[Home] [Databases] [World Law] [Multidatabase Search] [Help] [Feedback]
	High Court of Ireland Decisions
You are here: BAILII >> Databases >> High Court of Ireland Decisions >> Heaphy v. Heaphy [2004] IEHC 5 (15 January 2004) URL: http://www.bailii.org/ie/cases/IEHC/2004/5.html Cite as: [2004] IEHC 5

[New search] [Printable RTF version] [Help]

Heaphy v. Heaphy [2004] IEHC 5 (15 January 2004)

 


THE HIGH COURT

Record Number: 2002 No. 11678P

Between:

Tony Heaphy

Plaintiff

And

John Heaphy

Defendant

Judgment of Mr Justice Michael Peart delivered the 15^th day of January 2004:

The Plaintiff and the Defendant are brothers. The Plaintiff has sued the defendant for damages for fraud, breach of contract, misrepresentation and breach of fiduciary duty. The Defendant has brought an application to this court by way of Notice of Motion dated 28th July 2003 for an order dismissing the Plaintiff's claim on the grounds that it discloses no cause of action, or, in the alternative, an order dismissing the Plaintiff's claim as being an abuse of process and as being frivolous and vexatious, and also seeks an order striking out so much of the plaintiff's statement of claim as asserts rights on behalf of a company known as Springmound (Holdings) Ltd (hereinafter referred as "the company" or as "Springmound")

It is necessary at the outset to describe the historical facts which form the background to the dispute between these two brothers, and which has led to the institution of these proceedings. These facts are set out clearly in the Statement of Claim delivered by the Plaintiff on 16th October 2002 and can be summarised as follows:

In 1974 Plaintiff incorporated the company, and was the majority shareholder. Subsequently the company purchased two hotels in Dublin namely the Glencourt Hotel and the Elmar Hotel, both in Lower Gardner Street. It would appear that a sum of IR£100,000 was borrowed from Bank of Ireland in order to purchase these premises, and that this borrowing was the subject of a charge in favour of Bank of Ireland against the company.

About 12 years later, in 1986, the plaintiff left Ireland in order to pursue business interests abroad. He alleges that before he left he entered into an oral agreement with his brother, the Defendant, whereby the Defendant would run the bed and breakfast business being conducted at each hotel. The Defendant was to use two trading companies for the purpose of running those bed and breakfast businesses, namely Gembridge Taverns Limited (hereinafter referred to as "Gembridge") in respect of the business of the Glencourt Hotel, and Laurello Limited (hereinafter referred to as "Laurello") in respect of the business of the Elmar Hotel.

The plaintiff alleges that it was an express or an implied term of his oral agreement with his brother, and/or that his brother warranted and represented to him that: -

(a) the defendant would draw down a loan on behalf of Springmound in the sum of £100,000 from Hill Samuel Bank;

(b) the said loan would be secured on the Glencourt and the Elmar;

(c) the said loan would be repayable over a term of 14 years;

(d) the proceeds of the said loan would be used to satisfy in full spring mounds liability to the Bank of Ireland;

(e) the defendant would procure the release of the Bank of Ireland charge over the two hotels;

(f) the defendant would carry on the bed and breakfast business at the Glen Court and the Elmar for the said period of 14 years;

(g) defendant would repay the loan to Hill Samuel Bank over a 14 year period using the income from the two hotels;

(h) in return for his management and control of the bed and breakfast businesses, the defendant would be entitled to keep the profits thereby generated, after deduction of the loan repayment to Hill Samuel Bank, expenses incurred in the upkeep of the properties, and any other incidental expenses incurred by Springmound;

(i) after the expiry of the 14 year period, the plaintiff would return to Ireland and would take over control of the two hotels, whereupon the defendant's involvement with the hotels would cease; and,

(j) Springmound would continue to be the owner of the two hotels.

The plaintiff also says that it was an implied term of the said agreement that the defendant would serve him honestly and in good faith during this period of 14 years, and that the defendant would not receive or retain any secret profit or commission in respect of, or arising out of, his management and control of the two hotels, whether paid by a third party or otherwise, for which he did not account to the Plaintiff.

Paragraph 8 of the statement of claim then alleges that on or about 18th June 1986 the Defendant wrongfully and fraudulently caused the company to sell the Elmar to Gembridge for the sum of £50,000, and on the same day to sell the Glencourt to Laurello for the sum of £50,000, and that these sales were made without the knowledge, authority or consent of the Plaintiff, were a fraud on the Plaintiff, a fraud on Springmound, were in breach of defendant's agreement with, and representations and warranties to the Plaintiff, were in breach of the fiduciary duty owed by the defendant to the plaintiff, were ultra vires the capacity of Springmound, and that they were sold at a gross undervalue.

