliminary Issue”) in the above entitled proceedings:

“Whether the security held by the Third Named Respondent ranks in priority to any claims, rights or interests asserted by

the Applicants in respect of the Clearstream Development and/or related sale proceeds?”

2. In the event of the Preliminary Issue being determined in the affirmative, an order pursuant to Order 19 Rule 28 RSC

and/or the inherent jurisdiction of this Honourable Court striking out the within proceedings as disclosing no reasonable

cause of action; and/or as being frivolous or vexatious; and/or bound to fail.

3. Such directions as to this Honourable Court deems appropriate in respect of the setting down of the Preliminary Issue.

4. A stay on the directions timetable in respect of the substantive proceedings as issues on 9 September 2015 pending

determination of the Preliminary Issue.

5. Such further or other order as may be appropriate.

6. Costs.”

2 The Factual Background

2.1. The substantive proceedings are brought by the applicants by way of notice of motion dated 21st October, 2014, seeking, inter

alia:

(1) An order pursuant to section 298 of the Companies Act 1963 against the first and second named respondents;

(2) An order pursuant to section 38 of the Companies Act 1990 against all of the respondents

(3) A declaration pursuant to section 139 of the Companies Act, 1990 (as amended) that the property of the Company

comprising of the proceeds of sale of the apartments situated at Clearstream Court, Finglas, Dublin 11 was disposed of

with the effect of perpetrating a fraud on the Company and its creditors.

(4) An Order pursuant to section 139 of the Companies Act 1990 (as amended) requiring the Respondents to deliver up or

pay a sum to the Liquidator on such terms and conditions as the court deems fit in respect of the disposition of the

proceeds of sale of the apartments situated at Clearstream Court, Finglas, Dublin 11.

2.2. Section 139 of the Companies Act, 1990 (“the Act of 1990) provides:

“139.—(1) Where, on the application of a liquidator, creditor or contributory of a company which is being wound up, it can

be shown to the satisfaction of the court that—

(a) any property of the company of any kind whatsoever was disposed of either by way of conveyance, transfer,

mortgage, security, loan, or in any way whatsoever whether by act or omission, direct or indirect, and

(b) the effect of such disposal was to perpetrate a fraud on the company, its creditors or members,

the court may, if it deems it just and equitable to do so, order any person who appears to have the use, control or

possession of such property or the proceeds of the sale or development thereof to deliver it or pay a sum in respect of it

to the liquidator on such terms or conditions as the court sees fit.”

2.3. The first named applicant is the liquidator of the second named applicant (“the Company”). The Company was involved in the

development of an apartment complex in McKee Avenue, Dublin 11, comprising 88 apartments and 132 car-park spaces, and known as

Clearstream Court. For the purposes of the preliminary issue the following facts are admitted:

(i) That at all times Mr. Kilkenny and Mr. Rooney were directors and shareholders of the Company;

(ii) That under a facility letter dated 20th March, 2006, the Bank advanced loans in the amount of €7,900,000 (“the Term

Loan”) and €12,100,000 (“the Development Loan”) – which loans were subsequently increased under a facility letter dated

19th November, 2007, to approximately €24,000,000 – to Mr. Kilkenny to assist in the purchase of the lands on which the

Clearstream Court apartments were built, and to assist with the development costs associated with the constructions of

same;

(iii) That both the Term Loan and the Development Loan were to be repayable from the proceeds of apartment sales in

the development at Clearstream Court;

(iv) That Mr. Kilkenny purchased the beneficial interest in the land comprising the site on which Clearstream Court was

built relying upon the Term Loan provided to him by the Bank;

(v) That Mr. Kilkenny executed a mortgage dated 25th April, 2006, in favour of the Bank over all of his interest in the

Clearstream Court lands (“the Mortgage”);

(vi) That Mr. Kilkenny contracted with the Company to build the Clearstream Development for reward;

