Approval Criteria
Cases
Star Elm Frames Ltd & Companies Acts
[2013] IESC 57 (10 December 2013)
Judgment of Ms. Justice Laffoy delivered on.10th December, 2013
Background
1. Star Elm Frames Limited (the Company) was incorporated on 19th July, 2011. In September 2011 it acquired the assets and goodwill of the business of another company, Star Elm Limited (SEL), which was being wound up, from the liquidator at the price of €130,000, of which the sum of €65,000 remains due and owing to SEL (in liquidation). Since the acquisition was completed, the Company has carried on the business acquired, the manufacture and delivery of casement windows, doors and patio doors, from premises at Raheen Business Park, Raheen, County Limerick, which are held by it on lease. At present the Company has thirty one employees.
2. During its first year of trading, to mid-August 2012, the Company incurred an operating loss of €329,739, which represented 8.28% of turnover. In the following trading year, to mid-August 2013, it incurred an operating loss of €166,276, which represented 4.85% of turnover, which had diminished by 14.03% in that year. However, expenses as a percentage of turnover had also been reduced in that year.
3. On 26th September, 2013, the first date in respect of which the Court has an estimated statement of affairs, the Company had a deficit of €277,638 on a “going concern” basis. The Revenue Commissioners were the Company’s largest creditor. According to the Revenue Commissioners, the Company has a total tax liability of €418,237, comprising €384,374 in respect of VAT for periods November/December 2012, March/April 2013, May/June 2013 and July/August 2013 and €33,863 in respect of PAYE/PRSI for 2013. While there had been engagement between the Company and the Revenue Commissioners prior to October 2013, what appears to have precipitated the Company’s actions which led to these proceedings was the fact that on 1st October, 2013 the Revenue Commissioners placed an attachment on the Company’s bank account, in consequence of which the Company was going to be unable to discharge wages which were due to be paid on 3rd October, 2013.
The petition
4. On 3rd October, 2013 the Company presented a petition to the High Court seeking an order pursuant to s. 2(1) of the Companies (Amendment) Act 1990, as amended (the Act of 1990) appointing an examiner to the Company, On the same day, the Company applied ex parte to the High Court for the appointment of an interim examiner. By order of the High Court (Butler J.) made on 3rd October, 2013, Joseph Walsh (the Interim Examiner) of Hughes Blake, Chartered Accountants, was appointed as interim examiner until after the hearing of the petition on 4th November, 2013. There was before the Court on the hearing of the ex parte application a report dated 2nd October, 2013 of John Tobin, Certified Public Accountant, of J. P. O’Donohoe & Co., which was presented as the report of an independent accountant for the purposes of s. 3(3A) and (3B) of the Act of 1990 (the Independent Accountant’s Report).
5. When the petition came on for hearing before the High Court (Charleton J.) on 4th November, 2013, in addition to the Independent Accountant’s Report, there was before the Court an affidavit of the Interim Examiner, which exhibited a report of the Interim Examiner covering the period from his appointment on 3rd October, 2013 to 4th November, 2013 (the Interim Examiner’s First Report). There was also before the Court an affidavit sworn by Philip Moloney, an officer of the Revenue Commissioners, on 1st November, 2013. It was made clear in that affidavit that, while the Revenue Commissioners were bringing certain concerns they had to the attention of the Court to assist the Court’s adjudication on the petition, they were neutral as to the Company’s application for protection. At the hearing of the petition counsel for the Revenue Commissioners maintained the “guardedly neutral” approach to the application to appoint an examiner.
The decision of the High Court on the petition
6. By order of the High Court (Charleton J.) made on 4th November, 2013 it was ordered that the protection of the Court afforded to the Company be lifted forthwith and that the Interim Examiner be discharged as Interim Examiner of the Company. On 5th November, 2013 the said order was stayed until 8th November, 2013.
7. In an ex tempore judgment Charleton J. set out his reasons for refusing the application. First, the petitioner had failed to satisfy him that the Company was in a position where it had a reasonable prospect of survival as a going concern. Secondly, he was not satisfied that he should exercise the discretion conferred on the Court by the Act of 1990 in favour of the Company, which had collected VAT but had not remitted it to the Revenue Commissioners over a period of a year going back to November 2012, in circumstances where the Company had already defaulted on a “scheme to repay” insisted on by the Revenue Commissioners.
The Appeal
8. The Company served notice of appeal against the decision of the High Court on 6th November, 2013. Subsequently, the Company applied for a stay on the order of the High Court. That relief was granted and the position is that the Court protection and the appointment of the Interim Examiner have remained in place pending the determination of the appeal.
The sources of evidence before the Court on the hearing of the appeal
9. As has happened in the past, for example, in In the Matter of Gallium Limited [2009] 2 ILRM 11, there was new evidence before this Court on the appeal, which, adopting the words of Fennelly J. in his judgment in the Gallium Limited appeal, “had the effect of placing an entirely different complexion on matters as they had appeared before the High Court”. The new evidence consisted of:
(a) an affidavit of David Sage, a director of the Company, sworn on 6th November, 2013;
(b) an affidavit of the Interim Examiner sworn on 8th November, 2013, which exhibited a report of the Interim Examiner covering the period from 5th November, 2013 to 7th November, 2013 (the Interim Examiner’s Second Report);
(c) a further affidavit of the Interim Examiner sworn on 12th November, 2013, which exhibited a further report of the Interim Examiner covering the period from 8th November, 2013 to 12th November, 2013 (the Interim Examiner’s Third Report), to which there was appended a document entitled “Proposals for a Compromise and Scheme of Arrangement between the Company and its Members and Creditors” (the Scheme Proposals), which had been prepared by the Interim Examiner; and
(d) an affidavit sworn by the Interim Examiner on the 26th November, 2013 exhibiting a further report of the Interim Examiner for the period from 13th November, 2013 to 26th November, 2013 (the Interim Examiner’s Fourth Report).
10. There was also before this Court a second affidavit sworn by Mr. Moloney on behalf of the Revenue Commissioners on 12th November, 2013, which raised issues in relation to the viability of the Company having regard to matters asserted in the Independent Accountant’s Report and in the Interim Examiner’s Second Report. It was suggested that clarification of those matters would assist this Court in its consideration of the viability of the Company and its consideration of the prospects of the Company’s survival as a going concern. On receipt by the Revenue Commissioners of the Interim Examiner’s final affidavit sworn on 26th November, 2013, there was an exchange of correspondence between the Revenue solicitor and the solicitors for the Interim Examiner. The Revenue solicitor’s letter dated 26th November, 2013 identified certain issues arising out of the Interim Examiner’s Fourth Report which required further consideration. The response dated 27th November, 2013 was from the Interim Examiner to the Revenue solicitor and it included an appendix setting out an updated cash flow projection for six weeks, the first being the week ending on 29th November, 2013. That correspondence was furnished to the Court on the hearing of the appeal on 27th November, 2013.
Hearing of the Appeal
11. On the hearing of the appeal there were submissions from counsel for the Company, counsel for the Interim Examiner and counsel for the Revenue Commissioners. Counsel for the Revenue Commissioners reiterated that the Revenue Commissioners were not opposing the appointment of an examiner. However, they continued to have significant concerns in relation to the evidence and were continuing to assist this Court in its consideration of the issues. There was no appearance by or on behalf of any creditor of the Company other than the Revenue Commissioners.
The law
12. There was consensus between the parties as to the relevant legal principles to be applied in determining the issues before this Court.
13. Sub-section (1) of s. 2 of the Act of 1990 empowers the Court to appoint an examiner to a company which complies with the requirements set out in paragraphs (a), (b) and (c) of that sub-section, which I am satisfied are complied with by the Company, “for the purposes of examining the state of the company’s affairs and performing such duties in relation to the company as may be imposed by or under” the Act of 1990. Sub-section (2) of s. 2, as amended, provides:
“The court shall not make an order under this section unless it is satisfied that there is a reasonable prospect of the survival of the company and the whole or any part of its undertaking as a going concern.”
Here, the Court is concerned with the survival of the Company.
14. Of particular relevance to the application of those provisions, by reference to the requirements of sub-sections (3A) and (3B) of s. 3 of the Act of 1990 in relation to the report of an independent accountant which must accompany the petition under s. 2 and the contents of the report, to the circumstances of this petition is the approach adopted by the Supreme Court to the application of those provisions in In the Matter of Gallium Limited. Having stated that the onus of proof is on the petitioner, Fennelly J. stated (at para. 46):
“However, the statutory requirement is to show that ‘there is a reasonable prospect of the survival of the company . . .’. A petitioner does not, by getting over that threshold, acquire a right to have an order made. I still think it is fair to say that the section confers a ‘wide discretion’ on the court, or alternatively, that the court should take account of all the circumstances. The establishment of a reasonable prospect of the survival merely triggers the power, which remains discretionary.”
The manner in which the Court exercises its discretion under s. 2 was elaborated on by Fennelly J. in succeeding paragraphs as follows:
“47. The entire purpose of examinership is to make it possible to rescue companies in difficulty. The protection period is there to facilitate examination of the prospects of rescue. However, that protection may prejudice the interests of some creditors. The court will weigh the existence and degree of any such prejudice in the balance. It will have regard to the report of the independent accountant.
48. The Court has to take account of all relevant interests. The independent accountant must consider whether examinership would ‘be more advantageous to the members as a whole and the creditors as a whole than a winding-up of the company . . .’. This does not limit the range of interests to be taken into account by the court under section 2. The interests of employees cannot be excluded. In the case of an insolvent company, it is natural that the creditors will have the greatest interest in the future, if any, of the company. The court will take a balanced approach, as suggested by the reference to the creditors as a whole.”
The evidence
15. The opinion of Mr. Tobin in the Independent Accountant’s Report, based on the projections of the Company’s profit or loss over the twelve months to September 2014 which had been prepared by the directors of the Company and which, in his opinion, appeared to be viable, was that, subject to certain conditions, the Company has a reasonable prospect of survival as a going concern. The conditions he stipulated were:
(a) the securing of investment to fund a Scheme of Arrangement;
(b) the ability of the directors to implement and maintain efficiencies which were planned and were already implemented on an ongoing basis; and
(c) the approval of a Scheme of Arrangement by the members, creditors and the High Court.
In relation to the first condition, when the matter was before the High Court, the prospective investor had been named in the petition, which had been verified by an affidavit sworn by Michael Quaid, the owner of 100% of the issued share capital and a director of the Company, on 2nd October, 2013. In Mr. Moloney’s first affidavit, which was before the High Court, it was averred that the Revenue Commissioners had a judgment against the prospective investor for a sum in excess of €45,000, which remained unsatisfied and that the Revenue Commissioners had serious concerns with regard to the prospective investor’s ability to invest money in the Company. The factual position has changed materially since the matter was in the High Court, because that prospective investor has fallen out of the picture. In the Scheme Proposals alternative investors have been identified and no issue has been raised as to their ability to invest the agreed sum, €120,000.
16. In the Interim Examiner’s First Report, which was before the High Court, the Interim Examiner, who had then been in place for thirty three days, expressed the view that the conditions set out in the Independent Accountant’s Report are achievable. In his subsequent reports, which were prepared for this Court, the Interim Examiner maintained the belief that the Company has a reasonable prospect of survival based on projected trading, which, in turn, was based on current turnover and reduced cost. In the Interim Examiner’s Third Report his view was expressed in a very forthright manner. He stated that he was firmly of the view that the projections are reasonable and achievable. In the Interim Examiner’s Fourth Report, the belief of the Interim Examiner that the Company has a reasonable prospect of survival was reiterated in similar terms.
17. The attitude of the largest creditors has not changed since the matter was before the High Court. As has been made clear, the largest creditor, the Revenue Commissioners, while having raised issues which have been of considerable assistance to the Court, have made it clear that they are not opposing the petition. The second largest creditor is the Company’s main supplier, Profile 22 Systems (Profile 22), which is based in England. The Interim Examiner had put before the High Court an undated letter from Profile 22 confirming that it had continued to supply the Company since the petition was presented and would continue should the appointment of an examiner be confirmed. Further, it was stated that Profile 22 supports the application for the appointment of an examiner. The Interim Examiner appended to the Interim Examiner’s Fourth Report a letter dated 19th November, 2013 from the landlord of the unit occupied by the Company at Raheen Business Park, which is a creditor of the Company. That letter stated that the landlord supports the application to appoint an examiner. This Court was informed by counsel for the Company that the liquidator of SEL (in liquidation) also supports the appointment of an examiner, although no written communication to that effect has been put before this Court.
18. The most significant difference between the factual picture which was presented to the High Court and the evidence before this Court is that the Interim Examiner has put before this Court the Scheme Proposals. While it is no function of this Court to express a view on the Scheme Proposals, which will be the function of the High Court under s. 24 of the Act of 1990 if the examinership proceeds, the information contained in the Scheme Proposals, which was not before the High Court, is pertinent to the determination of the core issue which this Court has to determine on the appeal – whether it can be satisfied that the Company has a reasonable prospect of survival as a going concern. In broad terms, the Scheme Proposals envisage funds of €150,000 being available to implement the proposals. Those funds are to be made up of –
(a) input in the sum of €120,000 by two outside investors, who have been identified, comprising a long-term loan in the sum of €60,000 to the Company and an investment in shares of the Company in the sum of €60,000, and
(b) Company funds in the amount of €30,000, which have been generated since the Interim Examiner was appointed.
The proposed treatment of the creditors differentiates between various classes of creditors and, in very broad terms, provides as follows:
(i) the so-called “Retention of Title” creditors, which class I assume primarily relates to Profile 22, will have the option of exercising their retention of title rights;
(ii) the so-called “Lien Creditor”, meaning the liquidator of SEL, will be repaid the debt due to SEL (in liquidation) by sixty equal monthly instalments, the first instalment to be paid on 1st January, 2014;
(iii) the Revenue Commissioners’ debt is to be paid in full, 21% of it, which amounts to €87,500, to be paid within thirty days of the Scheme becoming effective and the balance over a period of seven years by three monthly equal instalments, the first instalment payable on 31st March, 2014; and
(iv) the Company’s landlord and the unsecured creditors will be paid 2.5% of their respective debts within thirty days of the Scheme becoming effective.
