Court orders respondent to pay liquidator value of disposed company property less net credit card contributions.

Neutral Citation Number: [2008] IEHC 349

THE HIGH COURT

2007 No. 89 COS

IN THE MATTER OF SECTION 286 OF THE COMPANIES ACT 1963 AS AMENDED

AND IN THE MATTER OF SECTION 139 OF THE COMPANIES ACT 1990

BETWEEN

LE CHATELAINE THUDICHUM LIMITED (IN VOLUNTARY LIQUIDATION)

APPLICANT

AND

NOEL CONWAY

RESPONDENT

Judgment of Mr. Justice Roderick Murphy delivered on the 11th day of November, 2008.

1. Facts underlying application

1. This is an application by the liquidator of the applicant company for a declaration that a transfer of goods and cash to the

respondent by the company constituted a fraudulent preference or, in the alternative, a fraudulent disposition. The background to

that transaction is as follows. In 2001 the respondent engaged Mr. Thudichum, a South African national with extensive experience in

the retail trade, to manage the franchised Spar outlet in the respondent’s premises at Ratoath, Co. Meath. After more than a year in

this capacity, Mr. Thudichum approached the respondent with a view to leasing the premises. The respondent agreed.

2. The applicant company was incorporated on the 11th June, 2003, with Mr. Thudichum as its managing director, and went into

occupation of the premises in October of that year. The respondent, in his own name and on behalf and with the agreement of the

applicant company, continued to order some stock from the main supplier, BWG, which was associated with Spar. Invoices issued at

the end of each week and were duly paid by the company. The respondent’s accountant, Mr. Sweetman, became accountant to the

company and oversaw these transactions.

3. Between October, 2003 when the company went into occupation, and April, 2004 shortly after a competing new retailer opened in

the area, the parties’ solicitors were engaged in correspondence concerning a written lease agreement. The draft lease provided that

rent was payable weekly and calculated as 8% of net turnover, excluding VAT and disregarding what were termed ‘agency sales’,

which term covered bus tickets and phone cards among other items. The respondent suggested that once these exclusions were

taken into account, only about 5.5% of total weekly net turnover was paid, but this was disputed. The evidence did not establish a

precise figure, but it was in the region of €30,000 per month approximately.

4. There was a dispute as to the effect of the correspondence to which I will return later in this judgment. Whether or not the

written agreement came into effect however, the parties’ commercial relationship carried on as planned, though the venture later ran

into difficulties.

5. Despite a reduction in rent in August, 2005 to accommodate the applicant, the business experienced trading losses, largely

because of an increase in competition with the opening of new retail outlets in the area. In March, 2006 Mr. Thudichum reached the

conclusion that he could no longer continue to operate the business, and informed the respondent accordingly. On the 10th April,

2006, after two and a half years in occupation, the applicant “returned control of the premises” to the respondent.

6. The company was by then heavily indebted, both to the respondent and to other creditors, and was unable to pay its debts. The

indebtedness to the respondent was in respect of rent owing and of four weeks unpaid invoices. On that date a stock take was

performed in the presence of the respondent and Mr. Thudichum, after which the respondent took possession of cash sums on the

premises totalling €9,500, together with stock valued at €112,080. The company was wound up on the 9th of September, 2006, and

Mr. Randal Gray was appointed its liquidator.

7. The liquidator has applied to this court for a declaration that the aforementioned transaction is a fraudulent preference of, or

alternatively a fraudulent disposition of its assets to, the respondent.

2. Fraudulent preference

8. So far as material, s. 286(1) of the Companies Act 1963, as amended by s. 135 of the Companies Act 1990, provides:

“Subject to the provisions of this section, any…delivery of goods, payment, execution or other act relating to property

made or done by or against a company which is unable to pay its debts as they become due in favour of any creditor…

with a view to giving such creditor…a preference over the other creditors, shall, if a winding-up of the company

commences within 6 months of the making or doing the same and the company is at the time of the commencement of

the winding-up unable to pay its debts (taking into account the contingent and prospective liabilities), be deemed a

fraudulent preference of its creditors and be invalid accordingly.”

