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You are here: BAILII >> Databases >> High Court of Ireland Decisions >> Skytours Travel Ltd -v Companies Acts [2011] IEHC 517 (29 July 2011) URL: http://www.bailii.org/ie/cases/IEHC/2011/H517.html Cite as: [2011] IEHC 517, [2011] 4 IR 651 |
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Judgment Title: Skytours Travel Ltd -v Companies Acts Composition of Court: Judgment by: Laffoy J. Status of Judgment: Approved |
Neutral Citation Number: [2011] IEHC 517 THE HIGH COURT 2010 162 COS IN THE MATTER OF THE COMPANIES ACTS 1963 – 2009
AND IN THE MATTER OF SECTION 205 OF THE COMPANIES ACT 1963 IN THE MATTER OF SKYTOURS TRAVEL LIMITED BETWEEN MARK EDMOND DOYLE PETITIONER AND
JOHN BERGIN RESPONDENT Judgment of Miss Justice Laffoy delivered on 29th day of July, 2011. 1. Previous judgment
(b) an order “pursuant to the inherent jurisdiction” of the Court precluding evidence being adduced in relation to a communication in respect of which the respondent contended that he was entitled to legal professional privilege.
(ii) an order staying further prosecution of the High Court proceedings pending the determination of the appeal by the respondent, 1.2 The substantive proceedings were heard in open Court. While issues were raised in relation to privilege during the course of the hearing and certain evidence was taken de bene esse, for the avoidance of doubt, I record that I consider that none of the evidence on which this judgment is based was evidence in respect of which legal professional privilege could be properly invoked. 2. The substantive proceedings and the factual background thereto
(b) an order that the respondent and/or the company be compelled to purchase the petitioner’s shares in the company at a value to be determined by the Court. 2.2 The company was incorporated on 30th October, 1987. From 1988 it was the corporate vehicle through which the respondent carried on his travel agency business, which over time developed into a very successful business. The current issued share capital of the company comprises 30,000 shares, as I understand it, at €1.20 per share (although I would have expected the nominal value to be at the Euro equivalent of IR£1 per share), of which 28,420 are owned by the respondent and the balance of 1,580 shares are owned by the petitioner. In other words, the petitioner owns 5.266%, rounded to 5.3%, of the issued share capital of the company. Neither the pleadings in the case nor the evidence of the petitioner or the respondent properly reflected how the petitioner and the respondent built up their respective shareholdings until, on the third day of the hearing, an agreed position was put before the Court, albeit in what I found to be a rather confusing manner. 2.3 In the points of defence delivered on behalf of the respondent it was pleaded that at the time the petitioner acquired his shareholding he was, and still is, the principal of the solicitors’ firm known as Actons. It was pleaded that he had acted in family law proceedings on behalf of the respondent and that as part of the settlement of those proceedings in 1990 the respondent’s wife relinquished her shareholding and directorship in the company. Therefore, it was necessary to have a replacement director. The petitioner proposed himself as a replacement director and it was agreed between the petitioner and the respondent that the petitioner would acquire the respondent’s wife’s shareholding of 1,000 shares in the company at their nominal value. It was not disclosed how the petitioner acquired the remaining 580 shares. As was clear from his evidence, the petitioner’s recollection was that in 1990 he purchased 1,580 shares which had been owned by the respondent’s wife at the price of IR£l,580. 2.4 The true position, however, is difficult to extrapolate from the transcript of the evidence. Working back from the current position, I assume that in October 1990 the respondent was already the owner of 14,000 shares in the company. On 31st October, 1990, 4,400 shares were issued for cash, of which the respondent acquired 3,400 shares and the petitioner acquired 1,000 shares. The annual returns for 1990, accordingly, show the respondent as the owner of 17,400 shares and the petitioner as the owner of 1,000 shares. On 23rd March, 1995, a further 11,600 shares were issued on capitalisation of reserves, of which 11,020 were allotted to the respondent and 580 allotted to the petitioner. Therefore, as appears, apparently, in the annual returns for 1996, the respondent was then the owner of 28,420 shares and the petitioner was the owner of 1,580 shares, which remains the position. When the agreed true position was put before the Court, it remained the position of the petitioner that he had paid IR£1,000 for 1,000 shares. I accept his evidence on that point. 2.5 There was no shareholder agreement put in place to regulate the rights and obligations of the petitioner and the respondent inter se. Both on the pleadings and on the evidence there was a conflict as to the incidents attaching to the petitioner’s position as director and shareholder. 2.6 It was pleaded in the points of defence that the understanding between the respondent and the petitioner was that, when the petitioner’s directorship and shareholding would no longer be of mutual assistance to the company and the petitioner, in terms of the petitioner and Actons providing legal advice to the company, the petitioner would return the shares to the respondent at the price the petitioner paid for them. A letter dated 5th March, 1990 from the petitioner to the respondent was relied on as corroboration of the alleged agreement. In the letter in question, the petitioner stated:
2.7 I am satisfied, on the evidence, that the understanding of the parties was that in the event of a situation arising during the lifetime of the petitioner which would give rise to the petitioner’s shareholding being realised, for example, if the company was sold to a third party, the petitioner would be entitled to be paid the value of his shares on the transfer thereof. In an e-mail dated 13th December, 2007 from Cathal Saunders, the principal of the firm of McInerney Saunders, the company’s auditors, to the respondent, which was forwarded by the respondent to the petitioner, Mr. Saunders stated that his understanding was that, if the company was sold at a future date, both parties “would share in the sale”. Indeed, as late as 28th January, 2010, the respondent, in the context of a suggestion by the petitioner that the respondent should get independent advice in relation to a joint venture in which the respondent was considering the company should engage, pointed out that what was in the proposal for the petitioner was “that the business may gain some value over the next few years and in a sell out they (sic) may be some gravy”, from which I infer that what was being suggested was that the petitioner would share in the “gravy”. I cannot find in the mountain of communications which passed between the parties from 2003 onwards any suggestion by the respondent that the petitioner’s shareholding was not worth its real value to the petitioner. 2.8 The position of the respondent as pleaded, and in his evidence, was that the petitioner agreed to become a director on the basis that no dividend would be paid to him and that the benefit he would derive was exclusively travel related discounts and workflow for Actons and that he would not receive directors’ fees. The evidence of the petitioner was that his understanding was that there were not going to be any dividends in the early stages of his involvement in the company. However, as the business grew he took the line with the respondent that he should get a reward for his involvement with the company. In the late 1990s he started to raise that issue with the respondent. There is plenty of documentary evidence available corroborating the attempts by the petitioner to procure a reward in the form of dividends or directors’ fees, and the resistance of the respondent to that approach. 2.9 In broad terms, the position of the respondent, both as pleaded and in his evidence, was that the petitioner was in fact remunerated by being given “travel perks”, that is to say, free and discounted travel, and by his firm, Actons, being given opportunities to earn fee income through advising the company. The respondent’s position was that the petitioner never made any contribution to the direction or management of the company and, for instance, that he did not attend board meetings. The petitioner on the other hand testified that, while the respondent did not call board meetings, he did meet the respondent on a regular basis in a coffee shop for “lattes” and at those meetings issues in relation to the running of the company were discussed. The respondent also had access to him on his “mobile” and his “landline”. I do not intend those observations, which, replicate the evidence, to sound trite, because I am satisfied on the evidence that the petitioner did contribute as much as any non-executive director in his position would be expected to contribute and, in reality, the only reward he got was discounted travel. Most significantly, as a director, he performed the functions which a director is required by law to perform, for example, in signing off the annual returns and suchlike, until the beginning of 2010. 2.10 In summary, therefore, I find that the allegations which the petitioner has made of oppression and disregard of his interests fall to be considered on the basis that the petitioner is the owner of a 5.3% stake in the shares of the company and his ownership thereof is not subject to any special agreement between the petitioner and the respondent governing the incidents of ownership during the lifetime of the petitioner, or affecting the consequences of any finding of oppression of the petitioner, or disregard of his interests. It is on that basis that I will now consider the allegations of oppression and disregard of his interests made by the petitioner against the respondent. 3. Oppression