(vii) That Mr. Kilkenny drew down the Development Loan to facilitate the construction of the site known as the

Clearstream Development;

(viii) That the Bank did not lend any money to the Company and that it does not hold (and never did hold) any security

from the Company, whether by way of mortgage, charge, or otherwise;

(ix) That the Clearstream Development was ready for occupation/sale in August 2008;

(x) That the first unit in Clearstream Court was sold on the 9th December, 2008;

(xi) That the first 30 units in Clearstream Court were sold by means of two separate contracts, the first being a contract

for the sale of the site (“the Site Contract”) as between Mr. Kilkenny and Mr. Rooney and the purchaser, and the second

being a building agreement between the purchaser of a unit and the Company (“the Building Agreement”)

(xii) That in respect of the first 30 sales, the Bank was furnished with a Closing Statement which referred to the

consideration payable by the purchaser, as apportioned between “Sale of Site as per Contract (Mark Kilkenny & Patrick

Rooney)” and “Building Agreement (Panshire Limited)” and;

(xiii) That the Bank received a substantial sum of money representing the proceeds of sale of the apartments at

Clearstream Court, including part of the “Building Agreement” element of such proceeds of sale, and applied the same in

permanent reduction of the debt due by the first named respondent in respect of the Term Loan and Development Loan.

3 The Legal Framework

3.1. Order 63A, r. 5 of the Rules of the Superior Courts provides:

“A Judge may, at any time and from time to time, of his own motion and having heard the parties, give such directions

and make such orders, including the fixing of time limits, for the conduct of proceedings entered in the Commercial List, as

appears convenient for the determination of the proceedings in a manner which is just, expeditious and likely to minimise

the costs of those proceedings.”

3.2. Order 63A, r. 6(1)(ii) RSC provides:

“Without prejudice to the generality of rule 5 of this Order, a Judge may, at the initial directions hearing –

(a) of his own motion and after hearing the parties, or

(b) on the application of a party by motion on notice to the other party or parties returnable to the initial directions

hearing,

give any of the following directions to facilitate the determination of the proceedings in the manner mentioned in that

rule:

…

(ii) fixing any issues of fact or law to be determined in the proceedings;…”

3.3. On a procedural note, the applicants contended that the Bank ought to have brought the application pursuant to Order 25 and/or

Order 34(2) RSC, rather than Order 63A. Order 25 RSC provides:

“1. Any party shall be entitled to raise by his pleading any point of law, and any point so raised shall be disposed of by

the Judge who tries the cause at or after the trial, provided that by consent of the parties, or by order of the Court on

the application of either party, the same may be set down for hearing and disposed of at any time before the trial.

2. If, in the opinion of the Court, the decision of such point of law substantially disposes of the whole action, or of any

distinct cause of action, ground of defence, set-off, counterclaim, or reply therein, the Court may thereupon dismiss the

action or make such other order therein as may be just.”

Order 34, r. 2 RSC provides:

“2. If it appear to the Court that there is in any cause or matter a question of law, which it would be convenient to have

decided before any evidence is given or any question or issue of fact is tried, or before any reference is made to an

arbitrator, the Court may make an order accordingly, and may direct such question of law to be raised for the opinion of

the Court, either by special case or in such other manner as the Court may deem expedient, and all such further

proceedings as the decision of such question of law may render unnecessary may thereupon be stayed.”

3.4. In Campion v. South Tipperary County Council [2015] IESC 79, McKechnie J. summarised, at para. 35, the circumstances in

which the jurisdiction to grant the trial of a preliminary issue might be successfully invoked:

“• There cannot exist any dispute about the material facts as asserted by the relevant party: such can be agreed by the

moving party or accepted by him or her, solely for the purposes of the application.

• There must exist a question of law which is discrete and which can be distilled from the factual matrix as presented.