9. It is settled law that, to succeed in an application under this provision, the liquidator must prove that the transfer of property or

funds was carried out with the dominant intention of preferring the recipient over the other creditors (Corran Construction Co. Ltd. v.

Bank of Ireland Finance Ltd. [1976-77] ILRM 175 at 178; Station Motors Ltd v. AIB Ltd. [1985] I.R. 756 at 760). Where the court is

faced with a member or director who has effective control over the affairs of the company, it may attribute his state of mind in this

regard to the company (Corran Construction [1976-77] ILRM 175 at 178; Station Motors [1985] I.R. 756 at 761).

10. In Station Motors, Carroll J. accepted the principle laid down in Re M Kushler Ltd [1943] 1 Ch 248 that an intention to prefer

cannot be inferred in hindsight merely from the fact that an actual preferment occurred. However, in the absence of direct evidence

of intention it remains possible for the court to infer intention, even where an alternative explanation is open (Station Motors [1985]

I.R. 756 at 761). Nevertheless, Carroll J. sounded a cautionary note, quoting the following passage from the judgment of Lord Greene

MR in Kushler:

“It must, however, be remembered that the inference to be drawn is of something which has about it, at the least, a

taint of dishonesty, and, in extreme cases, much more than a mere taint of dishonesty. The court is not in the habit of

drawing inferences which involve dishonesty or something approaching dishonesty unless there are solid grounds for

drawing them.” ([1943] 1 Ch 248 at 252).

11. In this case it is clear that an actual preferment occurred. Substantial amounts of stock and cash were transferred to the

respondent less than six months prior to the commencement of its winding up in September, 2006. Both at the commencement of its

winding up and at the time of the impugned transaction the company was unable to pay its debts.

12. The presence or absence of an intention to prefer is more difficult to ascertain. In this case it is not disputed that Mr. Thudichum,

as managing director, controlled the affairs of the company. He gave evidence of his mindset at the time of the transaction, saying it

was his intention to hand over the stock and cash to the respondent. However, he said in evidence that he understood at the time

that he, the respondent and Mr. Sweetman would arrive at a compromise arrangement with the other creditors such that no individual

would be left unduly exposed to an unfair share of uncompensated loss in the form of bad debts owed by the company. The

respondent emphatically denied having been told of any such proposal either before or at the time of the stock take. Mr. Sweetman

indicated that it had not been suggested to him before the stock take, but that some time afterwards he and Mr. Thudichum had

agreed to try to ensure each creditor received a portion of the debt owed to him.

13. I accept the evidence of Mr. Thudichum that he had formed the intention to reach such an arrangement at the time of the

impugned transaction. On the balance of probabilities, however, I find that he did not communicate that intention to either the

respondent or to Mr. Sweetman at or before that time. It was not a condition of the decision to return control of the premises to the

respondent. Notwithstanding, I also find that his dominant intention in carrying out that transaction was to ensure, in co-operation

with Mr. Sweetman and the respondent, that the arrangement he envisaged would become a reality. As Mr. Thudichum was at that

time the company’s managing director and was in control of its affairs, this intention can be attributed to the company for the

purposes of the fraudulent preference question.

14. However, the applicant submitted Mr. Thudichum had, by means of the impugned transaction, left the question of who was to be

compensated to the respondent. The court was invited to infer from this an intention to prefer the respondent. Such an inference

appears not to be justified. The respondent may have been given the stock and cash, but, according to Mr. Thudichum’s evidence,

only as a prelude to their equitable division among the company’s creditors. In addition, the submission on this point does not tally

with the evidence. Both Mr. Thudichum and Mr. Sweetman confirmed that the arrangement was to be brought about through co-

operation between the respondent and themselves: the decision was not to be left to the discretion of the respondent.