(b) in June 2009, again unbeknownst to the petitioner, the company entered into a settlement with the Revenue Commissioners in the sum of €1,164,297 in relation to the undisclosed income. 3.2 It was also pleaded by the petitioner that the respondent consistently failed to provide the petitioner with information to which he was entitled as a director and shareholder, or, alternatively, the respondent gave him false information. Further, it was pleaded that the petitioner was never apprised of the true financial position of the company and that his opportunity to sell his shareholding at a significant profit, of which he would have availed, was thereby lost as a direct result of the oppressive conduct of the respondent. 3.3 The petitioner also relied on the fact that, after he became aware of the expropriation by the respondent of the rebates and money which were the property of the company and of the settlement with the Revenue Commissioners on the basis of the company’s liability for the tax, interest and penalties due to the Revenue Commissioners on the undisclosed rebates and money, he was requested to “sign off” on the accounts of the company for the year ended 31st October, 2009, which accounts referred to the expropriation and subsequent Revenue settlement, without sight of independent legal advice and tax advice, which he was informed had been obtained by the company. He considered that, without sight of the independent legal advice, he was constrained to refuse to sign the accounts, which were signed by the respondent and the third director of the company, despite the petitioner’s objection. Thereafter, the petitioner remained a director of the company but, at the time the petition was presented, he had not been shown the independent legal advice or tax advice. That treatment, it was contended, is another incidence of oppression and disregard of his interests. 3.4 Since the petition was presented the following events have occurred:
“During the period from March 1997 to May 2006 I operated two deposit accounts with First Active Building Society, one in the name of [the company] and the other held personally. The details of the transactions for the account in the name of [the company] were not previously included in the financial statements of the company. The source of lodgements to these accounts was rebates from travel companies and some cheques drawn on the current account of [the company]. The lodgements to these deposit accounts ceased in December 2003, and some subsequent rebate cheques received were cashed by me for personal use. I had personal use of the funds which were lodged in each of these accounts until I closed the accounts in May 2006. The undisclosed income in question totalled €1,220,090. In June 2009 [the company] finalised a settlement with Revenue in the amount of €1,164,297. This followed on from an unprompted voluntary statement of disclosure which I made to the Revenue Commissioners.” (b) On 9th December, 2010 the company’s auditors, McInerney Saunders, submitted a report entitled “Indictable Report” in respect of the company to DCE, reporting that they had “formed the opinion that there are reasonable grounds for believing that … indictable offences under the Companies Acts may have been committed” arising from the voluntary statement of disclosure made by the respondent to the Revenue Commissioners, which was quoted. The provisions of the Companies Acts particularised as giving rise to the indictable offences were s. 202(10) of the Companies Act 1990 (the Act of 1990) (failure to keep proper books of account), s. 242(1) of the Act of 1990 (furnishing false information), and s. 297(1), (2) of the Act of 1963 (fraudulent trading). (c) At the end of 2010 McInerney Saunders submitted to the Companies Registration Office (CRO) a form H.4 (Notification of notice that proper books of account not kept: s. 194 of the Act of 1990), to which was annexed the “Auditors’ Special Report”, to the directors of the company pursuant to s. 194 of the Act of 1990 which stated: “With respect to the period March 1997 to May 2006, in our opinion the company failed to maintain proper books of account in accordance with s. 202 of the Companies Act, 1990. The failure to maintain proper books of account related specifically to the exclusion of two bank accounts, and related receipts and payments, from the accounting records of the company. We understand that this matter has since been rectified.” (d) On 16th February, 2011 McInerney Saunders made a report to An Garda Síochána pursuant to s. 59 of the Criminal Justice (Theft and Fraud Offences) Act 2001 reporting a possible offence arising from the expropriation of money by the respondent from the company between 1997 and 2006. The report referred to the company settlement with the Revenue Commissioners and it also stated that the matter had “been rectified and recompense made to the Revenue for the tax liability arising”. 3.6 Sub-section (1) of s. 205 provides:
3.9 In this case, the position which has been adopted by the respondent in denying that his actions constituted oppression of the petitioner is utterly untenable. It is difficult to imagine conduct by one director, who is the majority shareholder, of a company, which is more burdensome, harsh and wrongful to another director who is a minority shareholder of the company, than the admitted conduct of the respondent in this case. For over almost a decade he expropriated for his own use monies due to the company. In consequence of that, the company failed to comply with its statutory obligation to maintain proper books of accounts. The petitioner was put in the position of unwittingly signing accounts which did not represent the true financial position of the company. The respondent made a disclosure to the Revenue Commissioners of which the petitioner was wholly unaware, and he made a settlement with the Revenue Commissioners which resulted in liability for tax, interest and penalties on the undisclosed income being borne by the company without any notification to, or the approbation of, the petitioner. As I have stated, the oppression was ongoing when the petition was presented and it is properly regarded as still operative and ongoing because, as regards the company and its members, the adverse effect of the acts complained of, in reality, has not been redressed. In my view, as regards the petitioner, an order under subs. (3) of s. 205 is necessary “with a view to bringing to an end the matters complained of” by the petitioner. 3.10 Accordingly, I propose making a declaration in the terms sought by the petitioner that the affairs of the company are being conducted in a manner oppressive to him. I also propose making an order that the respondent be compelled to purchase the petitioner’s shares in the company. The only difficult issues in this case which require careful consideration, in my view, are issues concerning the proper approach to the valuation of the petitioner’s shares. 4. Valuation: the law
(b) whether the value should be discounted on the ground that the petitioner’s shareholding is a minority shareholding. 4.2 In Re Greenore Trading Co. Ltd., Keane J. decided that the petitioner’s shares should be purchased by the respondent at a fair price. Having concluded that it was unlikely that, having regard to the uncertain financial future of the company, a majority shareholder or an outsider would pay more than par value for the shares (£8,000), Keane J. continued:
4.4 In Irish Press Plc. v. Ingersoll Irish Publications Ltd. [1995] 2 I.R. 175 the Supreme Court held that, while in cases under s. 205, where the oppressor is ordered to purchase the share of the oppressed member, the determination of a fair price for the oppressed member’s shares might include an incidental element of compensation, there was no general right to compensation for loss arising from the oppression. On that point, in his judgment, Blayney J., with whom the other Judges of the Supreme Court concurred, quoted the first sentence in the second passage from the judgment of Keane J. in Re Greenore Trading Co. Ltd. quoted at 4.2 above and also the following passage from the judgment of Lord Denning in Scottish Co-Operative Wholesale Society v. Meyer [1959] AC 324 (at p. 369):
4.5 The most recent decision of the High Court on the question of valuation of shares in the context of a forced purchase under s. 205(3) to which the Court has been referred is the decision of the High Court (Finlay Geoghegan J.) in Re Emerald Group Holdings Ltd., Banfi Ltd. v. Moran and Ors. [2009] IEHC 440. Both parties referred the Court to paragraph 71 of that judgment, in which Finlay Geoghegan J. recorded that the accountancy expert on behalf of the respondent contended that the value put on the shares in issue there should be discounted by 30%, as the shares constituted a minority interest. There was a complication in that case, in that the Court ordered that the 19.5% shareholding of the petitioner, Banfi Ltd., in Emerald Group Holdings Ltd. be valued having regard to the probable value of a 19.5% shareholding in Best Christmas Trees Ltd., an associated, not using that expression in any technical sense, company of Emerald Group Holdings Ltd. Finlay Geoghegan J. stated that the contention of the respondents’ accountancy expert –
4.6 A considerable number of decisions of courts in the United Kingdom on the question of valuation of shares in the context of an order that an oppressor acquire the oppressed shareholder’s minority shareholding under the corresponding legislation in the United Kingdom were cited. 4.7 The line of authorities commences with the decision of the High Court in England and Wales In Re Bird Precision Bellows Ltd. [1984] 1 Ch. 419. The question which was being addressed by Nourse J. there, as stated in his judgment (at p. 425), was whether the price of shares in a small private company, which were ordered to be purchased pursuant to the then United Kingdom analogue of s. 205(3) (s. 75 of the Companies Act 1980), should be fixed pro-rata according to the value of the shares as a whole or should be discounted on the ground that they constituted a minority in number. In addressing that question, Nourse J. distinguished two different categories of company. The first was a quasi-partnership company, which he addressed in the following passage (at p. 430):