Apart from meeting the foregoing payments, the funds available will have to meet the costs of the examinership, which have been estimated at €52,000. As regards the owner of 100% of the issued share capital of the Company, Mr. Quaid, counsel for the Company pointed out that his shareholding will be diluted on the allotment of shares to the outside investors.
19. The Revenue Commissioners have reserved their rights as regards the Scheme Proposals and, in particular, the right to make submissions in respect of the proposals if and when the issue of confirmation of such proposals has to be determined by the Court in accordance with s. 24 of the Act of 1990. Counsel for the Revenue Commissioners submitted that this Court should be sceptical as to whether an injection of €120,000 is going to transform the fortunes of the Company and enable it to pay back the Revenue Commissioners and to avoid further arrears of tax accruing in the future. In particular, he highlighted that the costs of the examinership (€52,000) and the first payment to the Revenue Commissioners (€87,500) is coming out of that investment, the conclusion this Court was invited to draw being that there is no clear evidence before this Court now that the Company has a reasonable prospect of survival as a going concern.
20. Counsel for the Revenue Commissioners also questioned the reliability of projections in relation to cash flow and profitability contained in the Independent Accountant’s Report, which was before the High Court, when compared with the actual performance of the Company during the eight weeks of the interim examinership prior to the hearing in this Court and of the projections of the Interim Examiner appended to his letter dated 27th November, 2013 for the following six weeks. There are undoubtedly inconsistencies in that data, which are difficult to reconcile or rationalise. The strongest point made by the Interim Examiner in support of his recent projections is that they were based on a very strong order book and the current debtor’s ledger as at 27th November, 2013.
Conclusions
21. Adopting the approach adopted in In the Matter of Gallium Limited, the first question to be addressed is whether the petitioner has got over the threshold stipulated in s. 2(2) of the Act of 1990 and has satisfied this Court on the evidence adduced both before and since the order of the High Court that the Company has a reasonable prospect of survival as a going concern. Although, having regard to the analysis of the evidence conducted by counsel for the Revenue Commissioners, it must be acknowledged that this is very much a borderline case, the conclusion I have come to is that the Company has got over the threshold. The fact that both the Independent Accountant’s Report and the various reports of the Interim Examiner clearly and unequivocally support it, is the most important factor in reaching that conclusion.
22. On an application to court under s. 2, the court is usually to a very considerable extent reliant on the report of the independent accountant which is required to accompany the petition in accordance with s. 3(3A) and (3B) of the Act of 1990, although it may be supplemented, in a case where an interim examiner has been appointed by the court, by the report furnished by the interim examiner to the court at the hearing of the petition, in determining the crucial question as to whether it is satisfied that the company has a reasonable prospect of survival as a going concern. That being the case, while it is appreciated that the directors of the company will be the primary source of the material on which they form their respective opinions as to the prospect of the company surviving, both the independent accountant and the interim examiner must act independently of the company and of its directors and members in giving their respective opinions to the court. Further, s. 4A of the Act of 1990 imposes a strict duty of “utmost good faith” in the preparation of the presentation of the petition on the petitioner and on the independent accountant. It is particularly important that both the independent accountant and where appropriate the interim examiner are scrupulous in discharging their duty which involves giving the Court the benefit of their independent opinion, setting out the reasons for it and where appropriate indicating any contrary factors. In this case, genuine concerns have been raised and cogent arguments made on behalf of the Revenue Commissioners. I am of the view on balance however that there is not a sufficient basis for rejecting the opinions put before this Court in the Independent Accountant’s Report and in the various reports furnished by the Interim Examiner that the Company has a reasonable prospect of survival, and, accordingly, on balance, I accept that is so.
23. Turning to the “wide discretion” which, the petitioner having got over that threshold, is reposed in the Court, having regard to all of the circumstances, I consider that the discretion should be exercised in favour of continuing the protection of the Court and appointing the Interim Examiner as examiner for the purposes of s. 2(1) of the Act of 1990. On the evidence now before this Court, it is reasonable to conclude that an examinership would be more advantageous to the creditors as a whole than a winding up of the Company, which is the only alternative. It is of particular relevance that no creditor has opposed the appointment of an examiner. Three of the major creditors, Profile 22, the liquidator of SEL (in liquidation) and the Company’s landlord, have signified support for the petition. While the Revenue Commissioners, the largest creditors, apprised the Court of their concerns, it was made clear that they were not opposing the petition. The interests of the Company’s thirty one employees, who would inevitably become unemployed if the application were refused, favour continuing the protection of the Court and appointing the Interim Examiner as examiner. At this point in time the interim examinership has been in place for over two months and a considerable amount of work has been done by the Interim Examiner in examining the affairs of the Company and in formulating the Scheme Proposals. Subject to the observations in the next paragraph, the overall picture at this point in time indicates that the continuance of the protection and the appointment of the Interim Examiner as examiner is the course which is least prejudicial to the interested parties and, in particular, to the creditors as a whole.
24. As has been made clear earlier, although they have been outlined in very general terms, nothing in this judgment is to be construed as an endorsement of the Scheme Proposals which will, if appropriate, be considered at a hearing under s. 24 and where interested parties will have the opportunity of making their views known. On the contrary, it does seem that a very meagre provision is made in the Scheme Proposals for the Company’s unsecured creditors. It is recommended that the proposed provision for the unsecured creditors should be re-assessed by the Interim Examiner on his appointment as examiner.
Re: SIAC Construction Ltd & ors
& Companies (Amendment) Act 1990 (as amended) [2014] IESC 25 JUDGMENT of Mr. Justice Fennelly delivered the 8th day of April, 2014.
1. The appeal has come before this Court in truly remarkable circumstances. The SIAC Group of companies has been in examinership since October 2013. The Examiner made proposals for a Scheme of arrangement. On the 7th February 2014, the High Court heard the Examiner’s application for approval of his proposals, when it announced that it would pronounce its decision on 12th February. On that date Kelly J. announced his decision approving the proposals. On that date also, the appellant made its first appearance indicating that it wished to have modifications made to the proposed Scheme. Although it had provided no evidence, the Court permitted it to be heard on Friday 14th February. On that date, it had still produced no evidence. The matter proceeded on the basis of the evidence which the Examiner had placed before the court. The High Court rejected the appellant’s application. The appellant immediately appealed to this Court. It was permitted, exceptionally, an early hearing of its appeal.
2. However remarkable these circumstances, it is clear that the High Court permitted the appellant to appear and argue its case. This Court has entertained the appeal and has heard the appellant as well as the Examiner, the companies and the investor.
3. The Court, on Tuesday 24th February announced that it was dismissing the appeal. This judgment contains the reasons for that decision.
4. I propose, in the first instance, to outline the history of these examinership proceedings. Next I will describe the appellant’s application. Having referred to the relevant statutory provisions and the authorities on the relevant legal issues, I will apply these to the appellant’s appeal.
5. On 23rd October 2013, SIAC Construction Limited (hereinafter “SCL”) presented a petition to the High Court for an order that the protection of the Court be extended to that company and to a number of related companies. The order was duly made and the Examiner was appointed on an interim basis.
6. The petition was based on the Independent Accountant’s Report (IAR) of 23rd October 2013 prepared by Kieran Wallace, Chartered Accountant, of KPMG.
7. SCL was incorporated in 1913. It is the largest trading company of the Group which comprises some fifty trading and non-trading subsidiaries. SIAC Holdings (Ireland) Ltd (“SHIRE”) is the intermediate holding company for the SIAC Group’s trading business which comprises Civil Engineering and subcontracting works. There are three main interconnected divisions in the group: civil engineering, subcontracting and a property division. SCL is the largest trading company in the group.
8. SIAC has for many years been one of the best known and successful groups of companies in the construction and engineering sector of the Irish economy. Its history goes back for about 100 years. It has performed numerous contracts including road infrastructure, has been involved in the construction and widening of our new network of motorways. It operates primarily in the public sector, constructing roads, bridges, railways and water infrastructure for government agencies, local authorities and other state agencies both in Ireland and overseas. It frequently engages in joint ventures with other enterprises. It is a normal contract requirement that SCL provide a bond for the benefit of the client to cover a percentage of the contract sum.
9. SCL, the principal company, was highly profitable until 2011. It commenced to incur losses in 2012 and projected a substantial loss for the year 2013. At the time of entry into examinership it had 145 full-time employees working both in Ireland and the United Kingdom. Following a decline in construction activity in Ireland, as a result of the general financial crisis, it sought opportunities outside Ireland, most materially, for present purposes, in Poland. It was to a large extent difficulties arising on its Polish project which threatened the survival of SCL and of the SIAC group.
10. The IAR says that, apart from the decline in the Irish construction market, the largest contributing factor to the Group’s financial difficulties was its contract in Poland.
11. SCL, as part of a consortium with PBG S.A. with a Polish contractor, and two of its subsidiaries (HYDROBUDOWA POLSKA S.A. and APRIVIA S.A.), tendered for and was awarded a €365 million contract, the A4 contract, by the appellant, which is the Polish roads authority (GDDKiA), for the A4 road of 35 km of motorway and bridges from Tarnow to Rzeszow. The contracting authority is GDDKiA, the Polish State Treasury, the appellant in the present matter. I describe it as the appellant.
12. The history of the Polish project is central to the present appeal. Almost the only information available to the Court is contained in the IAR, to which, therefore, it is necessary to refer.
13. While work commenced on the A4 project in August 2010, SCL encountered numerous difficulties from the outset. It complains that it should have had a complete workable design from the commencement. This was not the case. The consortium was forced to carry out a complete redesign on part of the largest key structure, which resulted in severe delays. There were numerous other sources of delay. Extensions of time recommended by the client’s engineer, were never formally issued. A separate arrangement to fund cash flow had to be arranged with a bank, Bank Pekao SA.
14. In June 2012, the joint venture partner, which was the primary funder of working capital through Pekao, entered into an insolvency process under the protection of the Polish courts. At this point almost all bridge construction was complete. SCL offered to complete the venture on its own provided that the recommended extensions of time were granted and that all contractual entitlements were paid. The appellant refused to agree to any such terms.
15. On 24th July 2012, SCL served a 14 day notice of termination on the appellant under the contract claiming that the appellant had failed to perform its obligations under the contract provisions. The contractor, it is claimed, was then entitled to have its bond returned and to claim a contractual penalty of 10% of the contract price (including VAT) and payment of outstanding contractual entitlements. SCL’s share of the penalty, €42 million, would, it is claimed have been €21 million. The IAR does not record, but the Court has been informed that the appellant also served a notice of termination on 25th July 2012.
16. According to SCL, as recorded in the IAR, its contractual claims and other entitlements against the appellant amount in gross value to €210 million, of which SCL’s share is €113 million. These contractual claims include a PVC (price variation) claim of €64 million and circa €87 million concerned with operational issues claimed to be based on the appellant’s failure properly and fairly to administer the contract. The merits of these claims have not yet been assessed. It is acknowledged that many of the claims made by SCL are hotly contested. The most that can be said at this stage is that, assuming substantial work has been performed under the contract, it is not unreasonable to expect that substantial payments are due. All this is the common material for dispute under large building or engineering projects.
17. SCL had provided a contract performance bond in the sum of €10.7 million through Allianz Polska SA. The appellant demanded payment from Allianz. SCL disputed its right to do so. At first it obtained an injunction to prevent this, but the Polish courts reversed this and directed Allianz Polska to pay over the bond. SCL were forced to fund this payment via Allianz plc (in Ireland) and another company. To date €5.9 million has been paid and SCL remains liable to fund further payments: €350,000 in 2013, €2.4 million in 2014 and €2.4 million in 2015. These payments have placed severe strain on the finances of SCL.
18. The final issue relating to Poland concerns trade creditors, i.e., the normal claims for monies due for supply of works and services including rights of subcontractors. The appellant is obliged under Polish law to pay certain creditors’ claims up to certain limits. The IAR says that creditors in Poland have been reduced from €36 million to €7.4 million as a result of payments made by the appellant. These payments have become the subject of one of the claims advanced by the appellant before the High Court and on this appeal, where they take the form of subrogation claims. The IAR says nothing about the possibility that the appellant might be able to recover the sums so paid to creditors on the basis of any right of subrogation, although it might be assumed that such provision would exist under most systems of law. The terms of Clause 12.3 and Clause 20.3 of the Scheme relate to subrogation and set-off and will be considered later.
19. The Independent Accountant, in his report expressed the opinion that, subject to the following conditions, the companies and the whole or part of their undertakings had a reasonable prospect of survival as a going concern. The conditions were:
• The Company being granted the protection of the High Court;
• SHIRE being granted the protection of the High Court;
• The other seven (7) related entities being granted the protection of the High Court;
• The acceptance of an appropriate scheme of arrangement by the creditors and members of the Companies and its approval by the High Court;
• An investment of such funds that would support the Companies future working capital requirements and allow for the implementation of a scheme of arrangement with the Companies creditors;
• The restructure of Group debt to a level that is sustainable for both the individual companies and the Group as a whole;
• The continued co-operation of the Company’s key suppliers and sub-contractors during the protection period and beyond;
• The continued co-operation of SCL’s Employers/clients on current and future contracts during the protection period;
• The implementation of the Group Restructuring Plan;
• The continuing availability of bonding and insurance facilities;
• The continued co-operation of the Group’s Lenders and the future availability of funding;
• The write down of creditor liabilities;
• Maintenance of tax clearance certificate for contract tendering and collection of debtor balances.
20. On 6 November 2013, the High Court made an order confirming the Examiner’s appointment.
21. The appointment of the Interim Examiner was published in Irish newspapers and, on Monday 23rd October 2013 and a Polish translation of this notice was published in Poland in GazetaWyborcza and Rzeczpospolita on 29th October 2013 and 31st October 2013 respectively. Confirmation of the Examiner’s appointment was published in Iris Oifigiúil, Irish newspapers as well as Rzeczpospolita on 8th November 2013, 9th November 2013, and 12th November 2013 respectively. These are nationwide daily newspapers circulating in Poland. Both are widely used by state bodies, receivers and liquidators and businesses.