15. In reliance on the passage quoted above from the judgment of Lord Greene M.R. in Kushler, it was further suggested that this

transaction was a fraudulent preference owing to the presence of a “taint of dishonesty” about it. However, that passage merely

conveys that a fraudulent preference entails a taint of dishonesty; it does not follow that the presence of a taint of dishonesty,

without more, necessitates the conclusion that a fraudulent preference occurred. In any case, the applicant relies in this regard on

the alleged dishonesty of the respondent’s conduct. In determining whether a fraudulent preference occurred, it is apparent from the

authorities referred to that the court is concerned with the intention of the company, expressed through its director, not with that of

the transferee.

16. Accordingly, the liquidator has not established that the impugned transaction was driven by a dominant intention to prefer the

respondent. The claim under s. 286 must fail.

3. Fraudulent disposition

17. Section 139(1) of the 1990 Act provides:

“Where, on the application of a liquidator, creditor or contributory of a company which is being wound up, it can be shown

to the satisfaction of the court that—

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

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

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

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

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

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

(2) Subsection (1) shall not apply to any conveyance, mortgage, delivery of goods, payment, execution or other act

relating to property made or done by or against a company to which section 286(1) of the Principal Act applies.

(3) In deciding whether it is just and equitable to make an order under this section, the court shall have regard to the

rights of persons who have bona fide and for value acquired an interest in the property the subject of the application.”

18. It is apparent from the terms of this provision that, before it can make an order under s. 139, the court must be satisfied that all

of the following criteria are met:

(i) there was a disposition

(ii) of company property

(iii) the effect of the disposition was to perpetrate a fraud either on the company, its creditors or its members.

19. Insofar as the meaning of the term disposition is concerned, the section is drafted in very broad terms apt to encompass almost

any kind of transaction. For our purposes it is clear that the company, acting through Mr. Thudichum, gave the respondent

possession of the stock and cash involved in the transaction. On the date of that transaction the company was insolvent and the

respondent, with the co-operation of the applicant, resumed control of the premises together with all stock and cash thereon, and

resumed trading in the ordinary course. This appears sufficient to come within the ambit of the section. The court must then consider

and decide what the extent of the company’s stock was at the time of the transaction.

4. Who owned the stock?

20. The question of whether the company owned the property at the time of the transaction is more complex. It was agreed that

most of the stock concerned had been purchased by the respondent from BWG/Spar, the main supplier of goods to be sold at the

premises. The parties had an arrangement whereby the respondent would purchase goods from BWG/Spar on his account, before

transferring them to the applicant to be sold in the ordinary course. The applicant would then reimburse him. Those goods were

acquired subject to a clause providing for BWG/Spar to retain title until it had been paid in full. While the respondent had paid all

debts owing to BWG/Spar in respect of goods delivered to the premises, the applicant had not reimbursed him for the last four

deliveries invoiced. The respondent argues that the reservation of title clause applied not only in his dealings with BWG/Spar, but also

in the context of his arrangement with the applicant. Accordingly, the respondent submits, although he had acquired title having paid

for the goods included in the final four deliveries, that title never vested in the applicant company owing to its failure to reimburse

him.

21. The respondent advances two grounds for suggesting that the reservation of title clause operated between him and the

applicant. The first is founded on Clause 17 of the draft lease agreement between the parties, which provides:

“The Tenant is on notice that the Grocery Store/Off-Licence is leased subject to an agreement between BWG/Spar of the

One Part and the Landlord of the Other Part. The Tenant shall comply in all regards with all the obligations of the Landlord

pursuant to the terms of the said Agreement but shall not be entitled to any direct or indirect budget support scheme or

capital grants for shop redevelopment or otherwise or any other financial incentive pursuant to or ancillary to the said

Agreement.”

22. As noted above, there is a dispute as to whether this lease bound the parties, at least beyond those terms which had been acted

upon in practice. The solicitor acting for the respondent at the time gave evidence that he had sent a draft lease to the applicant’s

solicitor and had understood that, after the insertion of a series of amendments, it was agreed between the parties. Attention was

drawn to a letter of the 15th April, 2004, in which the applicant’s solicitor purported to defer consideration of the question in light of

the opening of a new retailer in the area and the increased competition emanating from it. The respondent’s solicitor regarded this

letter as merely raising a commercial issue rather than as a denial that the provisions of the lease applied.

