High Court of Ireland Decisions

1. CHI is in compulsory liquidation and Mr. Tom Grace was appointed Liquidator by order of the Court on 25th May, 1992. By further Order made on 4th August, 1994 the Liquidator was given leave to institute such proceedings as he might be advised by Counsel against CSZ and CSC in Ireland or elsewhere as he may be advised in respect of or arising out of any alleged breach of Section 60 of the Companies Act, 1963.

2. Pursuant to this leave, the Liquidator applied by way of Notice of Motion dated 30th January, 1995 for certain declarations in relation to both CSZ and CSC. Proceedings were brought by both CSZ and CSC to stay the said proceedings and by order dated 2nd February, 1996 the proceedings were stayed as against CSZ, but not as against CSC. As the proceedings are now only for declarations as against CSC, there is little point in setting out the reliefs sought in the Notice of Motion, which related to both banks.

3. It was agreed that the proceedings be heard on oral evidence, and therefore I propose to ignore the affidavits that were originally filed.

4. CSZ is a bank organised under Swiss law and having its headquarters in Zurich in Switzerland.

5. CSC is a bank incorporated in Canada which operates as a wholesale bank which deals primarily in wholesale loans to other banks, insurance companies and corporate bodies. The transactions it conducts are on a very large scale, and the average transaction size is in the range of Canadian $25 million - Canadian $50 million. It is a wholly owned subsidiary of CSZ.

6. Castor is a company incorporated in Canada having its head office in Montreal, which had been a customer of CSC since the early 1980s. It was primarily a finance company, providing first, second and third mortgages largely in relation to commercial real estate, and was funded by a number of banks and investors, including CSC. Castor also had a number of subsidiary companies in several countries outside Canada.

7. CHNB was a company incorporated in New Brunswick in Canada and was effectively a wholly owned subsidiary of Castor. Its involvement in the present transaction was largely as a conduit between Castor and CHI.

8. CHI was a company incorporated in this jurisdiction and was in effect a wholly owned subsidiary of CHNB. It was again involved in financing the purchase of properties, largely in the United States of America

9. Before going into the detailed documentation, and the evidence which was given on behalf of the parties, I think it would assist to set out in broad terms the transactions which are alleged to have taken place between the parties, and which have given rise to these proceedings. These transactions all took place within the space of a few days in December 1989. They can be briefly described as follows:-

10. It is alleged by the liquidator that the monies paid by CHNB to CHI as a subscription for shares in CHI were deposited by CHI effectively as the ultimate security for the monies advanced by CSC to Castor, and that this is a breach of Section 60 of the Companies Act, 1963.

11. As the meaning of the word "transaction" is to some extent in issue, it may also be relevant to consider the use of that word in other subsections of Section 60. These subsections provide a mechanism whereby, under certain circumstance, a company may in fact give financial assistance towards the purchase of its own shares. In relation to these procedures, the word "transaction" is used in three subsections.

12. In addition to the circular transactions referred to above, the liquidator also submits that a guarantee of 12th August, 1991 given by CHI to, inter alia, both CSZ and CSC constitutes a breach of Section 60. This document guarantees all liabilities of Castor to either of the banks in very wide terms, and would undoubtedly cover the liability of Castor to repay the Stg. £18.8 million advanced to it by CSC.

13. It would appear that this loan arose out of proposals made by Castor to CSC, probably in November 1989. I do not have evidence of any details of these proposals or of the discussions which took place at that time. However, it is clear that there was some kind of agreement in principle that a loan would be made, subject to the approval of CSZ. On

14. Mr. Stolzenberg, the President and Chief Executive Officer of Castor. While I am not concerned with the position of CSZ, I am concerned with the knowledge of CSC of this transaction, and in this regard a memorandum of this meeting sent by CSZ to CSC is of very considerable importance. The relevant portions of the memorandum are:-

15. Prior to this meeting, Mr. McFarland, who gave evidence on behalf of CSC and was the official in Toronto with primary responsibility for the account of the Castor companies, had put forward a proposal to the Toronto Credit Committee in relation to this loan on 5th December, 1989. This proposal is under certain standard headings and was approved by the Toronto Credit Committee on 7th December, 1989, and subsequently approved by CSZ on 14th December, 1989. The approved proposal is headed "credit authorisation" and is for C $35 million as a five year secured term loan. The relevant extracts from the credit authorisation are as follows:-

16. For some reason, presumably at the request of castor, on 14th December, 1989 it was decided that, instead of advancing a loan in Canadian dollars, CSC would advance the loan in sterling. A new credit authorisation and proposal was drawn up, and submitted by Mr. McFarland on 14th December, 1989, which was approved by the Toronto Credit Committee of CSC on 19th December, 1989, and ultimately approved by CS Zurich, very much after the event, on 30th January, 1990. The terms of this credit authorisation differ slightly from the earlier credit authorisation for the Canadian dollars, and is for a