22. During the same period the appellant was party to proceedings in Poland brought in respect of the calling in by the appellants of the performance bond. In the context of these proceedings the appellant was formally on notice of the examinership process by the 21st of November 2013, at the latest – as the examinership was raised at the Court hearing in Rzesow, Poland where the Company and the appellant (GDDKiA) were parties to the matter heard.
23. The appellant did not, at any time, submit any claim to be a creditor of SCL.
24. The Examiner, in due course, prepared a scheme of arrangement for presentation to the creditors and ultimately to the Court.
25. On 17th January 2014, the Examiner circulated notices together with the Scheme Proposals and related documentation relating to the creditors’ meetings to all Polish creditors. The creditors’ meetings were convened for 27th January 2014.
26. Meetings of the members and creditors of the Company and Related companies duly took place.
27. On 24th January 2014 the Examiner reported to the High Court that an investment of €10.5 had been agreed with investors, namely LKG Investments Limited and Finn Lyden. On that date SIAC (Butlers) Ltd was removed from the list of companies under protection; an order was made for its winding up.
28. The Examiner applied to the High Court ex parte on 29th January 2014 for leave to deliver his report pursuant to s. 18 of the Companies (Amendment) Act 1990 and for the fixing of a hearing date for an application to the Court for sanction of his proposals for the SCL and related companies under s. 24 of the Act. The Court duly granted such leave and fixed Friday 7th February 2013 as the date the hearing of the Examiner’s application.
29. Clause 7 of the Scheme is headed: “CLASSES OF CREDITORS AND EFFECT OF PROPOSALS.” Clause 7.1(a) lists 11 classes of Creditors of the Company as at the Fixed Date.” Leaving secured and preferential creditors and other special classes, most relevantly for present purposes, it lists “Unagreed Creditors” and “Contingent Creditors,” both being unsecured creditors. A number of Appendices contained listings of names of Creditors compiled from Company records. Clause 7(1)(d) provides for Unagreed Creditors as follows:
“Any Creditor or party claiming to be a Creditor:
– whose claim is not included in the Appendices; or
– which appears in the Appendices without the addition of the letter “Y”; or
– which disputes the amount of its claim as it appears in the voting form accompanying these Proposals,
shall be deemed to be an “Unagreed Creditor” for the purpose of these Proposals, which term shall be construed consistently with Clause 9.1(c) and shall be dealt with under the terms set out below.”
Clause 7.2 provides for “Determining the Claims of Unagreed Creditors.” It contains detailed provisions for the determination of the claims of Unagreed Creditors by an “Expert,” whose determination is to be “final and binding on both parties.” The Company and the Unagreed Creditor is each liable for 50% of the costs and expenses of the Expert.
30. Two Polish creditors, CEMEX and Karmar, appeared in the High Court to object to Clause 9.1(c) of the proposals, which provides:
“No interest, penalties, damages (save in respect of personal injuries) or costs save those which have been awarded prior to the Fixed Date by a court of competent jurisdiction shall be payable by the Company to any Creditor.”
31. On 7th February 2014, Kelly J heard the s. 24 application. There was substantial argument on behalf of CEMEX and Karmar as to the allegedly unfairly prejudicial effect of the exclusion of damages claims under the proposals on them.
32. Kelly J reserved his judgment to be delivered on 12th February 2014. On that date he delivered his ex tempore judgment. He dealt with the scheme generally and addressed a number of issues and three objections. He commenced by referring to the report of the examiner as follows:
“On 24th January 2014, the examiner reported to the court that an investment of €10.5m had been agreed with a number of investors, all of whom had signed an investment agreement with the companies………………”
33. The following are the principal points of his judgment:
“Having been under the protection of the court since last October, the Examiner has put together a scheme of arrangement which he now asks this court to confirm pursuant to the provisions of s. 24 of the Companies (Amendment) Act 1990.
“The companies are involved in the construction and contracting businesses and have three main areas of activity. They are civil engineering, subcontracting and investments…………………
”The scheme involves the companies being split into two groups. [The learned judge names the individual companies.]
”The proposed scheme will see the investment funds being used to pay the various classes of creditors under the proposals, to pay the examiner’s remuneration and expenses with the balance being used to provide working capital.
“There are minor differences between each scheme by reference to the classes of creditors but in the main, they provide that the payment of a €5m aggregate sum, the secured creditors will be repaid overdraft facilities only in full and on such payment will release their security over the companies’ assets.
“The preferential creditors will receive 10% of the debt due in full and final settlement within 21 days. Contingent preferential creditors will likewise receive 10% of the amount due in full and final settlement within 21 days of their claims ceasing to be contingent. Insofar as agreed creditors are concerned, they will receive 5% of their debt within 21 days. Unagreed, unsecured creditors will receive 5% of their debt within 21 days of the claim being determined as agreed unsecured creditors using the mechanism which is set out in the scheme of arrangement. Intercompany creditors will receive zero. Contingent creditors will receive 5% of their debt and what are described as employment appeal creditors are to receive a specified sum which amounts to 60% – 70% of the debt. Insofar as shareholders and members are concerned, the entire issued share capital will transfer to a nominee of the first investor for a nominal consideration.“
34. The learned judge observed that there was “no doubt that if the scheme [was] not approved, the companies [would] go into liquidation or receivership and that unsecured creditors instead of obtaining 5% of their debt as they [did] under the scheme [would] get a zero return.” It was, as he said, “against that backdrop,” that he examined the objections which had been raised. He expressed himself satisfied that the conditions for his confirmation of the scheme had been met. He continued:
“In addition, it is incumbent on me to be satisfied that there is a reasonable prospect of survival of these companies in the event of my approving the scheme. The opinion expressed by the examiner which is supportive of that notion is fortified by the trading performance to date during examination, the future trading prospects and the post investment balance sheet. His report makes it clear that the various conditions identified by the independent accountant have been met and that if the proposals are confirmed, the surviving companies will be placed on a sound commercial footing so that they will be able to exploit opportunities available to them in the coming years. Indeed, the current and anticipated list of contracts for work in this jurisdiction is impressive. The companies also have the continued support of their bankers.”
35. The learned judge considered three individual objections to the scheme advanced by creditors, one Irish and two Polish, the creditors mentioned above, on the basis of its being allegedly unfairly prejudicial to their interests. He noted that he had been informed by the examiner that the investor was not prepared to make available any additional monies and that the only alternative to the scheme was receivership or liquidation, in which event the unsecured creditors would receive nothing. He found that all creditors in each class were being treated equally, that all would be adversely affected in suffering a huge write-down in their entitlements and that the unsecured creditors would receive no return in the event of receivership or liquidation. In these circumstances he did not find that any of the creditors who had made objections were unfairly prejudiced. He proposed to confirm the scheme.
36. However, on the evening of Tuesday 11th February 2014, the eve of the delivery of the ruling of Kelly J, solicitors for the appellant contacted the solicitors for the Examiner seeking a copy of the Proposals. On the morning of Wednesday 12th February 2014, they e-mailed the Examiner’s Solicitors. No copy of that email has been provided to the Court: the Examiner has informed the Court that the email said that that, in the light of a counterclaim that the appellant wished to bring against the Company in Poland, it considered itself to be a creditor of the Company in respect of a damages claim and a subrogated claim in respect of payments said to have been made by it to various sub-contractors engaged on the A4 Contract. The email asked that the Examiner consider a modification to the Proposals: (a) to permit the Polish State Treasury to pursue its putative counterclaim before the Polish Courts and outside the Expert determination process under clause 7.2 of the Proposals, and (b) to permit the appellant to step into the shoes of creditors paid by it under the A4 Contract notwithstanding clause 12.3 of the Proposals.
37. Kelly J delivered his ruling on the morning of Wednesday 23rd February, indicating that he would confirm the proposals subject to some queries which he had arising from the amended proposals which ad been delivered on 10th February. Those queries were then dealt with.
38. It was then that counsel for the Examiner informed the Court that correspondence had been received late on the previous evening from the appellant. It was intimated to Kelly J that discussions were taking place between the respective solicitors and that it was anticipated that there might be an agreed revision to the scheme. The matter was put back to Friday 14th February. No agreement proved possible. The Examiner asked the learned judge to confirm the scheme. A solicitor for the appellant was permitted to address the court, as Kelly J put it, “as to why there should be a variation to the schemes to accommodate his particular client’s situation.”
39. It should be immediately noted that the appellant had provided no evidence as to the nature of its interest. It did not even write formally explaining its claim. The appellant explains its omissions, in its written submissions addressed to this Court, by saying that, when it was initially advised that SIAC had entered the examination (for which it does not provide a date) it was “preoccupied with putting together [its] counterclaim in the Polish proceedings…” In the High Court, the appellant advanced essentially two points:
1. It was said that Clause 9(1)(c) of the scheme was unfairly prejudicial to the interests of the appellant by excluding any claim for penalties, interest or damages, claims which the appellant would be entitled to make in a liquidation. The appellant accepted that it was an unsecured creditor in respect of any claim it might have. Kelly J ruled that the appellant, insofar as it had a liquidated claim, would be entitled, as an unsecured creditor, to a 5% dividend. Insofar as any claim to damages was concerned, the learned judge pointed out that the reality of the situation was that a limited sum of money was being invested. This would provide a small sum for unsecured creditors. In the event of liquidation, there would be no dividend at all. Every unsecured creditor was being dealt with in the same way. He did not consider that there was anything in the objection made “either by reference to the comparison with what would occur in liquidation or by reference to the provisions of s. 22(1)(d) of the Act.” He declined to modify the scheme.
2. The second point was treated by Kelly J as relating to the provisions as to set-off in the scheme. The learned judge refers to the provisions of Clause 12 of the scheme. It appears from the submissions made on the appeal that the appellant’s complaint relates to its rights, under Polish law, to be subrogated, as against the companies (SCL) to the claims of trade creditors such as sub-contractors who have been paid off by the appellant. It is preferable to address this issue as it arose on the appeal. At any rate, insofar as this aspect of the claim was concerned, Kelly J ruled that the appellant was being treated in the same way as all affected creditors. There was no breach of the provisions of s. 22(1)(d) of the Act. Again, the learned judge declined to modify the scheme.
40. The Examiner has explained to the Court that the position he adopted before the High Court was as follows (referring to the appellant as GDDKiA):
(1) GDDKiA is a substantial debtor of the Company but now claims to be a significant creditor of the Company in an amount which it says may exceed the Company’s claim against it, though this is disputed;
(2) As GDDKiA is not listed in any Appendix to the Scheme and its claim is not accepted, it is an Unagreed Creditor for the purposes of clause 7.1(d) of the Proposals;
(3) Insofar as the claims which GDDKiA has posited are asserted by way of set-off against the existing claims of the Company, the position of GDDKiA is protected by Article 6(1) of Council Regulation EC 1346/2000 (the “Insolvency Regulation”) – viz.
“The opening of insolvency proceedings shall not affect the right of creditors to demand the set-off of their claims against the claims of the debtor, where such set-off is permitted by the law applicable to the insolvent debtor’s claim.” (Consistent with the preservation of the Company’s right of set-ff under Clause 12.3 of the Proposals).
(4) Insofar as GDDKiA seeks to establish a claim for payment against the Company, however, that claim is subject to the provisions of the Proposals applicable to every other Unagreed (and unsecured) creditor. In particular:-
(i) The GDDKiA claims are subject to expert determination under clause 7.2;
(ii) Under Clause 9(1)(c) no interest, penalties, damages (save in respect of personal injuries) or costs (save those which have been awarded prior to the Fixed Date by court of competent jurisdiction) shall be payable by the Company to GDDKiA; and
(iii) Clause 12.3 operates to preclude a subrogated claim for payment or right of indemnity as against the Company in respect of any payment made by GDDKiA, consistent with the preclusion of set-off in respect of a post-insolvency payment claim. Any dispute between the Appellant and the Company as to such a claim falls to be dealt with under Clause 7.2 of the Proposals by way of expert determination.
(5) If, on determination by the expert, in accordance with Clause 7.2, it is found that the GDDKiA is entitled to payment in respect of any part of its claim against the Company (notwithstanding the significant claims made by the Company against GDDKiA) it will rank for dividend under the Proposals in respect of that claim for 5% in the ordinary way.
(6) This treatment of GDDKiA is not unfairly prejudicial. GDDKiA is treated precisely the same way as every other creditor of the Company asserting a claim by way of interest, penalty, damages or cost. On a winding up, a liquidator could choose to pursue GDDKiA for the same claims as now maintained by the Company – in which case the same set-off rules would apply as apply in the examinership. If GDDKiA established a claim over and above the Company’s claim, it would rank as unsecured in the winding up for such payment and would receive a nil return. In fact they do better under the Proposals – their right of set-off is preserved and there is, subject to expert determination, some prospect of a 5% return on any claim established before the expert.
41. The learned judge confirmed the scheme. He fixed an effective date: 5 pm on Monday 17th February.
42. The appellant has now appealed to this Court. The Notice of Appeal claims that the High Court judge was mistaken in rejecting its claim to have been unfairly prejudiced. The Scheme, it is claimed, is unfairly prejudicial insofar as it precludes the appellant from maintaining any claim for damages and/or from making any subrogation claims.
43. It must once more be noted that neither the High Court nor this Court has any evidence before it with regard to the amount or the nature of the appellant’s claim. The nature of the relationship between the appellant and SCL is, at least to some degree, apparent from the IAR. The relevant parts of that report have been summarised earlier.
44. At a general level, it is apparent that the appellant is the contracting authority which awarded the contract for the construction of the 35 km A4 road including bridges to the joint venture in which SCL was a participant. The material in the IAR is evidence of a contractual relationship between the parties for a period of some two years from 2010 to 2012. Substantial work was performed under the contract. SCL has outstanding claims against the appellant, which it has quantified at some €113m. It is obvious that there are very serious unresolved disputes between the parties. Nonetheless, the general picture is one where the appellant appears to be a debtor to SCL for very substantial sums. The appellant has not, at any stage, placed any material before the High Court or this Court to displace the prima facie picture that the appellant is a debtor rather than a creditor. It has not submitted any claim as a creditor.