23. However, even if the court were to assume that the lease became operative it cannot accept the proposition contended for. The

respondent contracted with BWG/Spar in his own name and, as was accepted in evidence, he would be liable to pay for the goods

irrespective of whether he received payment from the company. He may have acted for the benefit of the company in paying for the

goods, but he acted in his own capacity rather than as the company’s intermediary, and he remained bound by his obligations toward

BWG/Spar in this respect. Accordingly, one of the fundamental incidents of an agency relationship was lacking (see White,

Commercial Law, 2002, at 79). Accordingly, the respondent was not the agent of the company in paying for the goods. Equally, the

company was not the agent of the respondent in ordering the goods as it ordered them for its own use and benefit. While there was

no evidence as to the accounting or tax provisions of these transactions, it seems to have been a purchase by the respondent and a

sale of stock to the applicant company.

24. Clause 17 was designed to prevent the company from interfering with the performance by the respondent of his obligations under

the franchise agreement with BWG/Spar. It is not worded in such a way as to affect the relations between the parties to these

proceedings at all, save in that the applicant undertook a duty toward the respondent to have regard to the respondent’s obligations

toward BWG/Spar, which included sourcing stock from BWG/Spar. While the reservation of title until payment binds the respondent it

is not a term in the stocking arrangement whereby the company was to pay the respondent. Accordingly, Clause 17 cannot have

extended the reservation of title clause so as to apply to transactions between the applicant and the respondent involving BWG/Spar

goods.

25. The respondent relied on an alternative argument independent of the disputed agreement: that he had undertaken a considerable

risk in that he was liable to pay BWG/Spar whether or not he was reimbursed by the applicant. The applicant should not be in a better

position vis-à-vis the respondent than the latter found himself in concerning his dealings with BWG/Spar. Accordingly, a term should

be implied into the tenancy agreement extending the reservation of title clause so that title to the BWG/Spar goods would remain with

the respondent until he was reimbursed by the applicant.

26. The test for implying terms into contracts to give effect to the true intentions of the affected parties was the subject of a

decision of a unanimous Supreme Court in Carna Foods Ltd v. Eagle Star Insurance Co. (Ireland) Ltd [1997] 2 I.R. 193. There Lynch

J., delivering the judgment of the Court, rejected the suggestion of an implied term requiring the giving of reasons for the cancellation

of an insurance policy. He declined to imply such a term because, had an officious bystander inquired as to whether reasons would be

given:

“The defendant's answer would have been an emphatic “No” whereas to imply such a term into the policies the answer

would have to be by both parties “Yes, of course” expressed rather testily to discourage the officious bystander from

further interrupting.” ([1997] 2 I.R. 193 at 200).

27. He quoted with approval from the judgment of Pearson LJ in Trollope and Colls Ltd v. North West Metropolitan Regional Hospital

Board [1973] 1 WLR 601 at 609:

“An unexpressed term can be implied if and only if the court finds that the parties must have intended that term to form

part of their contract: it is not enough for the court to find that such a term would have been adopted by the parties as

reasonable men if it had been suggested to them: it must have been a term that went without saying, a term necessary

to give business efficacy to the contract, a term which, though tacit, formed part of the contract which the parties made

for themselves.”

28. Similarly, in Sullivan v. Southern Health Board [1997] 3 I.R. 123, Murphy J., delivering the judgment of a unanimous Supreme

Court, considered whether the officious bystander test was satisfied:

“Clearly that condition is not met where the question posed by the ubiquitous bystander is answered in the negative or

even where it is the subject matter of further discussion between the parties.” ([1997] 3 I.R. 123 at 131).

29. The test is a stringent one and must be applied with care so as to avoid substituting what the court believes the parties should

have agreed for their true intentions at the time of contracting. Maguire CJ, delivering the judgment of the Supreme Court in Ward v.

