Supreme Court dismisses asbestos claim against directors for reckless trading and contingent debt during company winding-up.

THE SUPREME COURT

136/04

Denham J

Geoghegan J

McCracken J

Between:

Sean Fay

Plaintiff/ Respondent

AND

Tegral Pipes Limited, Brian Burnside Taylor, Michael Joseph McDonnell, William Samuel Goodwin, Liam Patrick Hughes,

Maurice Lammerant and Jean Beeckman

Defendants/ Appellants

Judgment of Mr Justice McCracken delivered the 27th day of May 2005

The Relief Claimed

1. This is an appeal from a decision of the High Court (Quirke J) refusing the following reliefs sought by the Appellants:-

“1. An order pursuant to the inherent jurisdiction of this honourable Court striking out the plaintiff’s action herein as against

the defendants or, in the alternative, dismissing the said action or staying all further proceedings therein on one or more of

the grounds following:-

(i) The plaintiff’s action is clearly unsustainable;

(ii) the plaintiff’s action is bound to fail;

(iii) the plaintiff’s action is frivolous and/or vexatious;

(iv) the plaintiff’s action is an abuse of the process of the Court.

2. Further, or in the alternative, an order pursuant to the provisions of Order 19 Rule 28 of the Rules of the Superior Court,

striking out the plaintiff’s summons and statement of claim herein or, in the alternative, dismissing the plaintiff’s action or

staying all further proceedings therein on the ground that the same disclose no reasonable cause of action against the

defendant and, further, that the plaintiff’s action is frivolous or vexatious.”

The Plaintiff’s Claim

2. The Plaintiff was employed by a company called Tegral Pipes Limited (which for reasons which will become obvious I will hereinafter

refer to as “Oldco”) from July 1965 until June 1989, when he was made redundant. During that period he worked in Oldco’s factory

premises at Drogheda where they manufactured cement pipes. In the course of his employment during this period he was exposed to

asbestos fibres.

3. On 23rd December 1994 a resolution was passed by Oldco to wind-up Oldco in a members’ voluntary winding-up. On 29th December

1994 an associated company called Tegral Pipes (Trading) Limited (hereinafter referred to as “Newco”) resolved to change its name to

Tegral Pipes Limited and on 30th December 1994 the liquidator of Oldco resolved to change its name to Tegral Pipes (Trading) Limited.

4. At some stage in late 1998 or early 1999 the Plaintiff was advised that he had symptoms indicative of significant asbestos scarring

in the lungs and that there was a real risk of the development of either of the two cancers associated with asbestos exposure. He

issued a plenary summons in these proceedings on 25th March 1999 claiming damages for personal injuries against Newco and six

named directors of Oldco.

5. The claim against Newco is based on the allegation that Newco has succeeded to and is liable for the liabilities, debts, obligations

and duties of Oldco and that Newco had been a party to the use of the privileges of incorporation for an improper purpose, namely to

deprive the Plaintiff of his right to compensation. There were three bases set out for this allegation which can be briefly summarised

as follows:-

(a) By adopting the name used by Oldco, Newco assumed the identity of Oldco and misrepresented itself as Oldco and

conveyed the impression that Oldco remained in existence and continued to trade.

(b) Newco and Oldco in effect operated as a single entity and the business carried on by one would be regarded as the

business of the other.

(c) Newco was a party to a series of transactions which had the object of facilitating the liquidation and dissolution of Oldco

without this coming to the attention of all of its former employees, including the Plaintiff, and with the effect of placing Oldco

beyond the reach of potential claimants when it was known to the directors of both companies that claims for compensation

were likely to be made.

6. As against the personal Defendants, a number of causes of action are pleaded. These can be summarised as follows:-

(a) The second, third, fourth, fifth and seventh named Defendants were directors of Oldco during the Plaintiff’s employment and

are liable to the Plaintiff for negligence in exposing him knowingly to the risk of injury and illness.

(b) The second, third and fourth Defendants are signatories to the statutory declaration of solvency executed pursuant to

s.256 of the Companies Act 1963, which declaration was made for the purpose of the members’ voluntary winding-up of Oldco,

and made the said declaration without any or any reasonable belief in the truth of the matters set out therein, thus rendering

them personally liable for the deaths of Oldco.

(c) As against all the personal Defendants, as directors of Oldco in the period prior to its winding-up, a claim pursuant to s.297A

of the Companies Act 1963 that they knowingly carried on the business of Oldco in a reckless manner and were party to putting

it into members’ voluntary liquidation when they ought to have known it was unable to pay its debts, and consequently were

liable personally for the debts of Oldco.