4.8 The Court of Appeal, on the appeal in that case, which is reported as In Re Bird Precision Bellows Ltd. [1986] 1 Ch. 658, dismissed the appeal holding that the relevant section (s. 75) conferred on the Court a wide discretion to do what was fair and equitable in all the circumstances, so as to put right the unfair prejudice to a petitioner and cure it for the future. It was held that Nourse J. was right in concluding that it was appropriate to treat the company as a quasi-partnership and value its shares as a whole and that the petitioners be paid the proportionate part of that value which corresponded to their shareholding, not its market value as a minority shareholding. 4.9 It is interesting to note that in Courtney (op. cit.) it is stated that it has been accepted as the law in Ireland by Costello J. in Colgan v. Colgan & Colgan (the High Court, 22nd July, 1993, unreported), a case in which the valuation was being carried out on an application under s. 205, that in a quasi-partnership private company a minority shareholding should not be discounted, nor a majority shareholding attributed a premium. Costello J. stated that “all the authorities indicate that there should not be a discount when dealing with a quasi partnership, as this was”. 4.10 The discount or non-discount issue has been considered more recently by the Court of Appeal of England and Wales in Strahan v. Wilcock [2006] 2 BCLC 555. In that case (at para. 17) Arden L. J. made the following general observations in relation to the issue before the Court of Appeal:
4.12 The most recent authority of a court in the United Kingdom cited was a decision of the Court of Session (Outer House of Scotland) in Fowler v. Gruber [2010] 1 BCLC 563. There, Lord Menzies, having referred to the passage of Arden L. J. in Strahan v. Wilcock, which I have quoted at para. 4.10, and to the passage from the judgment of Blackburne J. in Irvine v. Irvine which I have quoted at para. 4.11, stated as follows (at para. 186):
4.14 Turning to the other issue, namely, the date at which the shares are to be valued, counsel for the respondent relied on the following dictum of Nourse J. in Re London School of Electronics Ltd. [1985] BCLC 273 (at p. 281):
4.15 There is very little guidance as to what is the appropriate date of valuation in the more recent decisions of the courts in the United Kingdom which have been put before the Court. In Re Sunrise Radio [2010] 1 BCLC 367, there is a quotation from the judgment of Robert Walker L. J. in Profinance Trust SA v. Gladstone [2002] 1 BCLC 141, where having referred to the judgment of Nourse J. in Re London School of Electronics Ltd., Robert Walker L. J. stated:
4.16 In this case, the expert called on behalf of the petitioner, Brendan Traynor, Chartered Accountant, of the firm BDO, carried out valuations based on the company’s financial statements for 2003 and the company’s audited accounts for 2009, which were the most up to date accounts available at the date of the presentation of the petition. The expert called on behalf of the respondent, Peter Dawson, Chartered Accountant, of the firm Leahy & Co., had available to him the company’s audited accounts for the year ended 31st October, 2010, for which year the results were marginally better than the previous year. From a purely pragmatic standpoint, on the basis of the evidence before the Court, there would, in reality, be little or no material difference in the outcome were the Court to adopt the date of the presentation of the petition rather the date of this judgment, or vice versa, as the appropriate valuation date. The real issue is whether the valuation should be carried out by reference to the accounts for 2003 or the most recent accounts. 4.17 There is no doubt that utilising the accounts for 2003 as the basis of the valuation of the petitioner’s shareholding will produce the optimum result, because the company performed better in that year than in any other year. It is true that at first instance in Irish Press Plc v. Ingersoll Irish Publications Ltd. (the High Court, 15th December, 1993, unreported) Barron J. addressed a submission made on behalf of the respondent that the date of the presentation of the petition should be the date at which the shares should be valued by stating:
4.18 In my view, in order to determine a fair price for the petitioner’s shareholding, it is not necessary that it should be valued by reference to the company’s accounts for the year 2003 and there is no basis in law or in equity for adopting that approach. Therefore, I consider that the proper course is to determine the value by reference to the most recent accounts, the accounts for 2009 or 2010, or by reference to the so called “straightforward” method. 5. Valuation: application of the law to the facts 5.2 On the basis that the company does not currently have any future maintainable earnings, Mr. Dawson valued the company at zero. However, he did do an exercise similar to the exercise carried out by Mr. Traynor calculating future maintainable earnings on the basis of an average of recent results, which included the results for the year ended 31st October, 2010 and factoring in the surplus cash of the company as adjusted for the Revenue audit settlement and also the after tax value of undisclosed income, assuming the income had been retained in the company. The value he put on the company on that basis was €2,365,508. He valued the petitioner’s share, on the basis that it is a 5% share rather a 5.3% share, before discount, at €118,275. On the basis that the petitioner’s shareholding is 5.3%, his figure before discount, would have been €125,372. 5.3 The various technicalities canvassed in the cross-examination of the experts, for example, whether the starting point in valuing on a maintainable earnings basis is earnings before interest, tax, depreciation and amortization, which was the approach adopted by Mr. Traynor, or average profit or loss after tax, as advocated by Mr. Dawson, or whether the adjustment to substitute an open market emolument for the emolument actually taken by way of remuneration by the respondent should be €140,000 (Mr. Traynor’s figure) or €150,000 (Mr. Dawson’s figure) are, in reality, wholly immaterial, because Mr. Traynor’s valuation of the company on an earnings basis was €169,000 and Mr. Dawson’s, as I have stated, was zero. The reality is that they both came up with figures for the petitioner’s 5.3% shareholding which were approximately similar when adjustment was made for the misappropriated monies and the Revenue penalty. That brings me to the so called “straightforward” method of valuation. It was submitted on behalf of the petitioner that it is open to the Court to determine the value of the petitioner’s shares at 5.3% of the aggregate of the misappropriated monies and the Revenue settlement for which the company assumed liability (€2,384,387), which is €125,371 less corporation tax at an approximate rate of 10% plus the par value of the 1,580 shares. Mr. Dawson acknowledged that that was a fair way to value the loss of cash to the company, which I understand to mean loss as a result of the conduct of the respondent. As he correctly pointed out, that, in essence, represented his alternative valuation to which I have referred to above, because he had put zero value on the company on an earnings basis. 5.4 The so called “straightforward” approach seems to me to be a fair method of valuing the petitioner’s shareholding. It is reasonable to assume that, but for the actions of the respondent which I have found to constitute oppression, the asset value of the company would be in the region of €2.3m greater than it is. That approach is in line with the approach adopted by Keane J. in Re Greenore Trading Co. Ltd., although that authority indicates that the petitioner should also be refunded the par value which he paid for his shares. The other methodologies deployed by the experts certainly did not produce any fairer figure. Accordingly, I find that, for the purposes of applying s. 205(3), the value of the shareholding of the petitioner, before discount, is €115,000. However, in the light of the view I have expressed earlier in para. 4.13, that value must be discounted. The evidence of both Mr. Traynor and Mr. Dawson was that the minority discount rate would be in the region of 40% to 60%. In view of the size of the petitioner’s shareholding, I consider it appropriate to apply a discount of 50%. Accordingly, for the purposes of applying s. 205(3), I find that the discounted value of the petitioner’s shares is €57,500. That figure plus the par value (IR£1,000 equivalent to €1,269.74) which he paid for the 1,000 shares he purchased, totalling €58,769.74, is the price that the respondent should pay for the petitioner’s 1,580 shares in the company. 5.5 By way of general observation, in adopting the approach that the petitioner’s shareholding be valued, before being discounted, as a percentage of the monies expropriated from and the liability for the Revenue settlement imposed on the company by the respondent, there is a notional redress of the defalcation of the respondent for the purposes of the valuation. Accordingly, the basis on which counsel for the petitioner sought to distinguish the decisions of the United Kingdom courts to which I have referred earlier, that those cases were concerned with mismanagement rather than misappropriation does not stand up to scrutiny. Applying a discount, in my view, results in a fair price, in accordance with the evidence. 6. Order
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