Yesterday the Fyffes/DCC case shifted focus from the price-sensitive information aspect of its deliberations to the issue of who decided to sell DCC's €106 million stake in Fyffes in February 2000.
DCC argues that a tax structure it put in place in 1995 meant a Dutch-based, Irish -registered company, Lotus Green Ltd, had control over DCC's shareholding in Fyffes and decided on the sale. The decision was not taken by DCC or by Mr Jim Flavin, chief executive and deputy chairman of DCC, the defendants say.
Mr Flavin was not on the board of Lotus Green, the majority of whose directors were Dutch and were not employees of DCC. Because of this structure, DCC avoided paying tax on the €85 million profit it made on the sale.
Chartered accountant Mr John Donnelly, the former chairman in Ireland of Deloitte & Touche and a chairman and non-executive director of a range of companies, gave expert evidence on behalf of Fyffes. Among the issues covered was that of Lotus Green.
Under Financial Reporting Standard (FRS) 2 (accounting for subsidiary undertakings), a subsidiary's results cannot be put into a group's consolidated accounts if severe long-term restrictions exist over the parent company's right to control the subsidiary, Mr Donnelly said.
He said the results of Lotus Green, a DCC subsidiary whose only asset was the shareholding in Fyffes, were consolidated into the DCC group accounts, "indicating that DCC does in fact control the subsidiary". The accounts could not have been drawn up the way they were if the restrictions DCC now says existed in fact existed.
The Fyffes/DCC case has a long way to run, but if Mr Donnelly is correct in his point concerning FR2, then questions arise for the Revenue.
The consolidated accounts were public documents, and the sale was highly controversial.
"DCC regarded themselves as controlling Lotus Green," Mr Donnelly said. This is directly contrary to the position being taken by DCC and Mr Flavin in the court case.
"In the preparation, review and finalisation of DCC's group accounts, a group ceo would have considered and known of the significant effect of the accounting treatment of Lotus Green, and its investment in Fyffes, in DCC's annual financial statements," Mr Donnelly said.
For the year ended March 31st, 1999, the stake in Fyffes represented 14 per cent of DCC's net assets. DCC's ability to include a share of Fyffes' figures in the DCC results meant they represented 19 per cent of DCC's turnover and 10 per cent of its operating profit in 1999.
Lotus Green's memorandum of association was such that its A director, who was Irish and a DCC executive, could prevent its B directors, who were all Dutch, from making any major decision without the A director's consent. Mr Fergal O'Dwyer, DCC's chief financial officer, was Lotus Green's A director.
Mr Donnelly's report to the court says a number of executives in DCC, including Mr Flavin, "were aware of, and participated in, the decision of Lotus Green to sell its stake in Fyffes. This is evidenced by records of telephone and telefaxes to and from DCC."
Mr Donnelly had access to these documents while preparing his report.
The information that Fyffes is alleging was price-sensitive was in Mr Flavin's possession by way of his being a non-executive director of Fyffes. The information concerned trading in the first three months of Fyffe's fiscal year 2000, and "looked pretty frightful", Mr Donnelly said. The information was price-sensitive, he said.
The cross-examination of Mr Donnelly begins today.