(d) As against all personal Defendants, as directors of Oldco in the period prior to its winding-up, for negligence and breach of

duty in failing to make any adequate provision for likely claims against Oldco, including the Plaintiff’s claim, and for continuing to

allow Oldco to trade when it was unable to pay its debts as they fell due.

The Jurisdiction to Strike Out

7. There is no serious dispute between the parties as to the principles applicable to motions of this nature. It is accepted that there

are two bases upon which such an application may be brought. The first is pursuant to the provisions of Order 19 Rule 28 of the Rules

of the Superior Courts which reads:-

“The Court may order any pleading to be struck out, on the ground that it discloses no reasonable cause of action or answer

and in any such case or in case of the action or defence being shown by the pleadings to be frivolous or vexatious, the Court

may order the action to be stayed or dismissed, or judgment to be entered accordingly, as may be just.”

8. In addition to this provision, the Court has an inherent jurisdiction to stay, strike-out or dismiss pleadings where no cause of action

is disclosed or if the claim is frivolous or vexatious. This was explained by Costello J in Barry v. Buckley [1981] IR 306 at page 308

where he said:-

“But, apart from order 19, the Court has an inherent jurisdiction to stay proceedings and, on applications made to exercise it,

the Court is not limited to the pleadings of the parties but is free to hear evidence on affidavit relating to the issues in the

case: see Wylie’s Judicature Acts (1906) at pp 34-37 and the Supreme Court Practice (1979) at para 18/19/10. The principles

on which the Court exercises this jurisdiction are well established. Basically its jurisdiction exists to ensure that an abuse of the

process of the Courts does not take place. So, if the proceedings are frivolous or vexatious they will be stayed. They will also

be stayed if it is clear that the plaintiff’s claim must fail; per Buckley LJ in Goodson v. Grierson at p 765.

This jurisdiction should be exercised sparingly and only in clear cases; but it is one which enables the Court to avoid injustice.”

9. In this case the Court had before it affidavit evidence setting out the background facts and the issues in relation to each of the

claims made. In the present case, to a large extent, the facts themselves are not in issue; what is in issue is the interpretation of

those facts and the question of whether the facts can give rise to any cause of action. Indeed, if any facts are in issue, that is not a

matter which can be determined on a motion of this nature, and the Court must assume that the facts as pleaded or deposed to on

behalf of the Plaintiff are correct. However, the Court is entitled to examine the inferences which the Plaintiff seeks to draw from the

facts in ascertaining whether those facts can give rise to any reasonable cause of action.

10. While the words “frivolous and vexatious” are frequently used in relation to applications such as this, the real purpose of the

jurisdiction is to ensure that there will not be an abuse of the process of the Courts. Such abuse cannot be permitted for two

reasons. Firstly, the Courts are entitled to ensure that the privilege of access to the Courts, which is of considerable constitutional

importance in relation to genuine disputes between parties, will only be used for the resolution of genuine disputes, and not as a

forum for lost causes which, no matter how strongly the party concerned may feel about them, nevertheless have no basis for a

complaint in law. The second, and equally important, purpose of the jurisdiction is to ensure that litigants will not be subjected to the

time consuming, expensive and worrying process of being asked to defend a claim which cannot succeed.

The Claim Against Newco

11. The basis of this claim arises from the manner in which Oldco was wound up, and the exchange of names by both companies.

Certain facts are not in dispute. The Plaintiff was made redundant by Oldco in June 1989 and shortly thereafter Oldco ceased to

manufacture cement pipes. From that time until the winding-up, Oldco acted as a sales company only. During that period, Oldco

suffered significant trading losses. Oldco was in fact a subsidiary of a Belgian company, Eternit SA, and under Belgian law the

accumulated losses of a subsidiary company could be availed of by the parent Belgian company to reduce its tax liability. This was the

stated purpose of the winding-up of Oldco and while the Plaintiff has sought to draw inferences that there may have been other

motives, no evidence has been produced to that effect. I have no doubt that, in itself, it was perfectly legitimate for the parent

company to wind-up Oldco, a company which had been trading at a loss and had only been kept in existence by virtue of injections of

capital from the parent company, when there was a considerable financial benefit to the parent company to do so. I do not think that

any reasonable inference could be drawn as to the effect that the purpose of winding-up Oldco was to deprive creditors such as the

Plaintiff of their right to compensation.

