Inspector Appointed to Company Following First Successful Application from a Creditor
Pensions Winter Briefing
The High Court (Court) has appointed an inspector to investigate the affairs of a company following the first recorded application by a creditor, under Section 747 of the Companies Act 2014 (Act).
The applicant, a creditor of WFS Forestry Ireland Limited (Company), and at least seventeen others, claimed that investments they made in the Company, in the form of loans and other advances, were not repaid when due.
The applicant alleged that the Company was formed to engage in a fraudulent scheme, soliciting loans and other investments to fund fictitious forestry projects and defraud creditors. He applied under section 747 for the appointment of an inspector to investigate the affairs of the Company (Application).
The Director of Corporate Enforcement (Director), (now the Corporate Enforcement Authority (CEA)), was given notice of the Application, and made submissions to the Court. The sole director and shareholder of the Company opposed the Application.
Appointment under Section 747 v Section 748 of the Act
Under Section 748 of the Act, the CEA can apply to the Court seeking the appointment of an inspector. Section 748 sets out a non-exhaustive list of relevant factors which the Court will consider in exercising its discretion. Those factors include fraud, conduct unfairly prejudicial to members or creditors, the formation of a company for fraudulent or unlawful purposes, misfeasance, or other misconduct. There is no such list of relevant factors under section 747. Although the Court was satisfied that the jurisdiction to appoint an inspector under section 747 is wider than section 748, it held that there must be evidence of matters comparable to those identified in section 748, or irregularity or unlawful conduct to justify the appointment.
The Court’s attention was drawn to the following factors:
- The public interest, noting that the Director submitted that this case was a private dispute pursued by disappointed investors. The Director’s argument was that the applicant’s objective was to recover his money, rather than having any broader public interest dimension.
- The relevance of other possible investigations into the affairs of the Company.
- The relevance of the insolvency of the Company, such that liquidation was a more appropriate remedy.
- The powers of an inspector compared to the powers available to a liquidator.
Neither the Minister for Justice, who was also a notice party to the Application, nor the Director, opposed the application. However, the Director submitted that a winding-up order was more appropriate. The Minister supported that submission and contended that appointing an inspector would open the floodgates to disappointed creditors and investors, with the costs borne by the State. (Under section 762 of the Act, costs of an investigation under section 747 are payable by the Minister).
Issue and Decision
The Court stressed that its task is to determine whether there is evidence warranting the appointment of an inspector and not to make definitive findings or conclusions as to the allegations of the applicant and other investors.
The Court believed there was evidence of matters worthy of investigation, including:
- the way loans and advances to the Company were applied.
- whether the crops of Christmas trees referred to in marketing materials exist.
- whether the Company held a valid interest in lands referred to in loan agreements and certificates.
- the status of loan capital investments sourced by the Company from others.
The Court found sufficient evidence existed of engagement with investors and transactions which warranted investigation by an inspector under Section 747. The Court appointed an inspector to investigate the affairs of the Company and report on whether its affairs were conducted with an intent to defraud creditors; for a fraudulent or unlawful purpose; in an unfairly prejudicial manner; or whether the Company was formed for a fraudulent or unlawful purpose.
Inspection v Liquidation
The Court considered whether a petition for the winding up of the Company was more appropriate than an application under Section 747.
The Court acknowledged that the usual remedy for a creditor is an action to recover a debt, or a statutory demand followed by a petition for liquidation under Section 569 of the Act. However, it found that the applicant should not be faulted for not seeking a liquidation. The applicant was honest in admitting that the cost of liquidation was something they were unwilling or unable to bear. Even if the Director, the Minister, or the Court considered liquidation a more appropriate remedy, the applicant has no obligation to pursue that approach.
This judgment confirms that the threshold requirements for the appointment of an inspector pursuant to section 747 of the Act are wider than those applicable to section 748. It clarifies that there is no obligation on a creditor to seek liquidation of a company in the first instance.
Contributed by Alexandra Drummy & Kate Abell