According to the Statement of Claim, the plaintiff returned to Ireland and discovered that the Defendant had caused Springmound to sell the two hotels as already described, and that he immediately began investigating what had happened, but that the Defendant has failed refused and neglected to explain his actions to the plaintiff, or to account for same.

It appears also from the Statement of Claim that it was the plaintiff's intention to use the two hotels to support him in his retirement. The plaintiff also states that his investigations have revealed that Gembridge sold the Elmar Hotel to a Patrick Beggan on the 20^th of October 2000 and that Laurello sold the Glencourt Hotel to the Northern Area Health Board on the 20^th December 2000. The plaintiff also states that until he gets discovery of documents in these proceedings, he is not aware as to whether the present owners of the two hotels were bona fide purchasers for value, but fears that he may no longer be able to recover ownership of the two hotels. He also states that the Defendant caused Gembridge and Lorello to be liquidated and that the two companies were dissolved on the 15th November 2001 and 21^st January 2002 respectively. The plaintiff states that until he gets discovery of documents he cannot quantify his loss.

The defendant in his replying affidavit makes the point that the plaintiff's claim in reality, is a claim, which if the facts are proven, is a claim which could be brought only by the company, now in liquidation, because the damage suffered is in fact damage suffered by the company, i.e. by the fraudulent sale of two of its assets, namely the hotels. He also contends in his affidavit that such a claim to damages by the company cannot, by law, give rise to a personal claim by a shareholder of the company, arising from any diminution in the value of his shares by reason of any such fraudulent sale of the company's assets. The liquidator might be able to pursue the matter in the interests of the shareholders, but in his replies to particulars the plaintiff has stated that it is not being alleged that he brings these proceedings with the authority of the liquidator of Springmound.

However, the defendant goes on in his affidavit to state that he is not simply relying on this technical objection to the plaintiff's claim. Even though he is maintaining that it is a claim which cannot by law succeed, he also disputes factual matters and says that in any event the plaintiff's claim cannot succeed on the merits either. As an example, he states that the Contract for Sale of each of the hotels in 1986 was in fact signed by the plaintiff. He exhibits one of those contracts, which certainly bears a signature which purports to be that of the plaintiff, but although I am not a handwriting expert, it seems to bear no resemblance to the signature of the plaintiff on his replying affidavit in this motion, or to his signature on a number of letters which have been exhibited by him in that replying affidavit. The defendant of course denies that he executed this contract in the name of the plaintiff, if such is the suggestion being made in these proceedings.

The defendant also refers to the fact that in the sale of the hotels a firm of solicitors represented the company in the sale, and another solicitor represented the purchasers. The defendant also disputes in his affidavit that it was part of any arrangement with the plaintiff that he would arrange for a loan from Hill Samuel which was to be used to pay off the indebtedness to Bank of Ireland as pleaded in the Statement of Claim. He exhibits some correspondence from Bank of Ireland in this regard. The defendant also points to the fact that the plaintiff has stated that he learned of this sale of the properties back in the year 2000, and yet did nothing to prevent the defendant from selling the properties on to two third parties later.

The defendant makes the point also that defending these proceedings is not something he should have to do, given that they must inevitably fail, and deal with matters going back over 16 years.

In his replying affidavit the plaintiff says that after he entered into his agreement with his brother, the defendant, he left him in charge of managing all his affairs and those of the company, including dealing with the property portfolio, banking duties, legal matters and soforth, and including the running of the bed and breakfast business. He says that the only reason 16 years elapsed before doing anything about these matters is that he trusted that his brother would run his affairs in a responsible and trustworthy manner, and that he had no reason to suspect that the hotels had been sold by his brother, and that his brother should not now be permitted to rely on his concealment of what he had done in order to defeat this claim.

He also makes the point to which I have already referred namely that the signature on the contract for sale exhibited by the defendant is not his signature, and that it is not a valid contract. He says that without discovery of documents he cannot say who did in fact sign these documents.

He also states that he never engaged solicitors in relation to the sale of the two hotels as alleged by the defendant, and that he never wrote a letter to Bank of Ireland dated the 9^th May 1986 which the defendant has exhibited, and states that same is a forgery. He also denies as alleged by the defendant that he is in bad financial circumstances. He accepts that he has a severe problem now in relation to his retirement since the hotels have been sold, but denies that these proceedings have been commenced out of some financial desperation.

The plaintiff concludes his affidavit by saying that the defendant carried out the transactions involving the sale of the hotels without his knowledge or consent, and that it has been difficult for him to piece together exactly how the defendant perpetrated what he describes as the fraud, since the defendant was in charge of all his affairs during those years, and because of the length of time which has elapsed it is difficult to get the information from any third parties.

