knowledge 30 August 2021 |

High Court Provides Clarity on Inspection Rights in Liquidation Under Sections 631 and 684 of the Companies Act 2014

Background

In Second Irish Forestry Fund Plc (In Liquidation) & Ors v Companies Act¹, the applicants were shareholders in two public limited companies, now in liquidation, and the respondent was the liquidator of the companies. The companies formed part of a wider portfolio of companies that owned and controlled approximately 10,000 acres of forestry land in Ireland. The opportunity to invest in the portfolio companies through the purchase of preference shares, with the full economic interest in the forestry land, was publicly marketed to investors by way of prospectuses. The applicants were former investors in the relevant forestry portfolio companies.

On 15 August 2019, each of the portfolio companies was placed in members’ voluntary liquidation and a liquidator was appointed. Prior to the liquidation, the forestry assets of each of the portfolio companies were sold. A dividend and distribution was issued to each of the preference shareholders, however the applicants were disappointed with their returns. The applicants assert, inter alia, that the companies’ forestry assets were sold prematurely and that, in facilitating the sale of these assets, the directors of the companies acted in breach of their duties to the companies and to investors.

The applicants applied to the High Court seeking orders under section 631 and section 684, or both, of the Act, directing the liquidator to furnish them with extensive categories of documents relating to, inter alia, the trade, dealings and business of the companies and the sale of the forestry assets.

Relevant Provisions of the Act

Section 631 of the Act provides that a contributory, amongst others, of a company may apply to court for directions to determine any question arising in the winding up of a company.

Section 684 of the Act provides that, at any time after making a winding-up order or the commencement of a voluntary winding up, the court may make an order for inspection of accounting records, books and papers of the company by creditors or contributories as the court thinks just.

The applicants argued that the inspection sought was necessary to fully assess whether they had a cause of action against the companies and/or their directors. The claims being contemplated by the applicants included claims under sections 608 of the Act seeking the return of assets improperly transferred and 612 of the Act seeking damages for misapplication of property, misfeasance and/or breach of duty, the proceeds of either such action, if successful, would be lodged in the liquidation. The applicants indicated that they were also contemplating seeking compensation pursuant to section 1349 of the Act on foot of misrepresentation in the prospectuses. The primary remedy upon such application, if successful, would be an award of damages directly to the applicants.

Decision

The court refused the orders sought by the applicants.

Section 631 of the 2014 Act

Mr Justice Keane considered whether the power under section 631 can go so far as empowering the court to direct the disclosure by a liquidator to a contributory of information and documentation in the guise of determining a question arising in a winding-up. The court accepted the liquidator’s argument that, while section 631 of the Act confers a wide power to determine – where just and beneficial - the rights and obligations that arise in a winding-up, the Court determined that section 631 does not confer a free-standing jurisdiction to order disclosure of information or documentation. An order under section 631 was therefore refused.

Section 684 and the need to show a potential benefit in the winding-up

The first issue which the Court had to consider in relation to section 684 was whether this power to order inspection can only be invoked for the benefit or purposes of the winding-up, as had been submitted by the liquidator, or alternatively may be invoked more broadly by a creditor or contributory who seeks inspection to advance a private interest.

While the Court accepted the respondent’s submissions that the inspection power conferred by section 684 of the Act could not be exercised solely to permit a creditor or contributory to pursue a private interest, it did not need to decide that issue in circumstances where the applicants were not merely contemplating a civil action for misrepresentation in the companies’ prospectuses under section 1349 of the Act but also applications under sections 608 and 612 of the Act. For that reason, the Court concluded that it could not be said that the applicants were seeking only to further their own interests, rather than to benefit the winding-up. The Court confirmed that the inspection power under section 684 can be invoked where the potential benefit to the winding-up is merely indirect or incidental, once that potential exists.

Section 684 and fishing for evidence

The second issue which the Court had to consider was whether the inspection sought by the applicants was so broad in scope as to constitute a “fishing expedition”.

In refusing the order sought, the Court held that the applicants had failed to satisfy the Court that it would be just to permit the inspection sought as it fell on the wrong side of the line between (1) inspection to assist with an existing or intended claim against the directors or promoters, on the one hand and (2) inspection that would allow them to fish for evidence to enable them to determine whether they can formulate such a claim, on the other hand. In this instance, the Court was persuaded that the inspection sought essentially amounted to a “fishing expedition” for documents to establish an alleged case. The Court provided the following reasons for refusing the order sought:

1. First, the applicants’ concerns that there may have been a fraudulent disposition of company property or some breach of duty on the part of the companies’ directors fell some way short of establishing a prima facie case.
2. Second, an applicant should not be permitted inspection to enable him or her to ‘fish’ for a case.
3. Third, the application seemed more akin to an investigation process than a litigation process and more appropriate to the exercise of public investigatory power by a competent authority.
4. Fourth, the inspection sought created the same difficulty as that identified in Inland Revenue Commissioners v Blueslate Ltd² , that a court should be slow to allow a potential litigant to conduct a review of the documents of another party and that the wider the allegations made and disclosure sought, the more sceptical a court should be to grant the inspection.
5. Finally, Mr Justice Keane stated that:

“the s. 684 disclosure entitlement that the applicants contend for, if accepted, would be easier to qualify for, wider in scope, and less constrained in effect than the discovery entitlement of a person who has actually brought proceedings of the kind that the applicants are, at present, only contemplating. I do not think that it would fair or just to purport to exercise the court’s discretion in that way.”³

Comment

The decision, which is the first reported decision regarding inspection rights under these sections, clarifies the nature and scope of the relevant sections of the Act in terms of what information contributories are entitled to, and in what circumstances, in a liquidation. The decision also highlights that section 684 of the Act cannot be relied upon to “fish” for evidence or to by-pass the discovery process.

If you have any queries on this decision, please contact Audrey Byrne, Áine Murphy or your usual contact within McCann FitzGerald for further information.

Also contributed to by Kieran Hannan.