45. The appellant has, in very general terms, summarised the respective claims and counterclaims as follows in its written submissions in which it is described as the “Polish State Treasury”:
1. In accordance with Polish Law the Polish State Treasury was legally required to discharge and did discharge substantial sums due to SIAC and PBG subcontractors, which amount so far to PLN87,520,437.50 (€20,838,199 approximately). The Polish State Treasury in turn is advised that it is entitled to recover these sums from SIAC and PGB on a subrogated claims basis.
2. In addition, the Polish State Treasury is entitled to damages against SIAC and PGB following service of a termination notice by it on SIAC on July 25th for non performance under the principal contract including ‘slow progress’ and the fact that SIAC had itself served a notice of termination of the contract on the previous day, July 24th 2012.
3. The quantum of the Polish State Treasury damages claim under the contract amounts to PLN207,893,546.28 (Contractual penalty PLN 176,361,140.69 and interest accrued PLN 31,532,405.59) (€49,498,463 approximately) as a result of the consortiums failure to complete the contract. SIAC for its part has commenced proceedings in Poland seeking payment of approximately €30 million, (in response to which the Polish State Treasury has lodged a counterclaim claiming damages and interest. SIAC has also intimated that it intends to bring further claims (as set out in paragraph 1.41 of the IAR) totalling an additional €83 million making in total claims for €113 million. These claims by SIAC, as acknowledged in the IAR, will be ‘vigorously defended’ by the Polish State Treasury and are strongly disputed.
4. In summary therefore the Polish State Treasury claims that SIAC is indebted to it in an aggregate amount of approximately €70 million whereas SIAC has intimated that it has claims against the Polish State Treasury for approximately €113 million. In the event that the Polish State Treasury prevails in its claims against SIAC, as it believes it will, SIAC’s liability to the Polish State Treasury is almost double the amount owed to its secured creditors (€37 million) and some €18 million more than the total amount owing to the unsecured creditors (€53 million). (The amount owing to the Polish State Treasury by SIAC may rise in the event that further claims are made by SIAC’s sub-contractors against it).
46. The appellant accepted in the High Court and appears also to accept in this Court its classification as an unagreed creditor entitled to be paid 5% of its claim. It says that the only claims that it has against SCL are:
1. firstly, by way of what it describes as contractual penalty (liquidated damages) and interest for breach of contract;
2. secondly, arising out of sums paid to subcontractors of SCL.
47. It says that the scheme precludes it from making either of these claims and that it is, thus, unfairly prejudicial. It says that the first heading of claim is precluded by Clause 9(1)(c) of the Scheme, which is as follows:
“No interest, penalties, damages (save in respect of personal injuries) or costs save those which have been awarded prior to the Fixed Date by a court of competent jurisdiction shall be payable by the Company to any Creditor.”
48. It says that the second heading of claim is precluded by Clause 12.3 of the Scheme as follows:
“For the avoidance of doubt, any Creditor, whether contingent or otherwise, who may be called upon to make a payment to any person whatsoever, including but not limited to a payment made to any party on foot of a personal guarantee given by such Creditor or a payment made to any party on foot of a contract of insurance by such Creditor, shall not be entitled, in respect of any such payment, to a subrogated claim or a right of indemnity against the Company and shall be deemed to have waived any and all rights and claims in subrogation against the Company which he may now have, or which may arise at any time.”
49. The result, the appellant says is that, unlike other unsecured creditors, whether agreed, unagreed or contingent, it is shut out from recovering 5% of its debt. It claims that the Examiner has provided no justification for excluding these headings of claim. It was submitted that the appellant is uniquely prejudiced by comparison with other creditors. Those with liquidated claims will, at least, recover 5% of that amount, whereas the appellant, which does not have such a claim, is denied the right to any dividend payment or recovery, while SCL is permitted to maintain its proceedings and its claims against the appellant. In the case of the subrogated claims, in particular, it says that a Polish sub-contractor on the A4 Motorway project could recover 5% of its claim, whereas the appellant which discharged some or all of a sub-contractor’s claim would be precluded from any recovery.
50. It should be noted that the appellant made its late intervention in the High Court in support of an application for modification of the Scheme of Arrangement proposed by the Examiner. The submissions of counsel for the appellant at the hearing of the appeal appeared to go further. Faced with the undisputed opinion of the Examiner that, in a liquidation, there would be no dividend at all for unsecured creditors, including the appellant, he submitted that the Court should find unfairly prejudice even if that were to result in their being no payment for any unsecured creditors, presumably including Polish sub-contractors and suppliers.
51. In legal terms, the appellant claims that it is treated in an unfairly prejudicial manner in terms of ss. 24 and 25 of the Act. The Examiner is required to satisfy the Court that the proposals being put forward are not unfairly prejudicial. In addition, it is submitted that the Scheme is inconsistent with the cornerstone of insolvency law which is that creditors in the same class and position are to be treated equally and without favour. It relies on s. 22(1)(d) of the Act which requires that “the proposals provide equal treatment for each claim or interest of a particular class.”
52. Both the Examiner and the Company object in the strongest terms to the late entry and attempted participation of the appellant in the proceedings. They object, in particular, to the failure of the appellant to place any information before the High Court. The Examiner has disputed both the basis of the subrogation claims and their quantification. It claims, for example, that the appellant paid subcontractors out of money provided to it pursuant to the bond mentioned above. The Examiner claims that the appellant was aware of the examinership process by 21st November 2013 at the latest but submitted no claim.
53. The Examiner submits that the appellant’s submissions are based on a number of misconceptions. In particular, he says that the Scheme does not in terms preclude the Appellant from “maintaining a claim against SIAC for damages and interest and for any subrogated claims.” A damages claim, it is said, may be maintained by the appellant but only by way of set-off against the Company’s claims, though not for payment and that a similar position may apply in respect of a subrogated claim for payment. The Examiner also says that any such claims are unagreed claims subject to the provisions of Clause 7 of the Scheme and subject also the Company’s right to assert set-off under Clause 20.3 of the Proposals. The examiner’s position as to the extent to which the appellant may be entitled to raise a defence of set-off in the Polish courts is considered later in this judgment.
54. The Examiner makes a submission, which he describes as fundamental, namely the failure on the part of the appellant to recognise the very real substantial protection it enjoys by way of set-off against the Company’s very substantial claims against it. He explains that the existence and availability of this right of set-off goes a significant way to explaining the fair treatment of the Appellant. While the appellant is equally impaired with the other creditors in terms of exclusion from payment of the claims it advances, the fact that it is a substantial debtor and that any rights of set-off which it claims to have under Polish law are preserved, means that it at least holds the prospect of obtaining some value from its asserted damages claim. Clearly, the Examiner is here referring to the context of claims against the Appellant in the Polish courts. It should be noted here that the Court has no information about the provisions of Polish law on these issues.
55. He rejects the appellant’s claim that he has failed to provide any rationale for the exclusion of any payment in respect of penalty, interest and damages. In an affidavit sworn on 6th February 2014, the Examiner had deposed as follows:
“14. The majority of Creditor claims received from Polish Creditors attempted to claim for interest and penalties above the core debt. These calculations are complicated and subject to significant amount of subjectivity and are disputed by [the Company]. While there are a number of creditors (circa five creditors) from Poland who formally expressed that disagreement with the provisions of Clause 9.1 of the Scheme that I proposed in respect of [the Company], the large unagreed unsecured creditor list reflects the nature of such claims for interest and penalties. The effect of provision 9.1 is that no interest, penalties or costs over and above creditor’s substantive claim will be payable. The relevant Polish creditors have queried the rationale for amounts appearing against their names in the Scheme differ to those which were lodged with me. The basis for this is as provided for Clause 9.1 – that is to say a disallowance of any penalty claim over and above the basic debt.
15. I say that a certain number of creditors have argued that this stance is unfairly prejudicial to their interests. While perhaps more appropriately a matter for legal submission, I say believe that it is not so in circumstances where the same treatment is applied in the proposals across all of the creditors of [the Company], and where, if the Company was wound up or placed into receivership, the creditors concerned would recover nothing in respect of their claims. Furthermore, there is a finite amount of investment available to the Company and, therefore, any further dividend to these creditors could only be paid at the expense of the other creditors. In the circumstances, while certain creditors will undoubtedly feel aggrieved that I have decided my proposals to disallow such penalty claims, I do not believe that this can properly be characterised as being inequitable in any way or unfairly prejudicial to the interests of such creditors.
16. In addition, I say that the investment is conditional on the Scheme being approved and implemented without material modification and the investors have confirmed to me that they are not agreeable to such a potentially significant change to the amounts to be paid to creditors particularly where the goodwill of many of the creditors who would be adversely affected is of importance to the continued trading of the Company. If the creditors who are claiming in respect of “damages” were in a separate class, given the level of uncertainty in relation to the precise quantum of claims, it would not have been possible to offer a percentage recovery (other than one which was much lower than 5%) but rather a defined amount of money would have had to have been made available to meet their claims with a consequence of potentially long delay in making any payments to support all of the claims had been agreed. In those circumstances, the creditors, in my view, would have fared worse than they will if the scheme proposed by me is approved by this Honourable Court and implemented.”
56. The Examiner refers to other affidavits sworn in the context of the objections by two Polish creditors to this precise point. He makes the two points that, firstly, the only alternative to the Scheme is liquidation, in which event unsecured creditors would get nothing, and, secondly, that the matter must be considered in the light of the fairness of the Scheme as a whole: any potential unfairness of the exclusion, applying across the board of all creditors. He adds that the alternative of including damages claims across all creditors (apart from being in a massive, uncertain and deeply disputed amount) would have unfairly prejudiced the claims and interests of supply and service creditors with a consequent detrimental impact on the prospects for survival of the Company as a going concern. . Such a modification would have made it impossible to offer any certainty of a return to the unsecured trade creditors and certainly not in the form of a guaranteed percentage dividend on their agreed claims. In the Examiner’s view, any such a change to the proposals could not be countenanced “in circumstances where the goodwill of many of the creditors who would be adversely affected is of importance to the continued trading of the Company.” The examiner has insisted that, in any event, the investor would not countenance any modification of the Scheme so as to make provision for these claims as formulated by the appellant.
57. The Companies, in their separate submissions in support of the position of the Examiner, especially argue that the appellant should be limited to the submissions it made to the High Court, namely that it was unfairly prejudiced and that it sought modifications of the Scheme. They argue that the Examiner has sworn uncontroverted affidavits to the effect that there are insufficient investment funds to bring provide for a modified Scheme of Arrangement in which the appellant would receive a 5% dividend. Thus what the appellant seeks is, in fact, impossible. It accepts that, in some circumstances, a comparison with how a creditor raising an objection, would fare on a liquidation may be relevant to determining unfairly prejudice. However, in circumstances where the ultimate effect of a creditor’s action would be to deprive all the other unsecured creditors of a dividend rather than securing any improvement in its own position, the result may be different.
58. Finally, the Court agreed, in the special circumstances of this case, to hear counsel for the investors, LKG Investments Limited and Finn Lyden, although that entity is not one of the parties listed in s. 24(1) of the Act as “persons [who] may appear and be heard at a hearing under subsection (1)…” The Examiner and the Companies supported the intervention of the investor. Counsel for the appellant did not object. The Court considered that it had power to hear the investor and noted that the High Court had permitted the investor to intervene in a number of cases. The Court considered that it was of special importance to ascertain the attitude of the investor to any modification of the Scheme to accommodate the interests of the appellant. In the event, the position was very simple. The investor made it abundantly clear that it would not accept any modification to the Scheme with that end in view. Put bluntly, it was not prepared to complete its investment in circumstances where the Scheme was to be rewritten.
Conclusions
59. This appeal has come before the Court in highly exceptional circumstances. Kelly J had virtually completed the process of approval of the Scheme of Arrangement before the last-minute appearance of a solicitor then extremely recently instructed for the appellant. No notice or other paper, document, letter or even written submission of any kind was placed before the High Court. Kelly J permitted the appellant the exceptional indulgence of being heard. In so far as he did so, it is clear that he heard argument in support of an application that the Scheme be modified to take account of the claim of the appellant that the Scheme treated it in an unfairly prejudicial manner. The claim of unfair prejudice related to two aspects of the scheme. They were: firstly, the exclusion by clause 9(1)(c) of claims for penalty, interest or damages; secondly, the exclusion by Clause 12.3 of subrogation claims.
60. The appeal must be strictly limited to those aspects of the decision of the High Court. The scope of the appeal, therefore, and this judgment is limited to a consideration of whether, in the respects alleged, the scheme is unfairly prejudicial to the appellant.
61. Section 22(1)(d) of the Companies (Amendment) Act, 1990 requires that “the proposals provide equal treatment for each claim or interest of a particular class”.
62. Section 24 provides as follows:
(4) The court shall not confirm any proposals –
(c) unless the court is satisfied that –
i) the proposals are fair and equitable in relation to any class of member or creditors that has not accepted the proposals and whose interest or claims would be impaired by implementation; and
ii) the proposals are not unfairly prejudicial to the interests of any interested party.
63. Reflecting that provision, s. 25 permits a member or creditor at a hearing under s. 24 to object to confirmation of proposals on the ground that “the proposals unfairly prejudice the interests of the objector.”
64. The appellant’s claim was, in the light of a counterclaim that it wished to bring against the Company in Poland, it considered itself to be a creditor of the Company in respect of a damages claim and a subrogated claim in respect of payments said to have been made by the Appellant to various sub-contractors engaged on the A4 Contract.
65. The notion of “unfair prejudice” in the Act requires to be considered from at least two points of view. Firstly, there is the question of whether the objector is unfairly treated by comparison with how he would be likely to fare in a liquidation. Secondly, a court will have regard to his treatment vis-à-vis other creditors.
