Court of Appeal: Defaulting shareholder unable to rely on principle of good faith in contract

About this case:

• Judgment:
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In the leading judgment of the three-judge Court of Appeal, Ms Justice Finlay Geoghegan found that the defaulting shareholder could not rely on the existence of a general principle of good faith as a ground for contending that there was an implied term in the shareholders’ agreement which precluded another shareholder from enforcing a sale of its shareholding.

Background

In 1983, BUPA Insurance with four doctors put together an investment package to build and develop the Blackrock Clinic, operated by Blackrock Hospital Limited (BHL).

In March 2006, Benray and Breccia acquired their shareholdings in BHL: Benray is owned by Mr John Flynn; and Breccia is owned by the Goodman Family Trust associated with Mr Laurence Goodman.

Anglo Irish Bank Loans

In March 2006, Breccia, Benray, and other shareholders each drew down loans from Anglo Irish Bank to finance the purchase of their respective allotment of shares.

On the 28th March 2006, the shareholders – including Breccia and Benray – entered into a shareholders agreement. On the same date, agreements were also entered into between the borrowing shareholders and Anglo in relation to borrowings, and also granting mortgages creating a first legal charge over the shares acquired in BHL. All shareholders provided guarantees or indemnities to Anglo as well as certain other documents.

In 2008, Benray borrowed a further €2 million from Anglo. The 2006 Anglo loan agreements required each of the parties to repay their loans in December 2010 – Breccia repaid its debt, but Benray defaulted.

Default

The loan and security agreements with Anglo in 2006 included cross security arrangements – the effect of which was that if one shareholder defaulted, Anglo had a right to force the sale of every shareholder’s shares. As a condition, furthermore, of the loans being advanced, each shareholder was required to give Anglo a formal assurance that if Anglo enforced its security and sold any of its shares in BHL they would waive any pre-emption rights that might arise.

Following the collapse of Anglo, Benray’s loan agreement along with guarantees and share charges became vested in National Asset Loan Management Ltd (NALM).

In May 2014, Breccia purchased the Benray loans from NALM for €9,104,616.41

In August 2014, Breccia served on Benray a demand notice for immediate repayment of €8,744,853 pursuant to the two loan agreements, however Benray did not pay and consequently Breccia appointed a receiver over the shares of Benray in BHL.

The High Court

Benray’s fundamental contention was that there was an implied term in the Shareholders’ Agreement that each of the shareholders owed one another a duty of good faith and fair dealing and/or that they would take no steps, the effect of which would be to cause the shares of other shareholders to be alienated, save in accordance with the Shareholders’ Agreement.

They claimed that no shareholder could acquire and/or exercise the rights of a lending institution in relation to the shares, and accordingly, challenged the validity of the loan sale deed from NALM to Breccia in relation to the Benray loan and associated security over Benray’s shares in BHL.

The trial judge found that upon the true construction of the Shareholders’ Agreement and/or pursuant to an implied term to like effect and/or pursuant to an implied term, that Breccia and Benray as shareholders owed each other mutual duties of good faith and fair dealing.

It was therefore declared that Breccia as a shareholder was not entitled to demand or recover monies from Benray as another shareholder in respect of monies due and owing under Benray’s Anglo Facilities dated 2006 and 2008 and/or to enforce a sale of Benray’s shareholding in BHL otherwise than in accordance with the Shareholders’ Agreement.

Court of Appeal

Ms Justice Finlay Geoghegan found that the trial judge’s interpretation of the Shareholders’ Agreement limiting a Shareholder’s right to recover monies pursuant to another Shareholder’s loan facility or to enforce a sale of another Shareholder’s shareholding could not be upheld; and that the Shareholders’ Agreement did not include an implied term that the parties owe each other mutual general duties of good faith and fair dealing.

In a concurring judgment, Mr Justice Gerard Hogan agreed that there was no basis for the implication of such an implied term, even if there was such a general principle of good faith in Irish contract law.

Justice Hogan added that it was unnecessary to decide in the present case whether Irish contract law contained a general principle of good faith beyond the existing recognised examples such as uberrimae fidei in insurance law, suretyship and partnership.

Irish common law has not recognised any such general principle such as is found in the civil codes of France, Germany, and Switzerland; or in the UNIDROIT Principles of International Commercial Commerce (2010).

Justice Hogan continued to reiterate that even if there were such a general doctrine of good faith, it would not lead to the implication of the term for which Benray contended.

Consequently, Breccia was entitled to judgment against Benray in the sum of €8,744,853 and interest.