knowledge | 23 November 2022 |
Creditor secures appointment of High Court inspector to investigate alleged corporate fraud
The High Court has made an order appointing an inspector to investigate alleged fraud and unlawful activity by a company. It appears that this is the first time the order has been made on the application of a creditor seeking to recover its “investment”.
Part 13 of the Companies Act 20141 sets out the mechanism for the statutory investigation of the affairs of a company. Chapter 2 provides for the court appointment of an inspector to carry out a fact-finding investigation and report to the court. This is a discretionary relief.
Under the Act, the court application can be brought by the Corporate Enforcement Authority (s748)2 or by another party, including the company, certain members, a director or a creditor (s747). While numerous orders have been made under s748 and its predecessor, until now there has been no recorded application under s747.
In this case,3 the applicant was a creditor of the company. It was alleged that he and others had made investments in the company, structured variously as loans and other advances and that these had not been repaid when due. He made various allegations of fraud against the company and its promoters, which were denied. There was evidence to suggest that the company was now insolvent.
This application was on notice to the Director of Corporate Enforcement (“Director”) under s747 and the court had directed notice on the Minister for Justice (“Minister”) as s762 provides that the Minister should, in the first instance, discharge the expenses of a s747 investigation. The court may later direct that the company or the applicant repay some or all of these expenses. In addition, s747(4) provides that the court may require the applicant to give security for the costs of the investigation.
The Director and the Minister appeared and did not oppose the application but made submissions on the exercise of the court’s discretion. The Minister also sought security for costs to offset the costs risk to the State.
The first issue for the court was what threshold criteria, if any, should be satisfied before its discretion to make an appointment could arise? Quinn J noted that on an application under s748, the court must be satisfied that there were “circumstances suggesting” that one or more of a number of things, such as fraud, misfeasance or misconduct, had occurred.
In contrast, s747 did not set out any threshold criteria. In that case, should the court apply similar criteria to those in s748? Was more required under s747 than simply “circumstances suggesting” such criteria or was less evidence required as no criteria were stipulated at all?
Looking at earlier legislation and case law,4 Quinn J concluded that the jurisdiction conferred by s747 was wider than that under s748 and that the court was at large in the exercise of its discretion, in determining whether there were circumstances which warranted investigation. However, he agreed with commentators that the court would need to be satisfied that there was “at least prima facie evidence of some irregularity in relation to the company’s affairs.”
He went on to say that it did not necessarily follow that the requirements in s748 were more onerous than for s747. If anything, it might be said that the use of the phrase “circumstances suggesting” in s748 set a lower threshold in terms of the evidence which would justify an appointment. Having said that, it was clear that a court could at least draw assistance by reference to s748 and case law concerning it. Even applying a wider test for s747, there should at least be evidence before the court of the existence either of a state of affairs comparable to those identified in s748 or other evidence of irregularity or unlawful conduct which would justify the appointment of an inspector. Looking at evidence, the threshold was met in this case.
Discretion of the court
The court then considered whether it should exercise it discretion to make the appointment. Citing case law, Quinn J said that relevant factors included the public interest and proportionality but that there was no exhaustive list here.
He noted that the Director and the Minister had made a number of submissions including that:
- A winding up of the company was a more appropriate remedy;
- A liquidator had all the necessary powers to investigate the affairs of the company;
- Although the Minister could apply for repayment of the costs of the investigation, where the company was insolvent, it was unlikely that an order for reimbursement would be met;
- The applicant had pursued the s747 route because it was unwilling or unable to fund a liquidation. This was to transfer to the State the expenses of an investigation which, in the case of an insolvent company, should be borne by the creditors.
- Making such an appointment would open a floodgate whereby disappointed creditors and investors would, by preference, pursue this route at a cost to the State in the first instance.
Court appoints the inspector
Ultimately, Quinn J decided to appoint the inspector. Addressing the submissions, he said that it had not been alleged that the application was frivolous or vexatious or for an improper motive but only that it was inappropriate to transfer the risk or cost of the investigation to the State.
While the usual and “natural” remedy for a creditor would be an action for the recovery of its debt, then enforcement or statutory demand followed by a petition for liquidation, the applicant could not be faulted for not pursuing this route, even to the first stage of a petition or a statutory demand. He was under no obligation to do so. However, Quinn J did say that if the applicant’s only motive in bringing the s747 application was to avoid liquidation costs, he would have considered exercising his discretion to refuse the application.
He also observed that even if the application was motivated initially by a desire to secure the return of the applicant’s money, it was not devoid of a public or multiparty dimension. At least 18 investors were affected and the applicant’s investment was only a small portion of the total investments. Therefore, it could not be said that there was no wider public interest or dimension to the case.
Quinn J dismissed as speculative an argument that his order would open floodgates whereby s747 creditor applications would become commonplace instead of petitions for a winding up.
He said that a winding-up petition on foot of a statutory demand was, at least in the first instance, a more straightforward procedure than an application under s747, where the proofs were more substantial. There was, therefore, no reason to believe that s747 applications were likely to be more cost effective and therefore become more popular for aggrieved creditors generally, at least in the first instance.
He said that the court would critically appraise any s747 application and if it was vexatious or frivolous or an abuse of the process, it would exercise its discretion to refuse it. It was unlikely that, as a general rule, such applications would become the norm. If he was wrong on this, the court’s scrutiny would have its own effect.
Security for costs
Finally, he refused to grant security for costs against the applicant in favour of the Minister. He said that the height of the criticisms made was that the applicant, and perhaps other investors, had not undertaken due diligence. No evidence was advanced to support that submission. He acknowledged that there was a high risk of non-recovery of expenses from the company but that in this case that factor would not of itself justify the order.
The substance of s747 has been on the statute book for some considerable time but this appears to be the first reported instance of its invocation before the courts. In an appropriate case, it may prove a useful tool in the armoury of private parties seeking to trace and recover misappropriated assets.
- Legislative references are to provisions of the Companies Act 2014 unless otherwise indicated.
- The initiation of the application in this case pre-dated the commencement of the Companies (Corporate Enforcement Authority) Act 2021 and the establishment of the Corporate Enforcement Authority. This is reflected in the references to the role of the Director of Corporate Enforcement in the application.
- In re WFS Forestry Ireland Ltd; application of Kearney  IEHC 512.
- Director of Corporate Enforcement v DCC Plc  IEHC 260.
This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.
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