Kirby v Petrolo Ltd & Anor

Factual and Procedural Background

The Applicant was appointed Official Liquidator of Company A by order of the Court on 23rd September 2013 following a petition by the Revenue Commissioners. Company A operated a restaurant from leased premises in The City from March 2011 until June 2013. The second named Respondent, Defendant, along with another director, were directors of Company A. Company B, the first named Respondent, succeeded another company in trading a different restaurant nearby and continued trading at the time of the application. The Defendant’s spouse is a director and sole shareholder of Company B.

The Liquidator applied under section 139 of the Companies Act 1990 and section 298 of the Companies Act 1963 for orders requiring Company B and/or the Defendant to deliver up a sum of €63,048.25 to the Liquidator and for declarations of misfeasance or breach of duty against the Defendant.

The application was supported by affidavits from the Liquidator, the Defendant, and a former director of Company A. There was a significant dispute between the Defendant and the former director, but the Court made no findings on those disputes. The Court also disregarded references to the Defendant’s sons, who were employed as managers and subject to prior Court orders, as no application was made against them.

Key undisputed facts include that by May 2013, the Defendant and the former director were in dispute. Company A maintained a bank account with a major bank and used credit card machines linked to this account. From 30th May 2013 to 9th June 2013, no sales receipts were lodged into Company A’s account. On 10th June 2013, the landlord repossessed the premises, and Company A ceased trading.

After the repossession, the landlord found a credit card machine belonging to Company B on the premises. The Liquidator’s analysis of Company A’s financial records showed that cash and credit card sales from 30th May to 10th June 2013 were lodged to Company B’s bank account, totalling €63,048.25. It was undisputed that these monies belonged to Company A but were lodged into Company B’s account.

The Revenue Commissioners had previously placed an attachment order on Company A’s bank account for unpaid taxes, which were paid out on 30th May 2013. After the landlord re-entered the premises, Company A’s employees transferred to Company B, which then traded the nearby restaurant formerly run by another liquidated company.

The motive and reasons for the transfer of monies to Company B’s account, and the subsequent use of those monies, were disputed.

Legal Issues Presented

1. Whether the transfer of €63,048.25 from Company A to Company B constituted a disposal of Company A’s property with the effect of perpetrating a fraud on Company A, its creditors, or members, pursuant to section 139 of the Companies Act 1990.
2. Whether it is just and equitable for the Court to order Company B and/or the Defendant to pay a sum in respect of the monies transferred to the Liquidator.
3. Whether the Defendant is guilty of misfeasance or breach of duty under section 298 of the Companies Act 1963 and, if so, whether the Court should make a monetary order against him pursuant to that section.

Arguments of the Parties

Applicant's Arguments

• The sum of €63,048.25, belonging to Company A, was improperly transferred to Company B’s bank account, constituting a disposal of Company A’s property.
• The transfer had the effect of depriving Company A of monies to which it was lawfully entitled, thereby perpetrating a fraud within the meaning of section 139(1)(b) of the Companies Act 1990.
• The Defendant controlled the transferred monies despite not being a director of Company B and should be ordered to pay the sum to the Liquidator.
• The payments made from Company B’s account to employees and creditors of Company A were either not sufficiently proven or may have benefited Company B, disputing their legitimacy as offsets against the sum claimed.
• Even if misfeasance or breach of duty were established against the Defendant under section 298 of the Companies Act 1963, the maximum monetary order should not exceed €21,049 based on the use of the monies.

Respondents' Arguments

• The monies were lodged into Company B’s account for reasons disputed by the Applicant but argued to be legitimate.
• The entire sum of €63,048.25 was used to discharge liabilities of Company A, including payment of salaries to employees and creditors, thereby justifying the transfer.
• The Defendant contended that payments made from Company B’s account were for the benefit of Company A’s business operations prior to cessation of trading.
• No submission was made to distinguish the Defendant’s position from that of Company B in relation to the orders sought.
• It was not just and equitable for the Court to make an order requiring repayment of the full sum claimed.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Devey Enterprises Ltd. v. Devey [2011] IEHC 340, [2012] 1 IR 127	Interpretation of section 139 of the Companies Act 1990 regarding disposal of company property and fraud.	The Court accepted the approach that fraud under s.139 requires deprivation of something lawfully entitled to the company or its creditors.
Le Chatelaine Thudichum (In Liquidation) Ltd. v. Conway [2008] IEHC 349, [2010] 1 IR 529	Clarification of the fraud criterion in section 139 of the Companies Act 1990.	The Court followed the principle that fraud requires deprivation of lawful entitlement, without needing to prove dishonesty.
Re Comet Food Machinery Company Ltd. (In Liquidation) [1999] 1 I.R. 485	Obiter observation on application of s.139 where assets are diverted to frustrate judgments against the company.	The Court referenced this to support the interpretation of s.139 as encompassing fraudulent disposals to frustrate company creditors.

Court's Reasoning and Analysis

The Court found that the sum of €63,048.25, property of Company A, was disposed of by transfer to Company B’s bank account via lodgement of cash and credit card receipts. The effect of this disposal was to deprive Company A of monies to which it was lawfully entitled, thus constituting a fraud within the meaning of section 139(1)(b) of the Companies Act 1990.

The Court noted that although the Defendant was not a director of Company B, he appeared to have control over the transferred monies, having made affidavits on behalf of Company B and produced relevant financial documents. Therefore, the Court had jurisdiction to make an order against both Company B and the Defendant.

The Court considered the rights of bona fide third parties as required by section 139(3) and examined the use of the monies after transfer. It accepted that approximately €29,334.92 was paid to employees of Company A for work performed before cessation of trading, and €12,664.31 was paid to suppliers for the benefit of Company A’s business. These sums were excluded from the amount to be recovered as it was just and equitable to do so.

The Court found insufficient evidence that other payments from Company B’s account were for the exclusive benefit of Company A, thus not justifying exclusion from the recovery order.

Regarding the alternative claim under section 298 of the Companies Act 1963, the Court held that the issue of misfeasance or breach of duty by the Defendant could not be fairly determined on affidavit evidence alone. Nonetheless, even if such liability were established, the Court would not make an order exceeding the sum of €21,049, reflecting the findings on the use of the monies.

Holding and Implications

The Court’s final decision was to ORDER the Respondents, Company B and the Defendant, to pay to the Liquidator the sum of €21,049 pursuant to section 139(1) of the Companies Act 1990.

The Court reserved the fixing of the payment date pending further submissions.

No monetary order was made under section 298 of the Companies Act 1963 at this stage, and no determination was made on misfeasance or breach of duty due to insufficient evidence.

The decision directly affects the parties by requiring repayment of part of the monies transferred improperly but does not establish new legal precedent beyond the application of existing law to the facts.