• There must result from such a process a saving of time and cost, when the same is contrasted with any other

suggested method by which the issues may be disposed of: in default with a unitary trial of the entire action. In the

absence of admissions, appropriate evidence will usually be necessary in this regard: impressions of what might or might

not be, will not be sufficient.

• The greater the impact which a decision on the preliminary issue(s) is likely to have, on the entire case, the stronger

will be the argument for making the requested order.

• Conversely if irrespective of the courts decision on that issue(s), there should remain for determination a number of

other substantial issues or issue(s) of a substantial nature, the less convincing will be the argument for making such an

order.

• Exceptionally however, even if the follow on impact will not dispose of any other issue, the process may still be

appropriate where the subject issue is substantial in its own right and where its determination will clearly benefit the

action in an overall sense.

• As an alternative to such a process in such circumstances, some other method or mode of proceeding, such as a

modular trial may be more appropriate.

• It must be ‘convenient’ to make such an order: at one level this consideration of itself, can be said to incorporate all

other factors herein mentioned, but for the purposes of clarity it is I think more helpful, to retain the traditional separation

of such matters.

• ‘Convenience’ therefore should be understood as meaning that the process will enhance in an overall way the most

efficient, timely and cost effective method of disposing of the entire litigation.

• The making of such an order must be consistent with the overall justice of the case, including of course fair procedures

for all parties.

• The court at all times retains a discretion whether or not to make such an order: when so deciding it should exercise

caution so as to make sure that if an order is made, it will meet the purposes intended by it; finally

• Subject to giving due and proper weight to the decision of the trial judge, the appellate court can substitute its own

views for those of the High Court where it thinks it is both necessary and appropriate to so do.”

4 Submissions of the Bank

Delay

4.1. The Bank rejected the claim that the application is made at a late stage. The Bank claimed its entitlement to invoke the

jurisdiction of the Court to set down the proposed preliminary issue under Order 25 RSC only arose once it had delivered its Points of

Response on 24th July, 2015. It was submitted that there has been no delay by the Bank thereafter in raising the issue, having

obtained the leave of the Court to bring its application in early October 2015.

Prior Attempt to Determine a Preliminary Issue

4.2. The Bank submitted that the claim that the Bank has already participated in a failed attempt to have an issue determined is

disingenuous. The first and second respondents brought an application, prior to the exchange of pleadings, to have the issue

determined as to whether the liquidator was validly appointed. The Bank made a brief submission as to the scope of the preliminary

hearing before Haughton J. (Garcia & Anor. v. Kilkenny & Ors. [2015] IEHC 272) but made it clear that the Bank did not wish to be

heard on the preliminary issue and with the leave of the Court withdrew.

The Issue is Determinable on Agreed or Accepted Facts

4.3. The Bank submitted that the application is brought by reference to facts that are not in controversy between the parties on the

pleadings (see “The Factual Background”). In fact, a notable feature of the application is that it is based on pleas positively made by

the applicants in their points of claim.

4.4. In relation to the facility letters and mortgages, the Bank submitted that the liquidator has specifically pleaded and relies upon

the terms of the facility letters entered into as between the Bank and Mr. Kilkenny as well as the mortgage executed by Mr. Kilkenny.

The Term and Development loans were first advanced on foot of a facility letter dated 20th March, 2006. It expressly provided that

the Term and Development loans were to be “repaid from the proceeds of apartment sales from the development”. As security for the

loans the Bank was to be provided, inter alia, with a mortgage over the entirety of the borrower’s interest (legal or equitable) in the

site, with full planning permission for the construction of the Development and a non-recourse collateral first legal mortgage and

charge over the site from the vendors.