Legal Submissions:

Mr Paul Fogarty BL on behalf of the defendant has submitted that the plaintiff has no personal claim against the defendant in respect of a claim which, if there is any merit in it, is a claim to be brought on behalf of the company which is the only entity which can have suffered a loss by reason of the sale of the hotels, if sold at undervalue. He has referred the court to the well-known principles emerging from Foss v. Harbottle (1843) 2 Hare 461, one of which is that only the company can bring proceedings to recover in respect of damage done to the company, and that an individual shareholder had no such right to bring proceedings in respect of loss or damage done to the company. There are of course the four exceptions to the rule in Foss v. Harbottle, and without going into each of those individually, it is clear that none of them apply in these proceedings.

The court has also been referred to the judgments in O'Neill v. Ryan and others (1990) ILRM 140. That decision arose out of a motion brought on behalf of four defendants to dismiss or stay the plaintiff's action against them, on the basis that it disclosed no reasonable cause of action, because damage alleged to have been caused was damage to a company, which itself was one of the defendants, and not to the plaintiff personally, who claimed that the value of his personal shareholding in that company had been reduced. The court was particularly referred to a passage from the judgment of Blayney J in the Supreme Court at page 569 where that learned judge stated as follows:

"Counsel further submitted that even though the damage was primarily to RyanAir, the plaintiff nonetheless was entitled to sue, but he was unable to point to any authority for this proposition. I am satisfied that there is none. What was being submitted was that a shareholder in a company has a personal action in respect of the reduction in value of his shareholding resulting from damage to the company, against the party who caused such damage. Such a proposition was firmly rejected by the Court of Appeal in England in the Prudential Assurance Company Ltd case to which I have referred earlier."

Blayney J. went on to quote at some length from that judgment in the Prudential Assurance case, including from page 224 of that judgment as follows:

"A personal action would subvert the rule in Foss v Harbottle and that rule is not merely a tiresome procedural obstacle placed in the path of a shareholder by a legalistic judiciary. The rule is the consequence of the fact that a corporation is a separate legal entity. Other consequences are limited liability and limited rights. The company is liable for its contracts and torts; the shareholder has no such liability The company acquires causes of action for breaches of contract and for torts which damage the company. No cause of action vests in the shareholder. When the shareholder acquires a share he accepts the fact that the value of his investment follows the fortunes of the company, and that he can only exercise his influence over the fortunes of the company by the exercise of his voting rights in general meeting. The law confers on him the right to ensure that the company observes the limitations of its memorandum of association and the right to ensure that other shareholders observe the rule, imposed upon them by the articles of association."

Blayney J. expressed his opinion that this is a correct statement of the law regarding the status of a shareholder in a company.

Mr Fogarty also submits that the loss if any in this case is the company's loss, and that it is open to the company to do something about that loss, if it so chooses. He points to the fact that the plaintiff is and was at all times the majority shareholder, but that the liquidator could even now investigate matters if an asset has been fraudulently removed from the company. He submits that the plaintiff could bring this matter to the attention of the liquidator. In addition to these submissions, Mr Fogarty has pointed to the fact that the plaintiff has not in any way attempted to quantify his losses for the purposes of this claim.

Mr Padraic O'Higgins SC, on behalf of the plaintiff, has submitted that one of the bases for the plaintiff's claim is that a fraud has been committed by the defendant and from which the plaintiff has suffered a loss which is not yet quantified. If the plaintiff is right in what he is alleging, then the defendant has been guilty of a fraud. He referred to the fact that the plaintiff went to England leaving the defendant in charge of his affairs in relation to the two hotels, and when he came back to this country, he discovered that both hotels had been sold without his knowledge or consent. He stated that the plaintiff was trying to launch an investigation into how this came about, and in a situation where the plaintiff, the majority shareholder and director of the company, signed nothing in relation to the sales of the hotels. Mr O'Higgins agrees that this case cannot be within one of the exceptions to the rule in Foss v. Harbottle.

Conclusion:

For what I am sure were at the time god commercial reasons the plaintiff, in 1974, decided to operate his hotel/bed and breakfast business by means of a limited liability company in which he is and was the majority shareholder. Again, for what I am sure seemed good reasons at the time in 1986, the plaintiff entered into an oral agreement with his brother, the defendant, in relation to the running of those hotels during his absence from the country. Nothing was committed to writing.

The fact is that a dispute has now arisen between the parties as to how it has come about that the company has sold two major assets, namely the two hotels, in circumstances where the plaintiff did not know about the sales. The defendant says that he knew all about the sales, and even says that the plaintiff himself signed the contracts for sale. What is clear beyond any doubt in the papers before me is that the plaintiff is alleging that the defendant sold the hotels, and either himself or through somebody else, had contracts for sale of the hotels signed, and conveyances eventually registered.