66. There can be no question, on the facts of the present case, of the appellant being the victim of unfairly prejudice by reference to the outcome of a liquidation. It must, for this purpose, be regarded as being an unsecured creditor. Assuming the appellant to be a creditor, the position is simple. It would, like all other unsecured creditors, recover nothing in a liquidation. Clarke J in Re Traffic Group Ltd [2008] 3 IR 253 considered the possibility that, on a winding up, there might be more funds, on the facts of that case, available to meet the entitlements of the Revenue as preferential creditor. At page 264 of the report he said:
“It is clear from cases such as Re Antigen Holdings Ltd. [2001] 4 I.R. 600, that a court can approve of a scheme, in all the circumstances, even where a creditor may be likely to do worse under the scheme than the same creditor might on a winding up. However it would, of course, be the case that if there were an extreme and disproportionate disparity between the position of a creditor on a winding up and under the scheme proposed compared with the position of other creditors under both alternatives, same might be a factor to be properly taken into account in ruling against confirmation of the scheme.
67. I am not sure that the disparity need be either extreme or disproportionate. If the proposals were clearly less favourable to an objector than the alternative of a winding up, a court might well come to the conclusion that they were unfairly prejudicial. What is clear, however, is that nothing of the sort arises here. The appellant would not, as an unsecured unagreed creditor, receive anything on a liquidation. Nor, of course, would any other such creditor.
68. The case for the appellant is quite narrowly focused on two provisions of the Scheme, namely Clause 9(1)(c) which excludes it from making a claim for penalties, interest or damages and Clause 12.3 insofar as, it is claimed, it precludes it from participating, to the extent of 5%, for its subrogated claims.
69. There are two aspects to the notion of unfairly prejudice. The underlying assumption is that the person in question is, to begin with, prejudiced, that is to say that his interests as a creditor (or, where relevant, a member) are adversely affected or impaired by the proposals. It is the inevitable consequence of the insolvency to a company is that every creditor will, in that sense, suffer prejudice no matter what proposals are put forward. But prejudice is not enough to trigger the court’s obligation to refuse to confirm the proposals. It must in addition be unfair. Unfairness, in turn comprises two essential aspects, the general notion of injustice and the more specific one of unequal treatment.
70. The Act, however, does not seek to define or to preordain what is to be considered to be “unfairly prejudicial” in any particular case. I would adopt the approach outlined by O’Donnell J in his judgment in Re McInerney Home Ltd [2011] IESC 31:
“It is very unlikely that a comprehensive definition of the circumstances of when a proposal would be unfair could be attempted, or indeed would be wise. The fact that any proposed scheme must receive the approval of the Court means that there will be a hearing. The Act of 1990 appears to invite a Court to exercise its general sense of whether, in the round, any particular proposal is unfair or unfairly prejudicial to any interested party, subject to the significant qualification that the test is posed in the negative: the Court cannot confirm the scheme unless it is satisfied that the proposals are not unfairly prejudicial to any interested party.”
71. I would also approve the following helpful passage in Corporate Insolvency and Rescue, by Irene Lynch-Fannon and Gerard Nicholas Murphy (2nd Ed. Bloomsbury Professional 2012) at paragraph 13.43:
“While the court can take into account the prejudice an individual may suffer if the scheme is implemented, the prejudice must be unfair; the court will also consider the prejudice that will be caused to other creditors and employees if the scheme is not approved by the court and weigh both considerations in the balance when deciding whether or not to confirm the scheme of arrangement.”
72. The court will need to assess any claim of a creditor to be unfairly prejudiced by proposals from all angles. There will be a wide range of potentially relevant elements in the factual circumstances of the company, some affecting the creditor adversely and some favourably. As can be seen from the cases, a court will take note of the fact that some creditors, while losing heavily in the write-down of their debts, are likely to benefit if the company is able to resume trading. A party may claim to be prejudiced by the loss of an advantage, right or benefit. On the other hand, it may be relevant to note that the same party is in a position to retain a right or benefit which is not available to other creditors.
73. Whether a set of proposals is unfairly prejudicial to any particular interested party will involve a comparison of the treatment of that party with any similarly situated interested party. The court will also take account of any aspects of either party’s individual position which places it at either an advantage or disadvantage. The court will take account of the totality of the circumstances. The interests of each creditor will depend on its setting.
74. A good illustration of a judge considering and weighing in the balance the different individual aspects of creditors’ claims is to be found in the judgment of McCracken J in Re Antigen Holdings Ltd. [2001] 4 I.R. 600. He was concerned, respectively, with the right of the banks as creditors to recover normal rates of interest weighed against the length of time it would take to discharge their debts within the capacity of the company to pay wighed against the benefits to trade creditors if the company was to be rescued. Here is how he approached the matter at page 603:
“I then have to consider whether the banks have been unfairly prejudiced. It is beyond doubt that if the company has to go into liquidation, then the banks will receive considerably less than they would under the scheme and this is a consideration to be taken into account. But it is not the only one. It has to be said that no creditors are getting paid interest. The banks’ debt of course is by far the largest proportion of the debts owed to the creditors and they undoubtedly are not being treated in the same way as the ordinary creditors. They are being paid off over a longer period and there is some validity in their point that interest to a bank is the equivalent to the profit made by an ordinary trade creditor on selling his goods and the trade creditors are in fact getting paid that profit. However the question is: is this unfair?
The purpose of the scheme is to ensure the viability of the company. This can only be done if there is a reasonable time span in which to discharge the debt and if there is an amount being paid which is within the capacity of the company to pay. Now the vast bulk of remaining creditors are trade creditors who are presumably going to continue trading with the company. I do not think it is unfair they should get some priority because they are going to keep the company going.
I should also say while the court has power to make modifications, which is what is being sought by the banks, the court cannot re-write the scheme. In my view if the banks were to be paid interest, or the alternative they suggest, repaid all their capital immediately, I think there would clearly have to have been new meetings of the creditors to consider this and of course this would carry with it the possibility that the creditors would not accept it and would not accept what would be effectively a new scheme and that would be most undesirable. It is also undesirable in the present case to postpone the final decision because this is a company which effectively has to some extent to keep trading.”
75. I turn then to consider, first separately, and then together, the two objections raised by the appellant.
76. Firstly, under Clause 9(1)(c) no interest, penalties or damages are payable by the Companies. Insofar as the appellant is concerned that means SCL. The appellant says that it has a claim against SCL in Poland for a penalty amounting to 10% of the contract price. It quantifies this claim in its written submissions at €49,498,463. That is the only evidence we have about it. The Examiner accepts that Clause 9(1)(c) prevents the appellant from making a claim for payment of this sum under the Scheme. He says that Clause 9(1)(c) applies equally to every creditor: there is no difference of treatment and no and fairness. He justifies this stands by referring, amongst other things, to the subjective nature of these claims, the expense involved in measuring and assessing them and, ultimately, by the lack of availability of monies to meet them. The appellant counters by claiming that it is in a unique position or, at least, that it is in a different position from other creditors such as trade creditors. They commence by having an underlying liquidated claim, of which they can receive 5%.
77. Secondly, the appellant complains that it is precluded by the terms of Clause 12.3 from recovering its subrogated claims. This is unfair, the appellant says for the following reason in particular. The ordinary trade creditor of SCL in Poland is entitled to recover 5% as an unsecured creditor. The appellant is obliged under Polish law to discharge of debts due to subcontractors of SCL and, it says, it has done so to the extent of some €20m. It is unjust, the argument goes, to preclude the appellant, which steps into the shoes of these subcontractors, from recovering in exactly the same way as the subcontractors themselves. What is more, the subcontractors will be entitled under the Scheme in respect of any excess over what the appellant is obliged to pay.
78. For the purposes of dealing with these objections, I propose to give the benefit of the doubt to the appellant and to take its claims as set out in their written submissions and quoted above at their face value.
79. Looking at the account given in those submissions of the respective claims and counter claims of SCL and the appellant, it is clear that, on any view, SCL has very substantial claims outstanding against the appellant in Poland. It is acknowledged that SCL (SIAC) has already commenced proceedings in Poland for €30 million and it has quantified its total claims at €113 million. These amounts are, of course, speculative at this stage. So also are the appellant’s claims. It would appear, as the Examiner acknowledged in his submissions to the Court that the appellant enjoys the very considerable advantage of being able to raise its own claims by way of counterclaim or set off or whatever equivalent exists in Polish law by way of defence or reduction of SCL’s claims. The Examiner acknowledges that the Scheme does not purport to, even if it could, prevent the appellant from raising by way of defence any of its claims in accordance with Polish law in the courts of Poland.
80. That consideration appears to me to apply to both headings claim. However, special note may need to be taken of the provisions of Clause 12.3. On its face, it appears to provided that each creditor “ shall be deemed to have waived any and all rights and claims in subrogation against a Company which he may now have, of which may arise at any time.” Counsel for the Examiner, in his submissions to this Court, did not claim that this provision could preclude the appellant from raising its subrogation claims by way of defence in the Polish courts. The position, therefore, is that, insofar as the appellant has rights pursuant to the contract or by way of subrogation, which may, insofar as Polish law allows, be set up by way of a defence of set-off, against any claims of SCL in Poland, the Examiner accepts that the scheme does not purport to affect those rights.
81. Looking at the totality of its situation, the position of the appellant is that, on all the evidence before the Court and, having regard even to the terms of the written submissions it has presented, it is a very substantial debtor of SCL in Poland. There is no suggestion from the Examiner that the Appellant will not be entitled, under Polish law, to raise any of its claims by way of set-off, defence or counterclaim in the Polish courts. That position sharply distinguishes it from other creditors, in particular unsecured creditors who are entitled to recover only 5% of their claims. Even assuming there to be an element of unfairness in not permitting the appellant to recover 5% of its claim to recover a penalty or the value of its subrogated claims, and ignoring the fact that all creditors are subjected to the same provisions, any such disadvantage is largely if not totally counter-balanced by its right to raise these claims in full by way of defence, set-off or counterclaim in Poland.
82. For all these reasons, I do not consider that the appellant is unfairly prejudiced. Those are the reasons for the decision of the Court to dismiss its appeal.
Camden Street Investments Ltd & ors & Companies Acts
[2014] IEHC 86 (28 February 2014)
JUDGMENT of Ms. Justice Finlay Geoghegan delivered on the 28th day of February, 2014.
1. This judgment is given on the application pursuant to s. 24 of the Companies (Amendment) Act 1990, by Mr. Neil Hughes (“the Examiner”) as examiner of each of the companies named in the title for confirmation of proposals for a scheme of arrangement relating to each of the companies. Initially, the application was opposed by the secured creditor of all three companies upon the ground of unfair prejudice to it. Subsequent to the initial hearing, there was a commercial settlement with the secured creditor and modifications proposed to the scheme. Also, regrettably, an issue arose in relation to a breach by the Examiner of his duties to the Court. Both these matters necessitated additional hearings and the Court reserved its decision. It is necessary to set out in some detail the facts and events which give rise to this decision.
Background
2. On 5th November, 2013, Camden Street Taverns Ltd. (CST) petitioned for the appointment of Mr. Neil Hughes as examiner of CST and as examiner of two related companies; Camden Street Investments Ltd. (CSI) and Camden Street Properties Ltd. (CSP). CSI is the only shareholder of each of CST and CSP and all three will be collectively referred to as the ‘Companies’.
3. CST operates a public house known as ‘Flannery’s’ in Camden Street, Dublin. CSP owns adjacent properties, part of which is used as a beer garden for Flannery’s. CSI’s activity is the management of its subsidiary companies.
4. The insolvency of each of the Companies at the time of presentation of the petition was principally by reason of an admitted inability to repay loans which had then been called in by Vanguard Property Finance Ltd. (“Vanguard”) a private equity fund. The liability of the Companies to Vanguard arose out of loans obtained by CSI from Bank of Scotland Ireland (BOSI) in connection with the purchase of Flannery’s and the adjacent property in November, 2008. The original loans were in the order of €13 million. The amount due to Vanguard by each of the Companies is in the order of €11 million.
5. In November 2012, CSI was notified by BOSI that the loan had been transferred to Vanguard and the formal transfer appears to have been completed about 11th February, 2013. The Companies never chose to do business with Vanguard.
6. On 24th September, 2013, Vanguard, then owed in excess of €11 million by the Companies, demanded repayment of the loans. The Companies immediately commenced plenary proceedings and obtained an interim injunction restraining the appointment of a receiver. There was subsequently a disputed interlocutory hearing and on 5th November, 2013 ([2013] IEHC 478, Cross J.) delivered judgment refusing the application for an interlocutory injunction. The reasons included non-disclosure by the plaintiffs at the interim application stage.
7. On 5th November, 2013, at an ex parte hearing following presentation of the petition, the Court appointed Mr. Hughes as interim examiner of each of the Companies and gave the usual directions for the advertisement and hearing of the petition. A copy of the judgment of Cross J. was made available to the Court.
8. There then followed a significant exchange of affidavits between the Companies and Vanguard and a hotly contested petition hearing. Relations between Vanguard and the Companies had totally broken down. The Companies had never chosen to do business with Vanguard whom they believed had purchased their loans and related security over Flannery’s and the adjacent properties at a significant discount and were seeking to realise same and make a profit. Many matters were in dispute and are not relevant in this judgment. However, the fact of the bitter dispute is relevant. The background to the strength of Vanguard’s opposition to the appointment of an examiner was that it believed, prior to September 2013, that the Companies were working with it towards a consensual sale of Flannery’s Pub and also the non-disclosure to the Court in the plenary proceeding. Vanguard contended that it had received an offer from the Mangan Group (subject to due diligence etc.) for the purchase of Flannery’s. Mr. Berg, the deponent on behalf of Vanguard, disclosed in the course of the affidavits that the potential sale to the Mangan Group was at “a level of approximately €8.5m (without taking into account the value of the adjacent site at 7, 8 and 8a Camden Street)”. One of the grounds upon which Vanguard objected to the appointment of an examiner was that a scheme of arrangement that would only ever be capable of passing an “unfair prejudice” test if it was one which would secure for Vanguard at least the amount of the Mangan Group offer, and by implication, that this was not achievable in a scheme which would also give the Companies a reasonable prospect of survival as going concerns.