12. It is of note that Oldco was wound-up by way of a members’ voluntary winding-up, and a declaration of solvency was executed

by some of the directors. While this is a matter which I will deal with more particularly in relation to the claim against directors, the

only basis on which it could be said that Oldco was insolvent would be that these directors failed to allow for contingent claims such

as that of the Plaintiff. At the time of the winding-up no such claim had been received by the company, whether on a contingent

basis or otherwise, and it is acknowledged that the liquidator of Oldco, against whom no allegation of impropriety whatever has been

made, did not see fit to make any allowance for contingencies of this nature, and it must also be noted that the proper

advertisements relating to the winding-up were placed and that no former employee saw fit to make any contingent claim.

13. Insofar as it is alleged that the change of names amounted to a misrepresentation that Oldco remained in existence, there is no

evidence that any creditor or former employee of Oldco was confused or mislead, and in particular there is no evidence that the

Plaintiff himself was confused or mislead. At the time of the winding-up and dissolution of Oldco, the Plaintiff was not aware that he

had suffered any injury, and did not become so aware for some four years after the winding-up. In those circumstances it is

extremely difficult to see how any cause of action could be maintained by the Plaintiff, even if the inference of a misrepresentation in

general could be taken. There is no doubt that the exchange of names was undertaken with the intention of preserving the goodwill

attached to the name, but this is a perfectly legitimate commercial practice. It was done openly and in accordance with the

regulations then in force as to the change of names and with the relevant Ministerial consent. Once it is accepted that there was no

improper motive in the winding-up itself, I cannot see how the change of name could in any way give rise to a cause of action by the

Plaintiff. By the time the Plaintiff discovered his possible illness, Oldco had long since been wound-up and dissolved, and it was not

possible for the Plaintiff to recover any damages against it. This would have been the case irrespective of whether Newco had

changed its name or not.

14. Accordingly, I would allow this appeal in relation to the claim against Newco.

Personal Liability of Directors

15. There is no doubt that there are circumstances in which a director, or indeed another employee, may be personally liable to an

injured third party, even though the employer is also so liable. The authorities on this point were considered in some detail in the

judgment of Fennelly J in Shinkwin v Quin-con Ltd [2001] 1 IR 514. There is nothing novel about such a proposition, but it is not in

anyway dependent upon the position of the second, third, fourth, fifth and seventh defendants as directors of Oldco. The claim being

made against them is not that they are liable for the tortious acts of the company, but that they themselves were personally

negligent, and thus are personally liable to the Plaintiff. This Court has on a number of occasions cited with approval the well known

passage from Lord Wilberforce in Anns v Merton London Borough [1978] AC 728 at page 751 where he said:-

“First one has to ask whether, as between the alleged wrongdoer and the person who has suffered damage there is a

sufficient relationship of proximity or neighbourhood such that, in the reasonable contemplation of the former, carelessness on

his part may be likely to cause damage to the latter…”

16. In the Shinkwin case Fennelly J emphasised that one of the tests for proximity was the element of control. This is particularly

important where, as in the Shinkwin case and the case of Purtill v Athlone UDC [1968] IR 205, there is a claim relating to loss caused

to one employee by the negligent actions of another employee or, as in this case, a director of a company. A director or employee of

a company will not have a personal liability for wrongful acts of the company merely because he was a director or employee. To incur

liability, there must be a duty of care owed by the individual in his own right, and such duty will only arise if, as an individual, he was

in a position of proximity or neighbourhood sufficient to give rise to personal liability. The Shinkwin case itself is a classic example of

how that can arise. The personal defendant was the sole shareholder of a company, he was in undisputed control of a factory and,

critically, he dealt personally with the plaintiff and saw the problems which the plaintiff had with the machine which caused him injury.

He had control over the workings of the shop floor and the use of the machines by the employees.

17. In the present case, paragraph 22 of the statement of claim pleads:-

“The second, third, fourth, fifth and seventh defendants, as directors of old Tegral Pipes when the plaintiff was employed by

that company, are liable to the plaintiff for their own negligence and breach of duty, including breach of statutory duty, and

for the negligence and breach of duty, including breach of statutory duty, of old Tegral Pipes, its servants or agents in that

they caused, required or permitted such negligence and breach of duty, including breach of statutory duty, to occur and they

owed a duty to the plaintiff to ensure that the company provided a proper and safe place of work and complied with its

statutory duties. In addition, the second, third, fourth, fifth and seventh defendants inclusive were negligent in the discharge

of their obligations to old Tegral Pipes and to the plaintiff by causing, requiring or permitting the said negligence and breach of

duty to occur.”

18. It is not pleaded that these Defendants were in any position of proximity or neighbourhood to give rise to an obligation to the

Plaintiff, nor is it pleaded that any of them personally had any element of control over application of any health or safety measures by

Oldco.

