High Court of Ireland Decisions

1. The first plaintiff was formed in the year 1971 and carries on business as a distributor of pharmaceutical products. The second plaintiff is a wholly owned subsidiary of the first plaintiff. It carries on a similar business to that of the first plaintiff but also carries on business as agent for pharmaceutical product manufacturers. I shall henceforth refer to either or both of them as the plaintiff. The chief executive of the plaintiff is Maurice Landers. Prior to 1971 he had experience in the wholesale pharmaceutical trade. In that year he decided to

2. The accounts department of the plaintiff was established by Mr. Slattery who had considerable experience in similar departments. He had no professional qualification. In practice, all the decisions relating to the finances of the company were made by John Walsh and were implemented either by Mr. Slattery or by Mr. John Murray, an employee of Robert J. Kidney & Company. John Walsh did not have any office in the plaintiff’s premises but worked from his own office in the offices of Robert J. Kidney & Company and meetings in which he was involved other than directors’ meetings took place in those offices. From early in their association the plaintiff through Mr. Landers and Mr. Slattery became aware of the existence of Thorndene and that it was Mr. Walsh’s family company. In 1972 when the plaintiff was short of working capital it was lent £8,000 at interest by Thorndene for approximately three months. This was the only such loan made to it by Thorndene.

3. In the year 1976 Mr. Walsh suggested to Mr. Slattery that the plaintiff should from time to time place money on deposit with Thorndene. Between that year and 1981 this was done on approximately 13 occasions. When this was first suggested to Mr. Slattery he asked Mr. Landers for authority to do so which he was given. Both Mr. Landers and Mr. Slattery have given evidence to the effect that Mr. Walsh advised them that it would be of benefit to the plaintiff to do so. At that time the plaintiff ran three accounts with its bankers, one for its Limerick operation, one for its Dublin operation and one for its subsidiary. Each account had its own overdraft facility. The nature of the plaintiff’s business was such that its several accounts would be heavily in credit at the beginning of the month and would go into debit towards the end of the month.

4. In his position as financial adviser Mr. Walsh received monthly accounts. From time to time, he inquired from Mr. Slattery what was the daily position of the company’s bank accounts. It was in the course of such inquiries and as a result of them that he suggested that money should be put on deposit with Thorndene. In his evidence, Mr. Slattery said that having received Mr. Lander’s approval he then asked for the terms of such loans and was told that the plaintiff would receive one per cent more than it was paying to the bank. He also said that when the bank balances had fallen to the point where he required the money he asked Mr. Walsh for a cheque and received it by return. It may be that Mr. Slattery believed at the time that this was the arrangement between them. There is nothing in the documentation which bears him out. One might have expected that with the fluctuating nature of his account the plaintiff would have been advised to put money on deposit with Thorndene when an account was in credit and to have sought repayment before it went into debit. Such was not the case. Deposits were made for much longer periods, on occasion for months. Obviously, as a result, it was on deposit for periods when the money was being borrowed from the bank and in some cases while the plaintiff was paying a three per cent surcharge to the bank for exceeding its overdraft limit. While the interest being received might at the beginning have in fact been one per cent more than the plaintiff’s overdraft rate at the bank, this, if it was ever the basis of the arrangement between the parties, was not the basis for long. The documents show that Thorndene circularised the plaintiff giving details of the rate of interest it was paying on deposits without any reference to any special rate for the plaintiff.

5. I have no doubt that the plaintiff placed money on deposit with Thorndene from time to time on the decision of Mr. Walsh. I have equally no doubt that the purpose of such deposits had no basis in the needs of the plaintiff. It must have been obvious to anyone who stood back and thought about what was happening that the deposits made no commercial sense for the plaintiff and were in fact costing it money. From the beginning, Mr. Walsh was the person who dealt with the bank and controlled the financial health of the company. No one ever questioned his decisions. In the course of his activities,, he was shown and saw all the financial data of the plaintiff. He was held in high esteem by Mr. Landers and Mr. Slattery. Mr. Landers had authorised Mr. Slattery to do whatever Mr. Walsh advised. Having regard to this background and the difference in their professional qualifications it is possible to understand how these transactions could have taken place.

6. From 1981 to 1986 no deposits were sought by Mr. Walsh. In March, 1986, the sum of £70,000 was placed on deposit with Thorndene which was repaid by the 1st September, 1986. On the 29th or 30th October Mr. Walsh asked for a deposit of £200,000. However he indicated that he did not want it until November. This Mr. Slattery agreed to and because he did not wish to sign cheques out of order the signing of the cheque was left until November. On that date Mr. Slattery was not available and the cheque was signed by another director. Neither Mr. Slattery nor this director apparently saw anything wrong in the transaction. A further deposit of £200,000 was made on the 27th November, 1986. There were further transactions during the early part of 1987 when a portion of this money was repaid and when further deposits were again made. Ultimately on the 11th March, 1987, there was a sum of £350,000 on deposit when Mr. Walsh informed the plaintiff that Thorndene was insolvent and not in a position to repay the amount on deposit.