4.5. The Mortgage executed by Mr. Kilkenny identified the “Mortgaged Property” as meaning: “(a) the property described in Schedule

1 hereto; and (b) (by way of extension of Section 6 of the Conveyancing Act 1881) all rights, liberties, powers, easements, quasi-

easements and appurtenances (in each case of whatever nature) attached to or appurtenant thereto and all buildings, structures,

erections, fixtures (including trade fixtures) from time to time therein and thereon.” The “Mortgaged Property” was secured in favour

of the bank under the terms of clause 3 of the Mortgage in terms that encompass all potential interests, whether leasehold freehold,

registered or unregistered in respect of the lands in question. Clause 4 provided that the Bank was obliged to release and discharge

the security only “if all the Secured Liabilities have been finally and indefeasibly paid and discharged in full…” Clause 5 provided that

the Mortgage would be “a continuing security” and would “extend to the ultimate balance of the Secured Liabilities and … continue in

force notwithstanding any intermediate payment or discharge in whole or in part of the Secured Liabilities”. Under Clause 6.1.1, Mr.

Kilkenny warranted, represented and undertook to the Bank that he was and would be “at all times during the subsistence of the

security…the sole lawful and beneficial owner of the Secured Assets”. Under clause 6.1.4, Mr. Kilkenny warranted, represented and

undertook to the Bank that “until released by the Bank, [the] Mortgage constitutes a first priority security interest over the Secured

Assets enforceable in accordance with its terms…” In addition, under clause 7.8, Mr. Kilkenny covenanted with the Bank that until the

Mortgage was discharged he would not:

“7.8.1 create or permit to subsist any Security Interest over the Secured Assets or any of them; or

7.8.2 part with, sell, transfer, lend, lease or otherwise dispose of, whether by means of one or a number of transactions

related or not and whether at one time or over a period of time, the whole or any part of the Secured Assets…”

At clause 7.18, Mr. Kilkenny covenanted that he would not “…enter into any onerous or restrictive obligations affecting any of the

Secured Assets or create or permit to subsist any over-riding interest or right therein or thereover which might adversely affect the

value thereof.”

4.6. The Bank submitted that the liquidator has not asserted on affidavit that there is a dispute about the Bank’s security over the

development. The assertions made in the liquidator’s affidavit at paras. 16-18 are at odds with the claim as pleaded by the applicants

in their points of claim, which the Bank contended positively asserts the acquisition of the relevant lands by Mr. Kilkenny and the

securing of same in favour of the Bank under the Mortgage. Further, the suggested concerns raised by the liquidator as to the

security in his affidavit are misleading by reference to the documentation before the Court on this application.

4.7. The Bank submitted that its fundamental position is that its security over the Clearstream Court lands extended to the

constructed development and that, accordingly, it had a prior claim to all proceeds of the sale of any apartment sold. The Bank

contended that this was at all times known to the company insofar as it was involved in the development works. It is on this basis

that the Bank contended that the payments to it cannot be considered to be disposals of company property or otherwise caught by

the terms of s. 139 of the Act of 1990.

4.8. The Bank submitted that the Mortgage expressly provided that it would extend to secure “all buildings, structures, erections,

fixtures (including trade fixtures) from time to time therein and thereon”. The Company was at all times aware of this. On the facts,

even before any contract for the sale of any apartment to a purchaser was concluded, the completed Clearstream Development was

captured by the Bank’s prior ranking security. Accordingly, on a sale of a part of the completed development, however structured, the

Bank had a prior claim to all proceeds under the terms of its mortgage. The fact that the Bank might have been aware of the

structuring of a sale of the first 30 units through the mechanism of a Site Contract and Building Agreement does not alter its security

rights, nor give rise to any estoppel. The Bank has never resiled from the position that it is entitled to the proceeds of sale of each

unit less agreed deductions. The Bank relied on In Re N17 Electrics Limited (In Liquidation) [2012] IEHC 228 in arguing that awareness

of the manner in which a mortgagor deals with his property does not bind the mortgagee.

4.9. The Bank argued that the claim advanced by the liquidator under s. 139 cannot succeed. First, there has been no disposal of

Company property to the Bank. Secondly, the Company was at all times on express notice both of the terms of the Mortgage and the

terms of the loan facilities made available to Mr. Kilkenny on foot of which development funds were in turn provided to the Company.