19. In the grounding affidavit for this application, the second named Defendant swears that none of the personal Defendants were

involved at any relevant time in the day to day management of Oldco, and this averment has not been denied. That being so, in my

view there could be no claim against them for negligence on a personal basis, as the necessary proximity did not exist between those

Defendants and the Plaintiff. Equally, I am quite satisfied that the mere fact that they were directors of Oldco does not involve any

personal vicarious liability for wrongful acts of the company, and accordingly I am satisfied that a claim based upon personal liability in

that sense could not be sustained.

The Declaration of Solvency

20. It is also pleaded that those directors that signed the declaration of solvency were negligent in so doing, and indeed it is at least

hinted that they may have done so fraudulently. Section 256(1) of the Companies Act 1963 provides:-

“Where it is proposed to wind up a company voluntarily, the directors of the company or, in the case of a company having

more than two directors, the majority of the directors may, at a meeting of the directors, make a statutory declaration to

the effect that they have made a full inquiry into the affairs of the company, and that having done so, they have formed the

opinion that the company will be able to pay its debts in full within such period not exceeding 12 months from the

commencement of the winding up as may be specified in the declaration.”

21. It is alleged by the Plaintiff that the second, third and fourth named Defendants signed the declaration of solvency without any

reasonable belief in its truth and without reasonable grounds for the opinion that the company would be able to pay its debts in full.

In fact the declaration of solvency embodied a report by an independent accountant as is required by s.256(2)(c)confirming the

opinion of the directors. The company was ultimately wound-up under the control of an experienced liquidator against whom, as I

have said, there is no suggestion of impropriety, and all the company’s creditors were paid in full within twelve months. The only

suggestion that can be made is that the liquidation did not make any provision for contingent creditors in the sense of potential claims

into the future by employees who may have suffered from contact with asbestos. It must be emphasised that no such claim had been

made against the company prior to or during its winding-up, and that neither the accountant who advised the directors on the

declaration of solvency nor the liquidator saw fit to make any such provision. There is of course no direct evidence of any wrongdoing

by the directors in signing the declaration, and I do not think that any Court could reasonably draw the inference from the facts that

have been proved that there was any such wrong doing.

22. In any event, I would question whether, in the absence of fraud, any action for negligence can lie against a director for his part in

signing a declaration of solvency. Section 256 embodies safeguards to ensure that a director will not act carelessly or recklessly. It

requires an independent report by a person who is qualified to be an auditor of a company and it allows any creditor to apply to the

Court within 28 days after the resolution of a winding-up has been advertised if the creditor wishes to contest the solvency of the

company. Where it transpires that in fact the declaration of solvency was incorrect, and the company is not able to pay its debts in

full, then and only then is there a provision for personal liability of the directors, but in the present case I am quite satisfied that the

company did pay its debts in full within the relevant period, and accordingly the directors do not have any liability under the statutory

provisions of the section.

23. Finally, there is a claim against the directors personally for what amounts to reckless trading. Insofar as the Plaintiff seeks to rely

on s.297(A) of the Companies Act 1963, I am quite satisfied that any such claim is not stateable. That section applied only if the

reckless trading appears in the course of the winding-up of the company or in the course of proceedings under the Companies

(Amendment) Act 1990. No such claim was made in the present case until some years after the termination of the winding-up of the

company and its dissolution.

24. In any event, this claim appears to be based on the fact that the Defendants knew or ought to have known that the Plaintiff, and

possibly other employees, had a contingent claim against the company in the event of their contracting an illness due to contact with

asbestos. In my view this totally misunderstands the nature of a contingent debt. For a contingent debt to exist, there must be a

relationship between the company and a specific creditor in relation to a specific debt which may or may not become due depending

upon the happening of some event. I do not think that some vague prospect in the future of some unidentified and unknown person

making a claim could be construed as a contingent debt. Were it otherwise, it could lead to absurdities, particularly in relation to the

winding-up of a company. To my mind there must be certainty in the winding-up of a company, and it would be ridiculous to suppose

that a company in liquidation must make provision, and presumably retain monies, in case at some time, perhaps ten or twenty years

in the future, a claim might be made against it by one of more of a class of claimants. In this regard it is relevant to note that the

declaration required by s.256 must state that all debts will be paid in full within twelve months. Thus it is clear that the policy of the

legislation is that where a solvent company is being wound-up, its debts should be paid, and the winding-up completed, within this

period. Where, as in this case, the company can pay all its present debts within the twelve month period, there could be no question

of negligence or breach of duty on the part of the directors in not making provision for possible unknown and unquantifiable claims

which might arise after that period.

25. For these reasons I would allow the appeal and I would make an order striking out these proceedings.