Receiver appointed to Residence

A receiver has been appointed by Zurich Bank to the insolvent Residence private members club at Dublin’s St Stephen’s Green after the High Court refused to extend court protection to it.

The club’s directors are restaurant owners Simon and Christian Stokes.

Mr Justice Peter Kelly strongly criticised the Stokes’ brothers management of the club, particularly the fact it traded using employees tax monies owed to the Revenue and said he was referring his judgment and papers in the case to the Director of Corporate Enforcement.

The judge said there was “at least a question mark” over the propriety of the directors’ behaviour relating to the wrongful retention of tax monies and the making of loans to related companies.

A 100 day examinership would not allow for a proper investigation into those matters but would allow the directors to have the liabilities of the company written down and avoid the full investigation which he believed was warranted.

Examinership should not be allowed when it was likely to have a beneficial effect for “delinquent directors” and its purpose was not to provide directors with “a ready form of absolution” in relation to corporate wrongdoing,” he said.

“There must come a time when companies that have flouted the obligations of company law, revenue law and their obligations to employees should not be allowed to call in aid the very legislation they have ignored so as to save the enterprise,” Mr Justice Kelly added.

The judge also said he was “extremely sceptical” of positive opinions by an independent accountant and the interim examiner of the prospects for survival of the club, which has liabilities of more than €4 million, given the “unprecedented recession”.

As the judge in charge of the Commerical Court list, he was aware the recession had, apart from banking, especially affected the hospitality business, building and motor trades, he said. It was “a remarkable feature” this club had never traded profitably but actually traded using tax monies and now owed some €1.2 million to the Revenue. It had spent €800,000 tax monies on capital expenditure which had been described by independent accountant Paul Wyse as “working capital”.

The judge said it was “high time” accountants abandoned what Mr Wyse had told him was their “normal” convention to treat as “working capital” for companies monies due to the Revenue but wrongfully retained by companies, as had happened here.

That accountancy convention “effectively gave a respectability” to the “misuse” of Revenue monies.

The Revenue had said it was “very guardedly neutral” on the protection application and had urged, if protection was granted, there should be a change in management. All other creditors, including Zurich Bank, supported protection.

The Residence club, a haunt of celebrities and Dublin socialites, opened in May 2008 and has 1450 members and some 41 employees. All its creditors supported protection and reports from Mr Wyse and interim examiner Jim Stafford said they believed the club had a reasonable prospect of survival, particularly given its location, provided certain conditions were met, including securing investment of some €1 million.

After Mr Justice Kelly’s judgment was delivered shortly after noon, Ross Gorman, for Missford Ltd, the holding company for Residence, sought a short stay pending consideration whether to appeal.

Rossa Fanning, for Zurich Bank, owed some €2.3 million secured on charges over the club premises, insurance policies and personal guarantees of the Stokes brothers, said the bank wished to immediately appoint a receiver.

The judge granted a short stay to 2pm to allow Missford consider whether to appeal. At 2pm, on being told there would be no appeal, he lifted the stay and was told Zurich would move immediately to appoint Jim Stafford, who had been interim examiner, as receiver.

Earlier, Mr Justice Kelly said the business plan prepared by the company’s current management “rather remarkably” projected, having had actual losses of €678,342 in 2009, the club would return profits in 2010 and 2011 and would increase its income this year to €3.8 million. He found it extremely difficult to believe the company’s fortunes would improve to that extent.

It was the court’s “unfortunate experience”, in an ever increasing number of cases, optimistic expressions at this stage of an examinership were shown later to be far too optimistic and the examinership collapsed. In this case, he was highly sceptical as the opinion ran counter to what was happening in the hospitality sector.

Despite his scepticism he had to accept the expressions of opinion as there was no evidence to the contrary but that was not the end of the matter as the court had discretion to refuse examinership after taking all the circumstances into account.

In this case, given the issues over the management of the company, he was refusing protection. He noted the independent accountant and interim examiner had agreed there was a need for further investigation of matters related to how the company was run, including the making of some €616,709 loans to related companies, Mayfair Properties Ltd, trading as Bang Cafe, and Auldcarn Ltd.

The judge said he was very mindful of the situation of the employees but believed their position would be no worse under receivership. It had been intended, whatever happened today, to reduce the number of employees, he noted.