In addition, both the 2006 and 2007 facility letters, the terms of which were known to the Company through its directors, made it

clear that the Bank debt was to be repaid from sales proceeds of all constructed apartments. To the extent that it is now contended

by the liquidator that the Company acquired some interest in the mortgaged property by constructing the development or on foot of

an agreement with Mr. Kilkenny, the quality of such interest is effected by the Mortgage both as to the validity of that interest

insofar as it can now be asserted as against the Bank, and its priority. Any company interest is postponed to the Bank’s prior security

(see In Re Salthill Properties (In Receivership) [2004] IEHC 145, [2006] IESC 35). Thirdly, the payments of sales proceeds to the Bank

did not have the effect of perpetrating any fraud on the Company or its creditors. This could only arise if money would have been

available to the Company to pay other creditors but for the payments to the Bank. However, insofar as the Company had a claim to a

potion of the proceeds of sale, this ranked behind the Bank’s priority to such payments. Fourthly, the Bank was the biggest

contributor in monetary terms to the Clearstream Development (advancing in excess of €20,000,000) and suffered the largest loss,

with a sum of €14,000,000 being irrecoverable. The Bank asserted that the Bank acted on foot of its security as any lender would be

entitled to do.

5 Submissions of the Applicants

Delay

5.1. The applicants argued that the application ought to be refused for delay in bringing this application, being made at a very late

stage in the proceedings. The first time the Bank indicated it wished to fix a preliminary issue was in October 2015. By that time, the

parties had agreed to have the matter dealt with as a unitary trial and considerable expense was incurred by the applicants on that

basis. Further, the applicants rejected the bank’s assertion that the entitlement of the bank to raise the preliminary issue only arose

on 24th July, 2015, when the pleadings closed with the delivery of the points of defence. In his affidavit sworn on 29th October,

2015, Aidan Garcia notes the almost identical nature of the defence set out in the affidavit of Michael Leonard of the Bank setting out

its full defence in January 2015 and the affidavit grounding this application.

The Applicants’ Position

5.2. The applicants submitted that the issue of the Bank’s security is not straightforward and is not a question of priority as claimed

by the Bank. The applicants rely on Barclays v. Langdraf [2015] 1 All ER (Comm) 720, which concerned the determination of loan

agreements through the summary judgment procedure and provides that where there is evidence that the written agreement is at

odds with the actual intention or the actions of the parties to it, the summary disposal of an action is not appropriate. It is asserted

by the applicants that, at trial, it will be submitted that the Bank’s charge on the buildings both in substance and in fact is not a fixed

charge, including the buildings on the land, as claimed by the Bank. The intention of the parties was that the Bank would be repaid

from the proceeds of the sale through the sale of the developed sites and that its security would be limited to the sites. The

applicants contended that, for this reason, the contracts for sale took the form of two separate agreements.

5.3. The applicants submitted that the Bank cannot now assert a fixed security over buildings which did not exist at the time of the

loan when this is contrary to its actions throughout the existence of the loan in allowing the profits from the sale of those buildings to

be paid to the Company and to be applied for purposes other than repaying the Bank’s loan. Written terms of an agreement cannot be

determinative where the parties act in contravention of them (see Agnew v. Inland Revenue Commissioner [2001] 2 AC 710). Reliance

was placed on J.D. Brian Limited (in Liquidation) t/a East Coast Print and Publicity [2015] IESC 62, with the applicants arguing that an

application of the “text in context” approach in the present case indicates the true intention of the parties to the charge was that

the Bank would not have a fixed security over the Buildings aspect of the land and that the Company would be free to deal with and

dispose of the proceeds of the sale of the Building arrangement without recourse from the Bank.