7. The relationship between Thorndene and the defendant firm is a somewhat unusual one. At all times the affairs of Thorndene were managed by Mr. Walsh with the assistance of his secretary in the partnership. All the books of the company were kept in his office in the partnership offices. In the 1970s one of the partners of the partnership was a director of Thorndene and another partner was the secretary. Both had resigned by the end of the decade. During that decade also several members of the firm had small loans from Thorndene. The accounts of Thorndene were audited by the employees of the partnership and for the years 1973 to 1977 inclusive were signed by John Kidney, another partner in the firm. There is no evidence of any further accounts being prepared by the partnership until 1986. However the accounts for the years 1978 to 1982 are in existence although the auditor’s reports have not been signed. I think it clear that these accounts were prepared by employees of the partnership. From early 1980 the tax affairs of Thorndene were dealt with by the tax division of the partnership. There is some dispute as to whether or not letters purporting to have been written by the partner in charge of the tax division were in fact written by him or by Mr. Walsh. This is not crucial to the case but on the probabilities I find the partner is mistaken and that the letters were in fact written by him. From 1980 onwards the affairs of Thorndene were financially insolvent. I am satisfied on the evidence that the financial state of the company got worse over the years. The problem appears to have arisen from the fact that the company made deposits and received deposits. On the deposits which it received it retained as it was obliged to do the relevant tax. On the deposits which it made the relevant tax was withheld from it. Had the company been trading reasonably these sums would probably have balanced one another out. However, since the company was trading at a loss it meant that a large tax liability arose for tax deductions not passed on to the revenue. Difficulties in relation to the payment of these arrears arose in the year 1986 when Mr. Walsh asked the taxation department to deal with the matter on his behalf. They realised that matters required attention and insisted upon accounts being prepared for the five years 1983 to 1987. In fact these accounts were never finalised. The reason being given is that when various queries were put to Mr. Walsh he never replied to them.

8. No charge was ever made by the partnership for the work done by it on behalf of Thorndene whether in respect of the preparation of its accounts or dealing with its tax liabilities. Nor was any contribution ever made by Thorndene to the salary paid to Mr. Walsh’s secretary who in effect acted as book-keeper to Thorndene. Much if not all the business of Thorndene during the period when its accounts were signed by John Kidney was with clients of the partnership. Its balance sheet and profit and loss account showed headings “Loans to Clients” and “Loans from Clients”. Later accounts referred mainly to loans, but it is reasonable to infer from the evidence the nature of the business did not materially alter.

9. The Institute of Chartered Accountants in Ireland brought out an ethical guide for members in 1976. Amongst other matters which this guide indicated as being contrary to the proper running of an accountant’s practice was the making of loans to or from clients and the acceptance of directorships in client companies. At some time in the year 1976 or 1977, following presumably the issue of this ethical guideline, the partners in the firm approached Mr. Walsh with the view of requiring him to cease his loan business under the guise of Thorndene. This Mr. Walsh agreed to do though somewhat reluctantly. Notwithstanding this the partners never took any further steps to see whether or not Mr. Walsh had complied with their requirement. In fact the employees of the partnership and in my view certainly the taxation partner and the partner involved in the unsigned accounts must have known that Mr. Walsh had not ceased his business but was in fact carrying it on. In November, 1986, Mr. Walsh actually made a loan to the partnership for a month or so to enable it to pay current tax. In addition to his loan business Mr. Walsh was director of a number of companies and certainly chairman and director of at least one other company. The partners in the partnership were fully aware of this and were equally aware that such companies had made deposits with Thorndene. At the date of the collapse of Thorndene there were some 17 clients of the partnership who had monies on deposit with Thorndene.

10. Having regard to this history of the relationship of Thorndene with the partnership it seems to me that the partners must have known and certainly ought to have known that Mr. Walsh was likely to take loans from clients. While perusal of the books and accounts of the various clients of the partnership by whom such deposits had been made might not have told any particular story to a layman, I am quite satisfied that to an accountant the picture would have been crystal clear.

11. The affairs of Thorndene were worse than was originally thought and the total of the sums placed on deposit by the plaintiff have been lost. The plaintiff now seeks to recover these monies and the interest which should have been paid thereon from the partnership. The claim as formulated by the plaintiff against the defendant partnership is essentially based upon the provisions of ss. 5 and 10 of the Partnership Act, 1890, which are as follows:-

12. These two sections are very similar in effect. The act, default or transaction Covered by the sections must be ones involving the partnership in the circumstances indicated. There must be some form of authority emanating from the partnership sufficient to impose obligations or confer rights on the partnership as the result of the dealing by the partner. It cannot be said here that the partnership was intended by either the plaintiff or Mr. Walsh to acquire rights or to incur obligations founded in contract. The claim therefore so far as it is founded in contract fails. Under s. 10 the partnership is liable for a wrongful act of a partner if it expressly authorises it or if it is something done in the ordinary course of the business of the partnership.

