The High Court has dismissed a shareholder’s application for leave to bring a derivative action in Seskin Properties Limited’s name over an alleged €5.33 million debt owed by Maplewood Developments Limited.
Mr Justice Kelly ruled on 27 July 2012 that the proposed claim had poor prospects of success and that the applicant had not established that either of the exceptions to the rule in Foss v Harbottle on which he relied applied. The ruling determined whether the shareholder could sue on the company’s behalf; it did not decide the underlying debt claim at trial.
The applicant, a director and 49 per cent shareholder in Seskin, alleged that Maplewood owed the company €5,329,920 under a 2007 agreement for construction of 82 homes at Ballynakelly, Newcastle, County Dublin. Seskin invoiced €14,342,400 between February 2008 and November 2011, and Maplewood paid €9,012,408. The applicant argued that Seskin’s other directors, Michael Whelan and Michael J. Whelan, had allowed the debt to accumulate and refused to pursue Maplewood, a company they controlled.
The Whelans disputed that the written agreement reflected the parties’ intended bargain. John Barrett, a former director of both companies who had worked on the agreement, said the arrangement was that Seskin would bear the development’s sales risk, including any reduction in house prices. The judge considered Mr Barrett’s account and supporting documents, including material from KPMG and the former solicitors. He found strong evidence supporting a possible rectification claim by Maplewood, while noting that rectification is not easy to obtain.
The judge concluded that the proposed claim against Maplewood had poor prospects and that Maplewood was unlikely to have assets to satisfy a judgment. He also found no better prospect of success in the proposed claim against the Whelans for breach of duty. On that basis, the application failed.
The applicant had also argued that the alleged conduct amounted to fraud on the minority, with the Whelans in control and benefiting from the alleged wrongdoing. The judge found no cogent evidence that the decision not to pursue Maplewood was a wrong to Seskin, or that the Whelans would benefit from that decision. The applicant had alleged personal guarantees of Maplewood’s borrowings, but accepted at the hearing that there were none. The judge also rejected the alternative argument that the interests of justice justified a further exception to the Foss v Harbottle rule, finding that no sufficiently strong case for intervention had been shown.
The court dismissed the application for leave to commence the derivative action.