5.4. There is a dispute between the parties as to the precise effect of the Bank’s charge, whatever charge is found to be the

relevant charge. The applicants contest on two grounds the Bank’s assertion that the arrangement (sale of units proceeded on the

basis of a separate Site Contract and Building Agreement with the Company) “could not alter the Bank’s de facto entitlement to claim

all proceeds of sale pursuant to its security.” The first of these relate to the manner in which the closings occurred and, for example

with the sale of unit one, the claim that sums of money that were paid to the Bank were not covered by the charge in favour of the

Bank as the Bank had provided partial release of the charge earlier on the close of sale. The applicants submitted that by allowing and

directing the monies to be paid to the Bank when they are lawfully due and owing to the Company, a breach of s. 139 of the Act of

1990 occurred. Secondly, by way of alternative and separate agreement, the applicants contended that due to the nature of the

agreement between the Company and the Bank, the Bank is estopped from relying on the terms of the charge. In the alternative, the

Bank is estopped from relying on the wording of the mortgage when by its conduct it clearly accepted a state of affairs, whereby the

proceeds of the Building Agreements were for the benefit of the Company.

5.5. The applicants contend that the four elements of estoppel by convention are met (see Ulster Investment Bank v. Rockrohan

[2015] IESC 17 and Garcia (Liquidator) and Panshire Limited (in liquidation) v. Kilkenny & Ors. [2015] IEHC 272). By approving and

enabling the sales of the apartments being effected by separate and building contracts, the Bank’s conduct led the Company to

develop the buildings on the site using its funds and then to proceed to market and sell those units in a manner approved by the

Bank. The applicants contend that it is unconscionable for the Bank to now seek to rely on the wording of the charge.

5.6. The applicants submit that even if the preliminary issue could be decided, the matter is not suitable for hearing by way of

preliminary issue having regard to the substantial matters involving the Bank that would have to be addressed, such as the Bank’s

position as shadow director and the corresponding duties that would flow from that finding.

6. The Decision of the Court.

6.1 The applicant’s raise the issue of the bank’s delay in seeking the trial of this preliminary issue. The bank argues that it was only

when the pleadings closed with the delivery of the points of defence that its entitlement to raise this preliminary issue arose. Is this

correct? Order 63 A r. 5 and r. 6 (1) (ii) cited above at 3.2 makes it clear that a judge at the initial directions hearing has a wide

range of powers to direct the manner in which the case shall proceed. This includes the fixing of any issues of fact or law. Thus the

bank could at any time from when the case entered the commercial list have applied for the trial of this preliminary issue. It argues

that this right only arose on the 24th of July 2015 when the pleadings closed. It brought this application on the 19th of October 2015

almost three months later. This in itself is somewhat delayed. Yet it is clear from the affidavit of Michael Leonard sworn on the 19th

of January 2015 notably at para. 15 thereof, that the bank intended to rely upon its security to answer the claim of the applicant

herein. No explanation is offered (other than above) for the failure to move more swiftly to raise this preliminary issue. In the interim

the motion for directions has been before the court on nine separate occasions. There has been an application for security for costs

finally withdrawn on the 16th of March 2015 and there has been the trial of another preliminary issue concerning the validity of the

appointment of the applicant. In my judgment this application for the trial of a preliminary issue ought to have been made in January

2015 or immediately thereafter. Much forensic water has flowed under the bridge since then. In any court but most particularly in the

commercial court, it is incumbent upon the parties to move with all possible expedition. In this matter the third respondent has

delayed too long. Moreover it is undesirable that multiple applications be made in a piecemeal fashion for the determination of certain

issues on a preliminary basis. This is particularly so in the Commercial Court where efficiency and expedition are the byword. All

possible grounds for seeking the determination of any issue in a preliminary hearing should be examined at the same and the earliest

time. Save for the most exceptional circumstances, there should be only one bite at the cherry.

6.2 I propose to make such orders now as I can to bring this case on for trial as soon as possible. The application is refused.