17. Stg. £19 million committed term loan, stated to be previously C $35 million. This was stated in evidence by Mr. McFarland to be an amendment of the earlier credit authorisation, but one which nevertheless required new approval because it was in a foreign currency. The relevant extracts from the sterling authorisation are:-

18. It should be noted that neither of these documents makes any mention of CHNB or CHI, although the dollar authorisation refers to Castor pledging cash collateral with CSZ for the payment obligation. The sterling authorisation makes no mention of this, but it was clearly known by CSC that the payment obligation was going to be backed by a cash deposit.

19. On 15th December, 1989 CSC issued a facility letter to Castor for a loan of up to Stg. £19 million expressed to be for general and corporate purposes. A security was again stated to be a payment obligation issued by CSZ and it was a condition precedent to the facility that there be final approval by CSZ to the transaction. The terms of the facility letter were signed and accepted by Mr. Stolzenberg on behalf of Castor on 15th December, 1989.

20. On 19th December, 1989 CSZ issued to CSC what is described as a payment obligation. It takes the form of a letter, the relevant portions of which are:-

21. If one goes back to the memorandum of the meeting on 11th December, 1989 in Zurich, in which it is recorded that Mr. Stolzenberg signed, inter alia, the order for and the liability under the payment obligation, I think it is quite clear that the client referred to in the payment obligation as having requested its issuance was in fact Mr. Stolzenberg, and the only question is the identity of the company which he was representing. Unfortunately, the documents which he signed remained in Zurich, and have not been put in evidence, and I think it is fair to say that they were almost certainly never seen by CSC. However, it seems to me as a matter of probability that, while he may have considered himself as acting for the entire Castor Group, nevertheless, in signing the order for and liability under the payment obligation he was in fact acting for CHI, as this document was tied in with the arrangement of fiduciary deposits. for the account of CHI.

22. Following the receipt of the payment obligation from CSZ, CSC credited the account of Castor with the Stg. £18,800,000 with a value date of 20th December, 1989. Thus the transaction between CSC and Castor was put in place.

23. While the monies were nominally credited to the account of Castor with value 20th December, 1989, the same sum was debited to Castor's account with value on the same date. CSC had already received two documents, both dated 15th December, 1989, which were directions to them in relation to these monies. Both documents were signed by

24. Mr. Stolzenberg.

25. The first document was a direction from Castor to effect a transfer of

26. Stg. £18,800,000 to CHNB's account with CSC with a value date of 19th December, 1989, although ultimately the transfer took place with a value date of 20th December, 1989. It is of considerable significance that the relevant portion of the letter ended with the words "reference: capital subscription". The second letter, signed by Mr. Stolzenberg on behalf of CHNB, directed CSC to make a transfer, clearly on the basis that the instructions in the first letter had been complied with, and therefore the monies were now in an account of CHNB. The transfer directed by the second letter was to pay the Stg. £18,800,000 to CHI's account with CSZ. The value date is again supposed to be 19th December, 1989 and was in fact

27. Interestingly, an internal document of CSC apparently known as an internal loan booking ticket, on which the loan transaction was recorded, would appear to combine all these various transactions. It records the loan of the monies and that it is a new advance, and then records that there is to be a transfer value 20th December, 1989 of the monies to CSZ for the account of CHI, with the account number given. It is further stated that this is done by order of CHNB. The reality is, therefore, that while there may have been nominal cancelling

28. Although the monies were advanced by CSC, it seems clear that the details of the entire financial arrangements were hammered out in Zurich between Mr. Stolzenberg and officials of CSZ. This was confirmed by the evidence of Mr. McFarland, who stated that Castor's principal relationship was with CSZ, and that generally in such circumstances CSC were told what they needed to be told by CSZ , but nothing more. I think it is clear, so far as it is relevant, that CSC were at all times acting by order of the direction of, or subject to the approval of CSZ in their relations with the entire Castor Group, and in particular with CHI. I should add that, on the documents and evidence before me, it appears almost certain that CSZ were fully aware of all aspects of the financial arrangements before the loan was advanced by CSC.

29. On 29th December, 1989 CHI executed a deed of pledge in favour of CSZ whereby it pledged in favour of CSZ all monies which it might have on account with CSZ to cover all claims which CSZ might have against CHI. In my view this document makes it quite clear what was meant by "fiduciary deposit" in the earlier document and was executed as confirmation that CSZ could have recourse to the monies deposited with it by CHI.