I cannot decide the factual merits of this claim on this motion, and nor do I have to, in the sense of determining any issue raised in the proceedings themselves. What I have to decide is whether, even if the plaintiff can prove everything he alleges, the plaintiff has any entitlement to recover any loss from the defendant, given that the loss if any which has been suffered, has been suffered by the company, and not by any individual shareholder, such as the plaintiff. Indeed, it could be said that even the company is at a loss only if the assets of the company were sold at undervalue, or if the proceeds of sale of the hotels were not lodged to the company's bank account.

What is at issue on this application is whether this is an action which is bound to fail. In my view it is such an action, not because I am satisfied that the plaintiff could not under any circumstances prove that something irregular occurred by which the hotels in question were sold without his knowledge, consent or agreement, but because, even if he did succeed in proving everything which he alleges against the defendant, the law, as it stands, and as is well settled by now, does not provide him in his personal capacity as a shareholder with a remedy against the defendant in civil proceedings.

When the plaintiff decided to purchase and operate the hotels through the mechanism of a limited liability company, he ceased to have the same control over his affairs as he would have had if he had dealt with these matters personally. Perhaps that was a deliberate ploy on his behalf. Certainly, if what he has pleaded in relation to the alleged oral agreement with his brother is true, the arrangement has a certain logic and plan to it, and may well have been facilitated by the fact that the hotels were owned by a limited company. But that is neither here nor there as things have turned out. The hotels are no longer in the ownership of the company. It is possible that the company has suffered a loss as a result, but not necessarily so. The company is in liquidation. I am told that it was a court liquidation, and in those circumstances, it should be possible for the plaintiff to make appropriate enquiries of the liquidator if he is still in situ. That liquidator will have operated as an officer of the court, and would have responsibilities to ensure that the assets of the company are ascertained and realised for the benefit of the creditors and shareholders of the company. I would have thought that the liquidator would be very concerned to know if assets of the company had been fraudulently disposed of prior to the liquidation, and would be under an obligation to investigate such a matter if there was thought to be substance to the allegation. He would be fully empowered to launch any necessary investigation in that regard, and if necessary to seek the directions of the court in relation to the examination of any director, shareholder or office holder of the company, or indeed any other person such as a solicitor who handled the sales of the hotels, in order to establish exactly what happened. The plaintiff may have already gone down that route. I do not know, but I suspect that he has not.

The plaintiff's principal allegation is that his signature to two contracts for sale has been forged, and that his name has been put to those contracts fraudulently. That, if true, would be a criminal offence, which the Fraud Investigation Branch of An Garda Siochana ought to have an interest in investigating. I am told that solicitors represented the Vendor company. That firm presumably was under the impression that it was receiving instructions from a person entitled to speak on behalf of the company and to execute any necessary documents. It is easy enough to appreciate that the firm in question would have assumed that the person who gave instructions to that firm was the person he said he was, and that he was entitled to bind the company in the sale of the hotels. But one's experience of life tells one that such strange things do happen where things are not necessarily as they might appear to be.

What all this amounts to is that the plaintiff is alleging a fraud against the company. This fraud would of necessity have had to be complex and involving other parties. It is natural that the plaintiff would be concerned about the matter, because inspite of the fact that from a legal standpoint the loss, if any, is a loss to the company and not to any individual shareholder, the plaintiff as he sees it has been done out of assets which he believed would secure his retirement. The loss therefore feels very personal to the plaintiff and he wants to do something about it, even at this late stage.

No matter how much sympathy the court may feel for the plaintiff in the predicament in which he now finds himself, the law on the point at issue on this motion is beyond any dispute. While there is ample authority that the court should exercise sparingly and with great caution its power to strike out a claim or to stay a claim indefinitely on the basis that it discloses no reasonable cause of action, there are times when it must, as in this case, where even if every fact is proven, the law clearly prevents the court from making any award or finding in favour of the plaintiff. The plaintiff as shareholder has no claim in respect of the loss, if any, to the company, and that is an end of the matter. The plaintiff's investigations will have to take another form.

I do not regard the plaintiff's claim as frivolous or vexatious, or even an abuse of process in any culpable sense of that word, and I will therefore not make the order in terms of paragraphs 2. Neither will I make the order as sought in paragraph 1 of the Notice of Motion, lest there remain within the Statement of Claim some headings of claim which can be made by the plaintiff personally against the defendant, and which do not involve the assertion of rights that belong to the company.

I will therefore make the order sought in paragraph 3 of the Notice of Motion dated 28^th July 2003 striking out so much of the plaintiff's Statement of Claim delivered the 15^th October 2002 as asserts rights on behalf of Springmound (Holdings) Limited.