13. The fact that the wrongful act is carried out by a partner does not necessarily make the partnership liable even if what he does is within the ordinary course of the partnership business. In British Homes Assurance Corporation Ltd. v. Paterson [1902] 2 Ch. 404 the plaintiff dealt with his solicitor in his firm name. In the course of its dealings with him, he entered into partnership with the defendant and the name of the firm was changed. The plaintiff, when notified of the change, continued to deal with the original solicitor alone. That solicitor defaulted owing the plaintiff money. It was held that the defendant was not liable for the default. In the course of his judgment referring to ss. 10 and 11 of the Partnership Act, 1890, Farwell J. said at p.411:-

14. It is not open however to the remaining partners in a firm to assert that a third party dealt with the partner as an individual rather than as a partner because the nature of the work was such that it could not have been performed by the partnership. In Kirkintilloch Equitable Co-operative Society Ltd. v. Livingstone [1972] SC 111 there was a claim for damages against inter alia the auditor of the plaintiff society for professional negligence. He was a partner in a firm of accountants and they were also made defendants. They sought to be dismissed from the proceedings. The basis of their submissions was that since the partnership could not in law have been appointed to audit the books of the plaintiff company, the audit was not carried out in the ordinary course of the partnership business and so it could not have authorised the individual partner to carry out such work. Although the individual partner was the auditor of the company nevertheless the audit fee was paid to the partnership and the employees of the partnership assisted the individual partner in the audit. The submissions were rejected. It was held that the ordinary business of the partnership included audit work. In rejecting the second part of the submissions Lord Cameron said at p. 122:-

15. Here there is no evidence to show that the defendants expressly authorised Mr. Walsh to require or direct the deposits which are the subject matter of these proceedings. It is necessary therefore for the plaintiff to establish an ostensible authority. This does not depend upon the belief of the person dealing with the partner, but requires evidence to establish some form of representation by the partnership to such person from which it is reasonable for that person to infer the existence of the authority. In Kett v. Shannon [1987] ILRM 364 a customer of a garage with which he had left his car for repair found that it was not ready when he called for it. The mechanic on duty said that he could take another car until his own was ready. He took this car and was involved in an accident while driving it. The question arose as to whether or not he was driving it with the consent of the garage owner. There was no evidence that the owner had ever indicated to the customer that he could borrow a car in such circumstances. The mechanic had no authority from the owner to allow customers to borrow cars. It was held that before an ostensible authority could be established it was necessary that there should have been a representation of some kind by the garage owner to the customer that the mechanic had authority to lend cars. Since the evidence did not disclose any such representation the claim failed. In the course of his judgment Henchy J. cited with approval a passage from the judgment of Robert Goff L.J. in Armagas Ltd. v. Mundogas S.A. [1986] AC 717, 731, part of which was as follows:-

16. Before considering directly whether or not Mr. Walsh had an ostensible authority from his partners to direct the plaintiff to make deposits with Thorndene it is necessary to determine the status of Mr. Walsh and then to determine the nature of the acts which led to the plaintiff’s loss. Mr. Walsh was employed by the plaintiff as a financial adviser. He became through Thorndene a shareholder in the plaintiff. He was also appointed a director. His expertise lay in financial matters. He was in no sense an executive of the plaintiff so far as the day to day business affairs of the plaintiff was concerned. When decisions had to be made in relation to financial matters whether day to day or long term, it was he who made the executive decision. His work in relation to the plaintiff was carried out in his office in the offices of the defendants. He made the decisions and these were carried out by a senior manager on the staff of the defendants in co-operation with Mr. Slattery. He was not paid a salary by the company. The remuneration for his services including his attendance at board meetings was calculated on a time basis and charged to the plaintiff by the defendants who received it. In my view, Mr. Walsh was at all times concerned with the affairs of the plaintiff as a partner in the defendant firm. Nevertheless his position was not solely that of a professional adviser. It was substantially that of an executive. He did not give his professional opinion as to courses to be adopted by the plaintiff. He actually made the decisions. So far as his relationship with Mr. Slattery was concerned, the latter was under instructions from Mr. Landers to carry out his directions. Mr. Walsh was well aware of this.

17. It was this relationship and Mr. Walsh’s position within the plaintiff which made it possible for him to procure the deposits which have been lost. Had he been purely a professional offering his opinion, Mr. Slattery and indeed Mr. Landers also would have had to consider his advice in relation to making such deposits. No doubt had they done so, they would not have made them. But he did not offer advice to the plaintiff, he told Mr. Slattery what to do. As Mr. Tempany said, the calls to Mr. Slattery to send on the cheques were acts done in an executive capacity.