Spivack Ltd [1957] I.R. 40, put the matter as follows:

“although it might have been a reasonable thing for Mr.. Spivack to have agreed to … I am quite unable to hold…that had

the matter been raised Mr.. Spivack must have agreed. To read such a term into the contract would in my view not be to

make clear the intention of the parties unexpressed at the time but would be to make a new contract.” ([1957] I.R. 40 at

48).

30. In my view, had the matter been raised at the time of contracting it cannot be said that the parties must have agreed.

Reservation of title clauses may have become increasingly common in commercial life, but they are a departure from the traditional

understanding of contractual dealings. They deprive the purchaser, at least for a time, of the title to the goods which he would

otherwise acquire immediately, albeit that he would have to pay for them later. They may also qualify his right to deal with the goods,

not least by imposing requirements as to their separate display and storage.

31. Cases such as this bring to light another of their potential affects, in that if the reservation of title clause were enforceable

against the company, it would not be able to treat the goods as its assets for the purposes of a liquidation. It cannot be considered

obvious that the company would have agreed to this as a condition of its dealings with the respondent. Far from being sufficiently

obvious as to go without saying, I consider that, at a minimum, there would have been further discussion of the matter had it been

raised at contracting stage.

32. In addition, I cannot see that business efficacy requires the implication of such a term. The parties had agreed that the

respondent was to be reimbursed for BWG/Spar purchases, so that in effect the applicant was buying goods on credit from the

respondent. Such arrangements are often entered into not only without reservation of title clauses but without any form of security.

A reservation of title clause in this case would have facilitated one of the parties, but it could not be called ‘necessary’ to give

business efficacy to the arrangement.

33. This disposes of the reservation of title question, and accordingly the question of whether the clause was drafted in such a way

as to validly vest title in the supplier until payment was made does not arise for decision.

34. The final question I have to address in determining whether a fraudulent disposition occurred is whether the effect of that

disposition was to perpetrate a fraud on the company, its creditors or members. While this question does not seem to have been

judicially considered, assistance can be drawn from commentators on the area. It has been suggested that unlike s. 286, which

focuses on intention, the fraud criterion in s. 139 merely requires that the company, its creditors or members be deprived of

something to which it is, or to which they are, lawfully entitled (Courtney, The Law of Private Companies, 2nd Ed. 2002, at para.

27.093). I would adopt this proposition as a correct statement of the law. Accordingly, the company was at the time of the

changeover on the 10th day of April, 2006, entitled to the ascertainable current assets which were assumed by the respondent,

subject to a consideration of whether the respondent, as landlord, was entitled to distress in relation to rent owed.

5. Distress by landlord

35. It was submitted, in the alternative, that the respondent as landlord only took what he was lawfully entitled to in satisfaction of

rent arrears by way of distress, and, for the remainder, in satisfaction of a vendor’s lien on the goods supplied to the applicant.

36. The first point might be accepted if distress had in fact been levied, but here that is not the case. Where distress is carried out

written particulars of the rent distrained for must be delivered to the person in possession of the premises or, if he is not found, must

be affixed to the premises (ss. 10 and 14 of the Ejectment and Distress (Ireland) Act 1846). After that point the goods must be

impounded, and can be sold by public auction only if the tenant has not redeemed them within eight days (s. 4 of the Distress for

Rent Act 1741, and s. 5 of the Distress for Rent Act 1751).

37. Here no such procedure was carried out. There is no evidence of written particulars of rent owing having been served on the

applicant, and no evidence of the stock or any portion thereof having been held back so that the applicant might redeem it. The

transaction, far removed from the usual reality of distress, was entirely voluntary. The argument founded on distress appears to be an

attempt to apply to the transaction in hindsight a view which was not in the mind of any of the parties at the time.