30. In the middle of 1991 CSZ and CSC became somewhat concerned as to the position of the Castor Group of companies, and in order to try to protect themselves they took a guarantee from each of the companies in the Castor Group which guaranteed in very wide terms the indebtedness of Castor to, inter alia, CSZ and CSC. The guarantee given by CHI was dated 12th August, 1991, and was again signed by Mr. Stolzenberg. It is not necessary to go into details, as it does not make any specific mention of the loan of Stg. £18.8 million with which this case is concerned. I accept that it was not entered into by specific reference to that loan, but by way of a general security for all advances which had been made to Castor.

31. In February 1992 it became clear that Castor and its subsidiaries were in very serious financial difficulties. Again, the initiative for action came from CSZ, and on

32. This Action arose because on 25th February, 1992 Castor had sought the protection of the Quebec Superior Court under the Companies Creditors Arrangement Act, 1985, which was a step which gave rise to an immediate liability on the part of Castor to repay the loan to CSC. Accordingly, immediately on receipt of the memorandum, on

33. I think it is quite clear that the only or main purpose of CHI depositing monies with CSZ was to ensure that CSC, effectively on the direction of CSZ, would advance monies to Castor and then to CHNB to enable it to purchase the shares in CHI. In my view this was clearly the giving of financial assistance within the meaning of Section 60. I believe that, had the deposit not been made, no monies would have been advanced by CSC to Castor and through it to CHNB, and therefore CHNB would have been unable to purchase the shares in CHI.

34. On the other hand, I do not think that the only or main purpose of the guarantee of 12th August, 1991 was to give financial assistance for the purchase of shares. This was a guarantee given in relation to the very considerable indebtedness of the Castor Group to the Credit Suisse Group, and was one of a series of guarantees given by all the subsidiaries of Castor. I believe its principal purpose was to try to ensure continued financial support for the entire Castor Group, which had very large borrowings from the Credit Suisse banks.

35. A transaction is only voidable under subsection 14 against any person who had notice of the facts which constitute the breach of Section 60. The onus is on the Liquidator to prove that CSC had such notice. However, while the onus is undoubtedly on the Liquidator, and while it has been said that this is a penal section, the fact remains that I still only have to decide this question as a matter of probability.

36. This whole question of notice was considered by the Supreme Court in Bank of Ireland Finance Limited -v- Rockfield Limited (1979) IR 21. At page 37 Kenny J. said:-

37. He then applied these principles to the case before him at page 38 where he said:-

38. In this case CSC knew the following:-

39. In my view, therefore, CSC had actual notice, in the sense that that phrase is explained in the Rockfield case, that the monies they were advancing were going to be ultimately used by CHNB to acquire shares in CHI, and that those monies were being secured by a payment obligation or guarantee by CSZ which was countersecured by the deposit of the same monies by CHI with CSZ.

40. As probably the most important link, or perhaps as it would be put by CSC as the weak link, in this argument, was the reference to capital subscription in the payment directions, I should comment on this further. The evidence of Mr. McFarland was that as far as he was concerned this was simply a note put into the request by Castor and by CHNB respectively for the purpose of giving information to their auditors, and that it was of no relevance to CSC. However, even if one accepts that that was what Mr. McFarland thought at the time, that does not take away from the fact that it is a clear statement of fact which directly informed CSC that the money was going to be used to subscribe for shares. I can appreciate that Mr. McFarland may not have thought this was of any relevance, as of course I fully accept that Mr. McFarland was totally unaware of the provisions of Section 60 of the Companies Act, 1963. However, what Section 60(14) relates to is a person having notice of the facts which constitute the breach of Section 60. It does not require that the person who had notice of the facts also had notice that it was in law a breach of Section 60, or indeed that such person was aware of the existence of Section 60. I am quite satisfied that CSC had notice of the facts which constituted the breach, and no doubt had they been aware of the provisions of Section 60, they would have been aware that there was a breach of that Section.

41. Under subsection (14) it is avoided against any person who had notice of the facts which constituted a breach. However, I fully accept Mr. Fitzsimons' argument that I cannot make an order declaring a transaction void as against a person or body who is not a party to these proceedings. In particular, while I have no real doubt but that CSZ were aware of all the facts, I cannot make an order against them, as these proceedings have been stayed against them. I can in fact only make an order as against CSC declaring void the transaction, which in my view is the deposit of the monies by CHI with CSZ as security, and the consideration for that deposit, which was the giving of the payment obligation by CSZ to CSC. Accordingly, I will make the relevant declaration as against CSC and with regard to that transaction only. I am not sure what practical effect this will have, but that is a matter for the parties to consider, possibly elsewhere.