9. Notwithstanding the objections made, for the reasons then set out, principally relating to the evidence of the reasonable prospect of survival of the Companies as going concerns and the position of approximately 39 employees, the Court appointed Mr. Hughes as examiner of CST pursuant to s. 2 of the Companies (Amendment) Act 1990, and to CSI and CSP as related companies pursuant to s. 4 of the 1990 Act.
10. By reason of the position of Vanguard as secured creditor, the order appointing the Examiner was only made in circumstances where the Examiner (who was satisfied by reasons of arrangements reached with the petitioners in relation to discharge of his remuneration, costs and expenses) gave to the Court an undertaking that in the event he did not obtain approval for a scheme of arrangement, he would not seek to have any remuneration, costs or expenses discharged out of the property of the Companies. This was for the purpose of avoiding any potential prejudice alleged on behalf of Vanguard by reason of the priority afforded to the expenses of examinership in s. 29 of the 1990 Act. The order appointing the Examiner also provided that he should not issue any s. 10 certificate without either the consent in writing of Vanguard or leave of the Court. Vanguard applied to the Court for a direction pursuant to s. 21 of the 1990 Act for the appointment of a committee of creditors and the Examiner indicated he was willing to appoint such a committee. In the circumstances, the Court made no order. The Examiner did appoint a committee of creditors upon which both Vanguard and the Revenue Commissioners were represented.
11. At the hearing of the petition, the Court had before it a report from Mr. Hughes as interim Examiner. Mr. Hughes is an experienced examiner who has been appointed by the High Court as examiner in many cases. In that report, he set out for the Court the manner in which he would propose seeking investments with a view to preparing proposals for his scheme of arrangement and stated, inter alia, that he would ensure that “a transparent and competitive investment process is undertaken which should generate the most appropriate investment to firstly secure the future of the Companies, and secondly to ensure that no creditor is unfairly prejudiced in any Scheme of Arrangement that I may formulate”. The Court relied on that stated intention in making its decision to appoint Mr. Hughes as Examiner.
12. Mr. Hughes also indicated in his interim report that he had obtained in recent time a valuation from CBRE and indicated that this would assist him in formulating any proposals relating to the Vanguard debt, and added “however, it is clear that the valuation will be a guide only and that the robust investment process I envisage will determine what the true value of the Companies is and therefore what a fair return to the creditors of the Companies might be”.
13. The matter was next listed before the Court on 19th December, 2013, when, on the basis of a report dated 17th December, 2013, and affidavit of 18th December, 2013, an application was made and granted for the extension of time for the delivery of the Examiner’s report pursuant to s. 18(3) until 16th January, 2014. The timeline indicated by the examiner for receipt of investment proposals was 11th December, 2013. In his report of 17th December, 2013, he indicated that he had received four proposals by that date; convened a meeting with the Board of directors on the morning of 12th December, 2013, and canvassed the views of the Board regarding the proposals in the light of specific criteria set out in the information memorandum. Further, that “following the conclusion of the Board meeting and following some discussion with certain of the interested parties, I identified a preferred investor consortium. I wrote to other interested parties informing them that they were not preferred investors”.
14. The Examiner also told the Court in his report on that date in relation to the requirement for any proposals he would formulate to deal with the debt owed by the Companies to Vanguard “I can confirm to the Court that the proposal from the preferred investment consortium provides for a sum payable to Vanguard which is substantially in excess of the open market ‘Red Book’ valuation placed on the property by CBRE”.
15. The Court, in reliance upon the Report then made to it by the Examiner and the apparent progress being made towards a scheme of arrangement, granted the extension of time. The Court did not seek at that stage either the identification of the “preferred investor consortium” nor the amount of the CBRE valuation or proposed investment.
16. The matter was again before the Court on 16th January, 2014, and the Examiner, in his report dated 14th January, 2014, stated to the Court that it remained the position that “the proposal from the preferred investment consortium provides for a sum payable to Vanguard which is substantially in excess of the open market Red Book valuation placed on the property by CBRE in the opening days of the examination”.
Section 18 Report
17. On 5th February, 2014, the Examiner presented his s. 18 report recommending proposals for a scheme of arrangement for CST, CSI and CSP. Vanguard and the Revenue Commissioners were on notice of this and it was immediately indicated that confirmation of the scheme would be opposed by Vanguard. The Revenue Commissioners supported confirmation of the scheme. Directions were given for the exchange of affidavits and 14th February, 2014, fixed as the hearing date.
18. The proposals were based upon an investment agreement entered into between Mr. Paul Clinton and the Companies in accordance with which, subject only to sanction from the Court, Mr. Clinton was to acquire the entire issued share capital of CSI in consideration of €1 and to invest in CSI by way of non-interest bearing loan note sum of €7,099,999. CSI in turn was to make a loan in the sum of €6,084,077.54 to CST by way of non-interest bearing loan note and to CSP the sum of €1,015,922.46 by way of non-interest bearing loan note. Under the proposals, the super preferential creditor was to be paid in full, the preferential creditors of each of the Companies to be paid in full, albeit 80% on a deferred basis, and the unsecured trade creditors to be paid in full, with 90% thereof on a deferred basis and there was provision for other creditors. Vanguard, as secured creditor, was to receive from CST the sum of €6,084,714.29; from CSP the sum of €1,014,285.71 and from CSI €1,000. In aggregate, it was to receive €7.1 million from the three Companies. This equated to the investment from Mr. Clinton. The balance of the scheme payments were to be paid out of cash flow from future trading of CST. An estimated cash flow was included.
19. The Examiner, in the s. 18 report, clearly anticipated objection from Vanguard to the scheme and explained to the Court in some detail the reasons for which he considered that confirmation of the scheme of arrangement would give each of the Companies a reasonable prospect of survival as a going concern, and also why it would not be unfairly prejudicial to Vanguard, having regard to the amount proposed to be paid to it. The total debt due to Vanguard was in the order of €11 million and it was to be paid €7.1 million under the scheme.
20. There is not and was not at any point in time during the s. 24 hearing any dispute in relation to the evidence adduced in support of the proposition that confirmation of the scheme of arrangement would give each of the Companies a reasonable prospect of survival as a going concern. The historic EBIDTA returns, the average weekly turnover during the period of examination and the exhibited cash flows of CST all indicate that it has a reasonable prospect of survival as a going concern, and as a consequence, CSI and CSP.
21. The Examiner, at the time of the s. 18 report, was clearly aware that the principal issue which would arise at the s. 24 confirmation hearing was whether or not the proposals for the scheme of arrangement, insofar as they related to Vanguard as the secured creditor of each of the three Companies, would or would not be considered by the Court to be unfairly prejudicial to the interests of Vanguard as a secured creditor.
22. Section 24(4)(c)(ii) of the 1990 Act precludes the Court from confirming any proposal for a scheme of arrangement unless the Court is satisfied that “the proposals are not unfairly prejudicial to the interests of any interested party”. The Examiner was aware that he had to satisfy the Court that these proposals were not unfairly prejudicial to the interests of Vanguard.
23. The Examiner exhibited in that context with the s. 18 report the valuation he had obtained from CBRE at the outset which valued Flannery’s at €6 million and the adjacent CSP property at €1 million giving a total of €7 million. He then states at pp. 16 to 17 of his report:
“The valuation was carried out to provide a guide as to the level of dividend that would be required in order to ensure that the Secured Creditor was treated fairly in this case . . . I am satisfied that the figure of €7m represented the open market value of the premises on the date of my appointment as examiner.
However, the CBRE valuation was not the decisive factor in determining what would represent a fair treatment of the Secured Creditor under any Proposals I might formulate. Ultimately, a valuation is simply an opinion of value on a given day from someone who has expertise in a particular sector. The true value can only be determined by testing the market in a fair, open and transparent process, governed by strict timelines. Accordingly, I wish to now turn to the examinership investment process that I conducted.”
24. The Examiner then set out in his report the process conducted by him which included, inter alia, the receipt of four indicative investment proposals by 11th December, 2013; the Board of directors meeting held on the morning of 12th December over which he presided as Chairman, and at p. 19 states that subsequent to that meeting and following consultation with his legal advisors he “identified two parties as preferred investors”. He then identifies the two preferred investors as being “Mr Paul Clinton and Mr Tom Anderson”. He explains that in the three weeks running up to the signing of an investment agreement he exhorted the parties to resolve all outstanding issues to achieve the best result possible and that, ultimately, “Mr Anderson withdrew from the process leaving Mr Clinton as the sole investor as identified in the proposals”. The Examiner then explains to the Court (as the issue had been raised at a meeting of the Committee of Creditors) why he rejected the two further investment proposals received by him, one of which came from Vanguard and the other from the Mangan Group, the latter of which had indicated an investment in the range €9 million to €10 million. The reasons for rejection by the Examiner are no longer relevant to any issue in this judgment. It was relevant to the issue of unfair prejudice that the Examiner had rejected two proposals which Vanguard contended were in excess of the investment then agreed to by Mr. Clinton.
25. The Examiner, at p. 21 of his report, then, under a heading of ‘The Preferred Proposal’, having identified the preferred investor as Mr. Clinton, stated to the Court as follows:
“The preferred investor set out a detailed 49-page proposal which included comprehensive details of his background and experience, letters of support from 16 members of staff together with details of the plans for the future development of the public house and adjacent site. The plan also included reference to the further prospects of job creation based on the architectural plans for the development of the site which in turn would lead to increased capacity on busy nights.
Critically, the proposal included unequivocal proof of funding at a level that seemed clear to me would provide for the survival of the Companies and not unfairly prejudice any creditor taking into account the valuation of the premises and the subsequent testing of that valuation by way of the investment process that I had just conducted.
. . .”
The 49-page proposal from the preferred investor identified as Mr Clinton was not exhibited.
26. Mr. Berg, on 10th February, 2014, swore an affidavit setting out the basis upon which Vanguard opposed confirmation of the scheme. He set out the facts upon which Vanguard contended that the proposals were unfairly prejudicial to it as secured creditor. Firstly, he exhibited valuations from three further valuers of the secured assets obtained by Vanguard: a valuation from Younge Auctioneers in the sum of €10.6 million including the adjoining site; a valuation from Morrissey’s for Flannery’s in the sum of €6.75 million (or €7.5 million if vendor finance were used) and a valuation from Kelly Walsh of the adjoining site in the sum of €1.5 million.
27. Mr. Berg also referred to the offers made by Vanguard itself and the Mangan Group and contended that they demonstrated that the market would pay a lot higher than the €7.1million on offer in the proposals and expressed a belief at para. 14 that “it is inconceivable that a proper and fair, competitive process could have yielded as low an offer as that being advanced by the Examiner”.
28. In support of the above contention, Mr. Berg expressly stated at para. 15 of his affidavit that “Vanguard is very concerned that the CBRE valuation (if not the Report itself) may have been disclosed to or otherwise made available to the investor in advance of his bid. Vanguard’s concerns in this regard arise in part from the description given to Mr. Clinton’s bid at page 21 of the Report and, in particular, the reference to the bid containing letters of support from 16 members of staff”.
29. Mr. Berg, in his affidavit, also challenged the process followed by the Examiner and, inter alia, at para. 25, made the point that the proposals received by the Examiner had not been exhibited and contended that the Court should be shown the documentation.
30. The Examiner swore a further affidavit in response to Mr. Berg’s affidavit. He rejected the criticisms made by Mr. Berg and under a heading of ‘Investment Process’, set out for the Court, in greater detail than had previously been done in his s. 18 report the investment process followed by him. He referred to the complete breakdown of relationship between Vanguard and the Companies and also disharmony within the Board itself by particular reference to Mr. Anderson who was a beneficial shareholder of 25% of the company and then stated at paras. 8 and 9:
“8. Therefore, I took the view from the outset that the investment process would have to be rigid in nature with strict criteria in the Information Memorandum and stringent adherence to timelines. I took the view that if I stepped outside this approach, the examinership could unravel very swiftly. An example of this would have been to initiate side discussions with any party, following receipt of the investment proposals or allowing other preferential treatment such as allowing parties to mend their hand or alter their proposals after the deadline. I believe that there was a very real risk of being accused of favouritism in that scenario.
9. I decided that the integrity of the process depended on me making a judgment call regarding the preferred investor based solely on the evidence that was before me following the deadline given to all twenty six investors. It was on this evidence alone that the decision was made, initially to prefer Mr Clinton and Mr Anderson jointly and ultimately just Mr Clinton following Mr Anderson’s withdrawal.”
31. The Examiner, at para. 20 of his affidavit, then deals with Mr. Clinton’s proposal and averred:
“20. Firstly for the avoidance of any doubt I wish to confirm that the valuation of the premises was not furnished by me to Mr Clinton. Secondly, there is absolutely no attempt to conceal that Mr Clinton previously provided mezzanine finance to certain of the directors.
. . .
22. As set out in my report pursuant to section 18 . . . Mr Clinton’s proposal included plans for the future development of the public house and adjacent site. The plan also included reference to the further prospects of job creation based on the architectural plans for the development of the site which in turn would lead to increased capacity on busy nights.
. . .
I beg to refer to a copy of Mr. Clinton’s plans for the business which form part of his investment proposal upon which is marked with the letters ‘NH6’ . . .”
The exhibit is architectural plans attached to a letter dated 5th December, 2013, from Dempsey Architects to the Examiner’s firm. This letter and plans form part of the Clinton Dolan investment proposal, later referred to in this judgment.
32. There were further affidavits sworn in advance of the hearing, principally relating to the underlying basis upon which CBRE and Morrissey’s had carried out their valuations, and in particular, to adjustments made to EBITDA figures by the former. There was also an affidavit from a Mr. Courtney on behalf of the Mangan Group in relation to the rejection of its bid and availability of funding. None of this is now directly relevant to the Court’s decision by reason of the intervening events.