18. I have no doubt that if Mr. Walsh’s position had been as an accountant solely then Mr. Slattery would have seen the requests for deposits for what they really were, private transactions made for his own purposes. But because of the manner in which he was involved in the plaintiff he succeeded in disguising them as transactions made in the interests of the plaintiff.

19. What had occurred was that Mr. Walsh had placed himself in a position where his interest and his duty were in conflict. His duty was to offer advice only so long as he was being remunerated as a partner in an accountancy firm. The interests of the client were paramount. He allowed himself to depart from this role by becoming a shareholder, a director and an executive. Having built up a position of trust within the company, he abused that trust. Not surprisingly the ethical code of his profession advised against members of that profession having shareholdings and directorships with client companies. It advised also against making loans to or taking loans from clients. This advice was given to protect its members from the very conflict between interest and duty which enmeshed Mr. Walsh.

20. The deposits were obtained by Mr. Walsh while a partner in the defendant firm. The defendants submit that the ordinary business of the firm did not include giving investment advice. I accept the defendants’ submission that the firm does not give investment advice and that if a client wanted such advice it would introduce him or her to a stockbroker or merchant banker. The question does not depend for its answer on whether or not the firm gave investment advice. The question to be answered is whether in doing what he did Mr. Walsh was carrying out the ordinary business of the partnership. It was clearly the ordinary business of the partnership to allow one of its number to be a director and even a chairman of a board of directors of a client company. It was the ordinary business of the partnership to allow an individual partner in such a position to take deposits from client companies for his own private company. It was equally the ordinary business of the partnership that such partner having such positions in client companies should make decisions directing client companies how to apply their monies. Taking these factors into account it seems to me that what Mr. Walsh was doing when deciding to direct the making of the deposits with Thorndene was something done within the ordinary business of the partnership.

21. Nevertheless it is essential that there should have been a representation by the partnership to the plaintiff that such conduct had its approval. The representation does not have to be made in writing or even orally. It is sufficient if it is made by conduct which is the normal way in which an ostensible authority is established. Here the defendant firm was also the auditor of the plaintiff. As such it would have had to have been aware of the transactions with Thorndene. At no time did it suggest to the plaintiff that there was anything unusual or improper in making the deposits. There was nothing to suggest to the plaintiff that it should not effect similar transactions in future. In my view, the absence of any comment from the defendant firm was a sufficient representation by conduct that Mr. Walsh had the authority of the defendants to direct the making of such deposits.

22. I have already dealt with the knowledge of the defendants of the conduct of Mr. Walsh in relation to the taking of deposits by Thorndene. Once they were aware that he was taking or likely to take such deposits then their failure to take any steps to prevent him from so acting imposes a liability upon them. In Mercantile Credit Co. Ltd. v. Garrod [1962] 3 All E.R. 1103, there was a claim by a hire purchase finance company against the owners of a garage for breach of warranty of title of a motor car sold to the finance company in the course of a hire purchase transaction between the finance company and a customer of the garage. There were two partners one of whom was a sleeping partner. It was a term of the partnership agreement that cars should not be bought and sold. The sleeping partner became aware that his partner was in fact making sales of cars. It was held on this ground as well as on other grounds that the sleeping partner was liable in damages to the finance company. At p. 1107 Mocatta J. held:-

23. The defendants have submitted that the taking of the deposits was clearly an independent transaction and one having no connection with his position as financial adviser to the plaintiff. I cannot accept that submission. What he did, he did in his position as a financial adviser to the plaintiff. In so doing he owed the plaintiff a duty of care. Having regard to the financial state of Thorndene at the material times, he ought not to have directed such deposits and in so doing was in breach of his duty of care to the plaintiff. This case has been put forward by the plaintiff as one in which an honest adviser directed the plaintiff to make the particular deposit. This has not been contested. As I pointed out during the course of the hearing no suggestion was being made by either party that the actions of Mr. Walsh were dishonest in any way. I should add that neither Mr. Walsh nor his secretary gave evidence and that therefore a decision of the court as to the involvement of the partnership has had to be made in the absence of what is in effect the most relevant evidence. I am satisfied that the defendant partnership is liable for this breach of duty on the part of Mr. Walsh for the reasons and also on the bases which I have indicated.

24. The defendants have raised the issue of contributory negligence. The onus is on them to show that the plaintiff failed to exercise reasonable care. There is no evidence to suggest that the plaintiff knew or ought to have known of the financial state of Thorndene. If, as I have held, it was reasonable for it to accept that the transactions had the approval of the defendants, then it seems to me to follow that it was in no way to blame for the loss which it incurred.