Liquidator's Actions Amounted to Negligence
High Court refuses liquidator's application and holds liquidator personally liable for costs as his actions were negligent and breached the duty of care owed to the company.

Background

In a recent High Court decision, it was ruled that the liquidator not only failed in his application before  the court, but in bringing forward an application that was 'doomed to fail', the liquidator was acting negligently and breached his duty of care to the company as liquidator. As a result, the liquidator was held personally liable for the costs of the application.

The case involved the liquidator of Elvertex Limited (Company), which operated a restaurant in Galway City under a lease. The company went into arrears on its rent payments. It ceased trading in January 2019, and the landlords re-entered the restaurant premises thereby terminating the lease.  Shortly after the restaurant closed, the landlords were approached by the restaurant's former manager who sought to lease the restaurant premises. A new lease entered into between the landlords and the former manager, who then operated the restaurant as a sole trader. To facilitate the new lease to the restaurant's former manager, the Company entered into a deed of renunciation with the landlords surrendering its formal interest in the lease of the restaurant premises. The liquidator, however, contended that the deed of renunciation was invalid under section 604 of the Companies Act 2014 (Act) because it gave the landlords an unfair preference over the creditors of the Company. The liquidator also argued that the deed of renunciation should be set aside under section 608 of the Act as the disposal of the lease as Company property perpetrated a fraud on the Company, its creditors or members. The liquidator asserted that as there was no valid prior termination of the lease, it remained an asset of the Company.

Reliefs Sought

The liquidator sought four reliefs:

  1. an order under section 596 of the Act directing the surrender of fixtures and fittings (Property) to the liquidator;
  2. an alternative order under section 608(2) of the Act directing the delivery of the Property to the liquidator, or a sum of €55,000;
  3. an order under section 596 of the Act directing the former manager to surrender €7,500 to the liquidator as the value of the Company's stock when it was liquidated; and
  4. a declaration that the deed of renunciation of the lease was invalid pursuant to section 604(4) of the Act as it gave the landlords, as connected persons, an unfair preference over other creditors.  Alternatively, the liquidator sought an order under section 608(2) of the Act setting aside the deed of renunciation, as a disposal of Company property the effect of which was to perpetrate a fraud on the Company, its creditors or members.

Mr Justice Keane ruled that the liquidator had failed to discharge the burden of proof which fell on him in the application. Applying the well-settled principles that govern the trial of issues on affidavit evidence as reiterated in the Supreme Court decision in RAS Medical Limited [2019] IESC 4, Keane J believed the liquidator's application for orders under sections 604 and 608 of the Act were doomed to fail from the outset. Keane J further stated that the liquidator's application for orders under section 596 of the Act were also doomed to fail unless he managed to persuade the court that the pervious High Court decision in SJK Wholesale Limited [2020] IEHC 196 was wrongly decided and the liquidator made no such argument. SJK Wholesale established that the court can only summarily direct delivery of property to a liquidator where the company is prima facie entitled to such property. 

Amounting to Negligence

By bringing forward and maintaining his application, the liquidator had breached the duty of care he owed to the Company. Keane J applied the principles governing an application for costs against a liquidator set out in Revenue Commissioners v Fitzpatrick in his capacity as liquidator of Ballyrider Limited (In Liquidation) (Unreported, Supreme Court, 31 July 2019). Keane J concluded that there had been no honest mistake on the part of the liquidator and that the liquidator was not entitled to have recourse to the Company's assets to discharge his own costs.

As a result, the liquidator was held personally liable for the costs of the application, including the costs incurred by the landlords and the former restaurant manager.

To discuss any aspect of the judgment in Elvertex Limited (In Liquidation) v The Companies Act [2021] IEHC 166, or if you have any queries on the topic, please contact a member of the William Fry Corporate Restructuring & Insolvency team. 

Contributed by Alice O'Connor & Charley Moore