The Initial Section 24 Hearing
33. The primary issue in dispute between the parties was whether the Examiner, on the evidence before the Court, could satisfy the Court as he was required to do by s. 24(4)(c)(ii) of the 1990 Act, that the proposals were not unfairly prejudicial to the interests of Vanguard as secured creditor. Whilst the affidavits sworn by Mr. Berg on behalf of Vanguard had raised a number of issues in relation to the process followed by the Examiner, counsel for the Examiner submitted to the Court that as Vanguard had not sought to cross-examine the Examiner that the Court should not have regard to those criticisms.
34. The primary submission made by counsel on behalf of the Examiner in favour of the proposition that the proposals were not unfairly prejudicial to Vanguard was that the Examiner had conducted an open and fair process by which he sought investment and that the true test of the market value of the property was the amount of the investment which he had been able to secure following the testing of the market by the process followed. Counsel submitted to the Court that, as acknowledged in the reports of the valuers, there had been few sales of similar properties in the recent past; that insofar as there were sales disclosed for public houses, none were of the order of €6 million (being the value placed by CBRE on the public house) and that the true test of the market value was what the Examiner had been able to achieve by the open and fair process undertaken by him.
35. Counsel for the Companies supported the submissions of Counsel for the Examiner and the Revenue Commissioners also supported confirmation of the scheme.
36. Counsel for Vanguard, submitted inter alia, that the Court should not accept the process undertaken by the Examiner as a true test of market value of the properties. He drew attention to the earlier reports from the Examiner in which he had told the Court that the proposal from the preferred investment consortium provides for a sum payable to Vanguard which is “substantially in excess of the open market (Red Book) evaluation placed on the property by CBRE”, whereas the proposals would only give Vanguard marginally more i.e. €7.1 million, or €100,000 in excess of the valuation of €7 million. He also referred to many of the averments of Mr. Berg, some of which are reproduced in this judgment in relation to the alleged unsatisfactory nature of the investment process undertaken and an alleged connection between Mr. Clinton and the existing directors/shareholders.
37. There were also submissions made in relation to an issue raised by the Court as to whether the Court did or did not have jurisdiction to approve the proposals in the form of a single scheme of arrangement which purported to relate to all three Companies. Counsel for the Examiner submitted that in his experience, this had been done in other examinerships but also acknowledged that in other instances, the Court had insisted upon separate schemes for each of the relevant companies.
38. At the end of the s. 24 hearing, the Court indicated that it was reserving its judgment and:
(i) The Court, having regard to the submissions made on behalf of Vanguard, requested and was given the document which had been referred to by the Examiner in his reports and affidavits as being a 49-page investment proposal from the preferred investor identified as Mr. Paul Clinton. The document was furnished to the Court with the agreement of Vanguard without the necessity of disclosure to Vanguard consistent with the practice of disclosure to the Court in the course of examinerships of documents with commercially sensitive information.
(ii) The Court referred to its jurisdiction to modify proposals and indicated that as it was reserving its decision that it was not too late for the relevant parties to reconsider the proposed investment and scheme, but indicated that this would have to be done promptly and that if there were to be any application to modify the proposals, this would have to be done by the following Tuesday.
Post-Section 24 Hearing
39. To the absolute astonishment of the Court, the document handed into Court at the end of the s. 24 hearing was not, as it had understood from the s. 18 report, affidavits of the Examiner and submissions made, an investment proposal from Mr. Paul Clinton but, rather, was a joint investment proposal from Mr. Paul Clinton and Mr. Colin Dolan. Mr. Dolan is one of the three existing directors of each of the Companies and one of the shareholders of CSI. The document is entitled ‘The Clinton & Dolan Investment Proposal’. The document states it is prepared for the Examiner and the High Court. The document states that Mr. Clinton will act as “lead investor” and that Mr. Dolan was to be the lead operator for Flannery’s Bar. It states that Mr. Clinton and Mr. Dolan are the only directors and shareholders in this bid with “a 25% (Colin Dolan) and 75% (Paul Clinton) shareholding”. The proposal states that Mr. Clinton and Mr. Dolan “have allocated funds to cover the scheme for creditors and the cost of the examination”. It specifies that the secured creditor would be paid €7.02 million and specifies percentage amounts to be paid to the other creditors.
40. At p. 12, under the heading of ‘Investment Offer’, the document states:
“After careful consideration, a review of circumstances and a belief in the future potential of Flannery’s Bar, Colin Dolan and Paul Clinton would like to submit an offer for €7.02m. They would also like to show proof of funds of €10m for which an additional investment of €2.25m would be used to complete upgrade of first floor, as intended, and development of Phase 2 of the plans set out for the adjoining properties and associated costs.”
The proof of funds attached is from a bank confirming that Mr. Clinton has in excess of €10m on deposit with them.
41. The investment proposal also refers to attached letters of support from staff. Those letters are individual letters in different terms. All refer to support for and happiness with the current owners and management of Flannery’s. Not one letter makes any reference to Mr. Paul Clinton. The document also includes as Appendix F the letter of 5th December, 2013, from Dempsey Architects and attached architectural plans, an extract from which is exhibited in the affidavit of the Examiner of 12th February, 2014.
42. The Court considered that the joint investment proposal was not easily reconcilable with certain parts of the affidavits and reports of the Examiner to the Court. These related to matters which were objectively material to the issues in dispute and relevant to the Court’s determination as to whether or not the proposals of the Examiner were unfairly prejudicial to Vanguard.
43. The Court took the unusual step of issuing a direction on 18th February, 2014, which is appended to this judgment and which the Registrar furnished to the solicitors for each of the parties appearing at the s. 24 hearing. The matter was listed in accordance with the direction for 2.00pm on Wednesday 19th February, 2014.
44. The Registrar was then informed, late on the evening of Tuesday 18th February, 2014, that a commercial settlement had been reached between the relevant parties in dispute and that the Examiner wished to put before the Court on Wednesday 19th February, 2014, modified proposals. The affidavit of the Examiner exhibiting the modified proposals makes no reference to any issue raised in the Court’s direction of 18th February, 2014.
Hearing on 18th February 2014
45. The Examiner put before the Court modified proposals arising out of the commercial settlement between the Companies, Mr. Clinton and Vanguard. The proposed modifications in broad terms are:
(i) The investment from Mr. Clinton is increased to €7,358,915;
(ii) the loan from CSI to CST is increased to €7.1 million;
(iii) the loan from CSI to CSP is to be €1,636.75;
(iv) Vanguard is to receive the following payments:
(a) from CSI €1,000 immediately;
(b) from CST €7,099,000 immediately;
(c) from CSP €1,500,000 payable by 27 equal monthly instalments in the sum of €50,000 each from 1st December, 2014, with a final payment of €150,000 payable on the first business day of March, 2017.
(v) Vanguard is to release its security on Flannery’s Pub upon payment of the €7.1 million and to retain security on part of the adjoining premises owned by CSP until the final payment of the €1.5 million.
46. The Examiner also put before the Court amended cash flow statements indicating the ability of CST, through its projected trading, to pay the additional €50,000 per month from 1st December, 2014.
47. Vanguard, through its counsel, withdrew any objection to confirmation by the Court of the modified proposals. The Revenue Commissioners continued to support confirmation by the Court of the modified proposals.
48. The Court explained its concern about the apparent inconsistencies between the Clinton and Dolan Investment Proposal and certain parts of the reports of the Examiner and affidavits sworn by the Examiner, having referred to the relevant principles set out below. Counsel for the Examiner did not dispute the duties owed by the Examiner (and his lawyers) to the Court in accordance with those principles.
49. The Examiner then gave evidence and answered questions put to him by the Court. In summary, his evidence was to the following effect. The Examiner confirmed that the ‘Clinton & Dolan Investment Proposal’ handed into Court at the end of the s. 24 hearing was the document to which he had referred in his s. 18 report and affidavits as the investment proposal from Mr. Clinton. He confirmed that he had nowhere in his reports and affidavits told the Court that this was a joint investment proposal with Mr. Dolan. He initially attempted to justify the exclusion of any reference to Mr. Dolan by reason of the reference in the joint proposal to Mr. Clinton as the “lead investor”. He also referred to the fact that the proof of funding related to Mr. Clinton alone. He acknowledged, however, that the joint investment proposal indicated that Mr. Dolan was to have a 25% interest in the bid.
50. The Examiner explained to the Court that after receipt of the joint proposal and the three other proposals on 11th December, 2013, there was the Board meeting on 12th December, 2013, referred to in his reports. He said that in the course of that Board meeting, it was disclosed that Mr. Clinton and Mr. Anderson, who had made a separate investment proposal, would work together and that this was the basis upon which matters moved forward and to which he had referred as the “investor consortium” and that Mr. Dolan then dropped out of the picture as an investor. He also told the Court that he did not appreciate the significance of Mr. Dolan being a joint investor. At no point did he indicate to the Court that he had forgotten that the initial investment proposal received from Mr. Clinton on 11th December, 2013, was, in fact, a joint investment proposal with Mr. Dolan.
51. The Examiner told the Court that the CBRE valuation which he had obtained at the commencement of the examinership had been paid for by the Companies and that the directors, including Mr. Dolan, were aware of the content of the report. He confirmed that Mr. Dolan was therefore aware of the content of the report when he and Mr. Clinton made the joint investment proposal on 11th December, 2013, to him. When asked by the Court to explain his averment at para. 20 of his affidavit of 12th February, 2014, in response to the concern expressed by Mr. Berg on behalf of Vanguard that the CBRE valuation may have been disclosed to or otherwise made available to Mr. Clinton in advance of his bid, the Examiner acknowledged that he should have disclosed to the Court that Mr. Dolan was aware of the valuation and that he may have disclosed it to Mr. Clinton. He apologised to the Court for this omission.
52. The Examiner told the Court that he did not intend to mislead the Court; that he understood the concern expressed by the Court and apologised to the Court. The Examiner confirmed that he had given a copy of the Clinton & Dolan Investment Proposal to his solicitors.
53. Vanguard requested a short opportunity to consider the detail of certain aspects of the modified proposals and some points of clarification sought by the Court in relation to same. The matter was adjourned to 21st February, 2014.
Hearing of 21st February, 2014
54. There was a further short hearing on 21st February, 2014, in relation to points of detail in the modified proposals, and subsequent thereto, the solicitors for the Examiner have furnished to the Registrar the modified proposals. Those modified proposals are dated 20th February, 2014, and are the final modified proposals which are the subject matter of this judgment.
55. The modified proposals provide at para. 16.2.3 for CSP and Vanguard to enter into a deed in relation to certain retained security and the release of other security. The solicitors for the respective parties were requested to agree the terms of that deed on or before 27th February, 2014, and to notify the Court of such agreement. The Court reserved its decision until Friday 28th February, 2014.
Duties of an Examiner
56. An examiner appointed pursuant to the 1990 Act is an officer of the Court. As such, he owes duties to the Court in addition to his express statutory obligations pursuant to the 1990 Act. Courtney The Law of Companies 3rd Ed., (Dublin, 2012) at p. 1432, para. 22.113 succinctly states those obligations:
“In general terms, an examiner must act honestly, reasonably, and with the fullest candour to the court in respect of all matters which, on objective criteria, could be material.”
57. Costello J. in his judgments in Re Wogans (Drogheda) (No. 2) (Unreported, High Court, 7th May, 1992) and the related case of Re Wogans (Drogheda) (No. 3) (Unreported, High Court, 9th February, 1993) explained in his 7th May, 1992, judgment, in the context, both of duties of good faith owed by directors and all those associated with applications (including their professional advisors) and of examiners that “[t]his duty involves an obligation to disclose all relevant facts material to the exercise by the Court of its discretion”.
58. Costello J. also referred to the necessity for compliance with these obligations because, inter alia, the Court must depend to a considerable extent on the truth of what it is told by, in the first instance, the company, as petitioner, and thereafter, by an interim examiner or examiner. I respectfully agree. In many examinerships, unlike the present one, there may be no creditor or other interested party who takes an active role in opposing any aspect of the applications before the Court. The Court is required to make decisions, either at a petition hearing or subsequently on an application to confirm a scheme which may have an immediate and sometimes adverse impact on creditors, employees and others who are not present and not represented before the Court. The Court is absolutely dependent upon being able to rely upon petitioners, in the first instance, and thereafter, examiners and their professional advisors giving to the Court a full, frank and clear picture with all the objectively material or potentially material facts relevant to any decision which it is required to take, or to the exercise by it of its discretion.
59. The role or participation by an existing shareholder or director of a company to which an examiner has been appointed and which, by definition, is insolvent in any proposed investment and scheme of arrangement for which sanction is sought, is always and obviously objectively material. Clarke J., in an oft cited decision given in the High Court in December 2007, in Re Traffic Group Ltd. [2007] IEHC 445, [2008] 3 IR 253, stated at p. 260, paras. 5.4 and 5.5:
“5.4 It is important to note that the Companies (Amendment) Act 1990 is not designed to immunise the principals or shareholders of a company from the consequences of the company concerned getting into financial difficulties. The value which shareholders may have in a company (whether they are involved in its management or not) may, in practice, be extinguished or greatly diminished by bad judgment in investing in the company in the first place, by bad management (either on the part of the investors themselves or those whom they trusted to run the company) or, indeed, plain bad luck. Whatever may be the cause, it does not seem to me that it is any part of the purpose of the Act to solve the difficulties of such shareholders howsoever those difficulties may have arisen. If the Act were so designed it might well give some truth to the verse penned at the time of the introduction of limited liability companies into our legal scheme, which suggested that such companies amounted to a conspiracy by gentlemen (and at the relevant time it almost always would have been gentlemen or those who claimed to be such) whereby they met together to decide by how much they would not pay their debts.
5.5 It is clear that the principal focus of the legislation is to enable, in an appropriate case, an enterprise to continue in existence for the benefit of the economy as a whole and, of equal, or indeed greater, importance to enable as many as possible of the jobs which may be at stake in such enterprise to be maintained for the benefit of the community in which the relevant employment is located. It is important both for the court and, indeed, for examiners, to keep in mind that such is the focus of the legislation. It is not designed to help shareholders whose investment has proved to be unsuccessful. It is to seek to save the enterprise and jobs.”