38. It was submitted that the respondent was entitled to a vendor’s lien over the goods he had paid for in order to facilitate the

applicant. Counsel argued that the respondent was entitled to rely on this lien because the respondent had come lawfully into

possession of the stock and cash. On the evidence of both the respondent and Mr. Thudichum, the transfer of the 10th April, 2006,

had accorded with Clause 19 of the draft lease. Clause 19, as amended by the solicitor for the company, provided for the return of all

stock in trade to the applicant at the termination or expiry of the lease, with provision for the applicant to be reimbursed for the

stock.

39. However, even if Clause 19 came into operation, it cannot be said that the respondent came lawfully into possession of the

property. The fact remains that it was the property of the company and that, contrary to the terms of Clause 19, the company was

not reimbursed for it. Accordingly, this clause cannot be relied on in support of the contention that the respondent acquired the

property lawfully. Insofar as the respondent may have been entitled to a lien over stock, it cannot be such as to confer on him

priority to the exclusion of other creditors.

6. Conclusion

40. I am satisfied that the disposition in favour of the respondent had the effect of perpetrating a fraud on the applicant in depriving

it of its assets, and on the creditors in diminishing the pool of assets available for distribution upon liquidation. The creditors were

thus denied the possibility of having a portion of the debts owed to them repaid, and were accordingly deprived of a benefit to which

they were lawfully entitled.

41. Since the respondent acquired the cash and the proceeds of sale of stock he appears to have had the use, control or possession

of such monies and is accordingly a person to whom the section applies. Since he acquired the stock and cash knowing that the

company could not fully discharge its debts to its other creditors, he cannot be said to have acquired the property bona fide, and

accordingly s. 139(3) has no application to the present proceedings. The court may therefore require the respondent to pay a sum to

the company in respect of the property acquired. That property, being the current assets of the company in respect of which

evidence was given, seems to be limited to stock and cash.

7. How is such sum to be calculated?

42. Section 139 refers to “the proceeds of such sale or development [of the property]”. The section adds the more general phrase “or

pay a sum in respect of [the disposition]” to describe what should be returned to the company, which appears to leave the court to

determine what sum should be repaid, rather than simply requiring repayment of precisely the proceeds of sale in all cases. The court

has discretion regarding terms and conditions of its order, which is to be made on just and equitable grounds.

43. For the purpose of determining what should be paid to the company the court is bound to take into account all the circumstances

of the case.

44. It is common case that the respondent in effect wrote off €80,000 in rent due from the applicant by taking that amount from the

rent he was paid and transferring it into the BWG/Spar account to help the applicant overcome financial difficulties. As this sum was

written off it is, accordingly, not due and owing by the company to the respondent.

45. I accept that the respondent, through inadvertence, allowed credit card payments to be credited to the company’s bank account

in the months following the stock take and before liquidation, with a net gain of €21,368 for the company. While no evidence was

adduced as to when the company’s bank account(s) were closed, nor of the nature of such payments, it is strange that the bank

accounts remained opened after the handover of the premises.

46. The company would appear to have no entitlement to the sum of €21,368 in respect of credit card payments. The respondent

was not bound to give such benefit. There was no consideration for such payment. It was due and owing to the respondent who is

entitled to claim for that sum in the liquidation.

47. The purchase price of BWG/Spar goods bought by the respondent, for which he was not reimbursed by the applicant is a debt

owed in common with those owed to other creditors, to be addressed in the ordinary course of the distribution of assets on liquidation

according to the statutory order of priority among creditors. Though it is unclear whether rent due and owing was formally demanded,

is a debt due to the respondent. No evidence was given in relation to any bank balances. The evidence was that the respondent

acquired €9,500 in cash and stock valued at €112,080 from the transaction, totalling €121,580.

48. The respondent is entitled to claim in the liquidation for payments made to Spar for the four weeks and for the credit card

payments totalling €21,368 net.

49. Accordingly, the court declares that it is satisfied that it is just and equitable that the respondent pay to the liquidator the sum

of €121,580, being the value of the property of the company which was disposed of on the 10th April, 2006, less the net sum

contributed to the company by way of the credit card payments referred to above.