60. The above principles set out by Clarke J. are well known to all experienced examiners and their advisors and regularly cited in this Court. Counsel for the Examiner, in the initial s. 24 hearing, referred to these principles and the judgment of Clarke J. in Re Traffic Group for the purpose of distinguishing the position of Mr. Clinton as an investor who was not a prior shareholder or director. Counsel also stated that in other judgments, albeit not in written form, Clarke J. had stated that where a proposed scheme was dependent on investment from existing shareholders, that the Court has to be particularly careful in considering the issue of unfair prejudice to creditors by reason of the above principles. There is no objection to an existing shareholder being an investor but it does give rise to special considerations.
61. The Court, having reconsidered all the evidence in this case, including the reports, affidavits and oral evidence of the Examiner, must conclude that the Examiner is in breach of his duties to act with fullest candour in putting all material matters before the Court in connection with this application for confirmation of his proposals for a scheme of arrangement. My conclusion is that he is in breach of his duty to the Court in failing to disclose to the Court that the original investment proposal from Mr. Clinton was, in fact, a joint investment proposal from Mr. Clinton and Mr. Dolan. Regrettably, I cannot accept that the Examiner, who is a very experienced examiner and must be aware of the principles referred to above, did not appreciate the significance of Mr. Dolan, an existing shareholder of CSI and a director of all three Companies, having made a joint investment proposal with Mr. Clinton. Further, once the issue of Mr. Clinton’s knowledge of the CBRE valuation was raised by Vanguard, it was clearly objectively material that Mr. Clinton had made a joint proposal with Mr. Dolan, who was aware of the CBRE valuation.
62. As accepted by the Examiner, he was also in breach of his duty to the Court in making the averment at para. 20 of his affidavit sworn on 12th February, 2014, as a response to the allegation made on behalf of Vanguard that the CBRE valuation had been disclosed to or made available directly or indirectly to Mr. Clinton in advance of his making his bid. It was a clear breach of the Examiner’s duty to the Court on the facts then known to him simply to aver that he had not disclosed the valuation to Mr. Clinton (which he may not have done) without also telling the Court that Mr Dolan was aware of the valuation and that the bid was in fact a joint bid with Mr Dolan.
63. Counsel and solicitor acting for the Examiner must accept some responsibility for the above breaches of duty by the Examiner. Counsel has informed the Court that both he and the solicitor were furnished with a copy of the Clinton & Dolan Investment Proposal in December, 2013. However, counsel also states that when advising and settling the s. 18 report and affidavits relating to the s. 24 hearing, neither recalled that the investment proposal of Mr. Clinton was a joint proposal with Mr. Dolan. I accept that explanation from both counsel and solicitor. It is inconceivable that counsel and solicitor would have settled the affidavit of 12th February, 2012, (which they acknowledge they did) in its present form, nor could counsel have made the submissions in the form made at the s. 24 hearing if they had recalled that fact or were aware of the content of the joint investment proposal. Nevertheless, the Court must conclude that they failed to make appropriate enquiries of the Examiner prior to settling the affidavit, and in particular, para. 20 thereof, and in deciding upon the submissions which could properly be made to the Court in relation to the alleged unfair prejudice. Proper enquiries of the Examiner’s knowledge of relevant facts, and in particular, as to whether the CBRE valuation had been directly or indirectly disclosed to Mr. Clinton should and probably would have elicited afresh the information in relation to the joint investment proposal and the obvious conclusion that Mr. Clinton was aware of the CBRE valuation when making the joint investment proposal with Mr. Dolan. The content of the joint investment proposal specifying, as it does, that Vanguard should be paid €7.02 million i.e. only €20,000 more than the CBRE valuation, which was known to the joint investors at the time of making the bid, was objectively material to the submissions subsequently made by counsel and the Court’s decision on unfair prejudice.
Decision
64. The express statutory constraints on the Court confirming proposals for a scheme of arrangement are those set out in s. 24(4) and (4A) of the 1990 Act. The Examiner established that in respect of each company, CSI, CST and CSP, one class of creditors whose interests are impaired accepted the proposals and, hence, s. 24(4)(a) is satisfied. I am satisfied that there is no evidence to suggest that the sole or primary purpose of the proposals is the avoidance or payment of tax due, and hence, am not precluded by section 24(4)(b). As Vanguard is agreeable to the modified proposals, the Court can be satisfied for the purposes of s. 24(4)(c)that they are not unfairly prejudicial to its interests. Section 24(4)(A) does not arise on the facts.
65. The Court is given a wide discretion by s. 24(3) to confirm the proposals subject to modifications. The modifications made and outlined in this judgment are matters which, it appears to me, may properly be the subject of modification at a s. 24 hearing and are unlikely to adversely impact on any class of creditor not appearing or represented at the hearing. The additional sums payable to Vanguard by CST are provided for by the investment monies from Mr. Clinton. The additional sums payable by CSP on a deferred basis are not to commence until December, 2014. It is intended that those monies be paid out of the cash flow created by the trading in CST, presumably by way of inter-company loan. The revised cash flow statements indicate that the envisaged turnover and expenses of CST are such that it should be capable of providing for these additional payments. They are only to commence in December, 2014. By that date, the payments to preferential creditors and unsecured trade creditors under the scheme should be complete.
66. The Court is also satisfied that the modified proposals for the scheme of arrangement on the facts before the Court give to each of the Companies a reasonable prospect of survival as a going concern.
67. By reason of the finding made that the Examiner was in breach of his duties to the Court, it is necessary to consider whether notwithstanding the Court should now exercise its discretion to confirm his proposals for the scheme of arrangement. In reaching a decision on this issue, the principles set out by Clarke J. in Re Traffic Group Ltd. [2007] IEHC 445, [2008] 3 IR 253, are applicable. In that case, there had been a finding of a lack of candour by the petitioners in the lead up to the presentation of the petition. Nevertheless, it appears to me that the principles are equally applicable to a situation where the lack of candour is by the Examiner in the lead up to a s. 24 hearing. It is clear that these are matters which the Court should properly take into account in exercising its discretion under s. 24, but the underlying object of the 1990 Act must also be weighed in the balance. Clarke J. in Re Traffic Group Ltd., having considered the earlier decisions of Costello J. in Re Selukwe Ltd. (Unreported, High Court, 20th December, 1991) and Re Wogans (Drogheda) Ltd. (No. 2) (Unreported, High Court, 7th May, 1992), then stated at p. 261, paras. 5.7 to 5.10:
“5.7 It seems to me, therefore, that a court should lean in favour of approving a scheme where the enterprise, or a significant portion of it, and the jobs or a significant portion of them, are likely to be saved. That is not to say that the court should disregard any lack of candour or other wrongful actions. It does, however, seem to me that the court’s approach to such matters should take into account the following.
5.8 Firstly it needs to be recognised that there may be cases where the wrongful actions of those involved in promoting the examinership are so serious that the court is left with no option but, on that ground alone, to decline to confirm a scheme which would otherwise be in order. It is necessary, as Costello J. pointed out in Re Wogan’s (Drogheda) Ltd. (Unreported, High Court, Costello J., 7th May, 1992) to discourage highly wrongful behaviour.
. . .
5.10 Where there is a high level of likelihood that the company can survive with a consequent saving of a significant enterprise and at least a significant proportion of the jobs at stake, the court should lean in favour of confirmation, especially if appropriate remedial measures can be put in place to mark and deal with the consequences of any lack of candour or other inappropriate action on the part of those charged with the management of the company.”
68. On the facts herein, there is no question of remedial measures to mark or deal with the consequences of any lack of candour as it was not by those charged with the management of the company and the Examiner is not making any application to the Court in respect of his fees, costs and expenses.
69. As previously stated, even at a time when there was bitter disagreement with Vanguard in relation to the proposals for the scheme of arrangement, the one matter about which all were agreed was that there was a high likelihood that CST can survive and be a profitable company with positive consequences for both CSI and CSP. The scheme is unusual in that the trade creditors are being paid in full albeit 80% on a deferred basis and there are approximately 39 employees. In accordance with the principles set out, in such circumstances, the Court should lean in favour of confirmation. I have determined that notwithstanding the findings made, the Court should exercise its discretion to confirm the proposals for the scheme of arrangement.
70. There is one final issue in relation to the form in which the proposals were put before the Court. This is not a matter of substance but is relevant to compliance with the requirements of the 1990 Act.
71. The proposals prepared by the Examiner are for a single scheme of arrangement, albeit that it does set out in separate and distinct provisions the treatment under the scheme for members of each of the three Companies and separately provides for the treatment of each class of creditor of each of the three Companies. All the general provisions of the scheme apply to each of the three Companies. It also sets out in the appendices the relevant information in relation to each company separately.
72. A consideration of the relevant provisions of the 1990 Act leads to a conclusion that the Act requires a separate and distinct scheme of arrangement for each company to which an examiner is appointed, whether pursuant to s. 2 or as a related company pursuant to s. 4, unless the Court has given a contrary direction in relation to a related company pursuant to section 4(4). This sub-section provides that an examiner appointed to two or more related companies shall have the same “powers and duties in relation to each company, taken separately, unless the court otherwise directs”. No such contrary direction was given herein.
73. Section 18(1) of the 1990 Act, as amended, obliges the examiner to formulate proposals for “a scheme of arrangement in relation to the company concerned”. This provision objectively appears to require an individual scheme for each company.
74. The requirement for an individual scheme for each company is emphasised also by the requirements of s. 22(1)(a), (2) and (3) in relation to the contents of proposals for a scheme of arrangement. Section 24 itself, and in particular, sub-sections (2), (5), (6), (7) and (10) are only consistent with a distinct and identifiable scheme relevant to an individual company.
75. Hence, I am satisfied that the Act of 1990 requires an individual scheme of arrangement in relation to each company. In this instance, whilst the Examiner has prepared proposals for a single scheme which, on its face, purports to relate to all three Companies, he has, in respect of each individual company, included in the scheme in distinct sections the individual matters required by s. 22 in respect of each individual company and set out separately and distinctly the treatment of each class of members and creditors of each Company. Hence, whilst the proposals have been drafted for a single scheme, it appears that the Court may properly treat them as proposals for three distinct schemes relating to each company with common provisions which apply to all three schemes. There is no ambiguity in the proposals, as drafted, as to which provisions apply to each individual company.
76. By reason of the very significant difficulties which have been overcome in these particularly difficult examinerships, I do not require a further modification so as to isolate and divide into three separate schemes the relevant provisions of the scheme applicable to each of the Companies. Hence, I propose, exceptionally, in this application confirming the proposals for each of the schemes applicable to each of the Companies as contained in the proposals for the modified scheme submitted by the Examiner and dated 20th February, 2014.
77. I will direct that the modified scheme be attached to the orders confirming the proposals in relation to each of the three Companies named in the title and direct pursuant to s. 24 (10) of the 1990 Act, that three copies of the order with the scheme scheduled be furnished to the Registrar of the Companies for registration on the Company Register relating to each of the Companies.
78. I wish, however, to point out that, the better practice, for an examiner appointed to several related companies is to prepare an individual scheme in relation to each company. Where he wishes to do otherwise, he should seek, in advance of preparation of the proposals, a direction from the Court pursuant to s. 4(4) of the 1990 Act.
Addendum
79. Subsequent to completion but prior to delivery of the above judgment the Examiner filed an affidavit exhibiting a further modified scheme dated 28th February 2014. The additional modifications principally address the deed of release in relation to CSP which is now agreed and do not require any change in the decision of the Court save in relation to the identification of the final modified scheme.
Relief
80. There will be an order pursuant to s. 24 of the Companies (Amendment) Act 1990, confirming the proposals for the schemes of arrangement in relation to each of Camden Street Investments Ltd., Camden Street Taverns Ltd. and Camden Street Properties Ltd. as contained in the modified proposals submitted by the Examiner dated 28th February, 2014, and to be appended to the order. Three copies of the order of the Court are to be furnished to the Registrar of Companies for registration on the Company Register relating to each of the said companies.
APPENDIX
THE HIGH COURT
2013 501 COS
IN THE MATTER OF
CAMDEN STREET INVESTMENTS LIMITED
AND IN THE MATTER OF THE COMPANIES ACTS 1963-2012
IN THE MATTER OF
CAMDEN STREET TAVERNS LIMITED
AND IN THE MATTER OF THE COMPANIES ACTS 1963-2012
IN THE MATTER OF
CAMDEN STREET PROPERTIES LIMITED
AND IN THE MATTER OF THE COMPANIES ACTS 1963-2012
Direction of Ms Justice Finlay Geoghegan given 18th February 2014
1. The Court requested and was furnished at the end of the s.24 hearing with the 49 page Investment Proposal stated to have been received by the Examiner from the preferred investor whom he had identified as Mr. Paul Clinton. The document had been referred to by the Examiner in his affidavits and reports to the Court but not exhibited.
2. This document was furnished to the Court with the agreement of Vanguard, the party opposing the confirmation of the proposals for the Scheme of Arrangement without the necessity of disclosure to Vanguard consistent with the practice of disclosing to the Court documents with commercial sensitive information in the course of Examinerships.
3. Regrettably the document furnished to the Court is not easily reconcilable with certain parts of the affidavits and reports of the Examiner to the Court. The Court needs explanations from the Examiner prior to making a decision on his application for confirmation of his proposals for a Scheme of Arrangement. Fair procedures dictate that this be done in the presence of Vanguard and other parties present at the s.24 hearing. Also, subject to the issue of redaction of any commercially sensitive information, the disclosure of the document furnished to the Court to Vanguard and the other parties and the re-listing of the s. 24 hearing.
4. Given the basis upon which the document was furnished to the Court, it is intended in the first instance, the Court would hold a hearing in the presence only of the Examiner, his solicitor and counsel and, if they wish to be present, Mr. Clinton and the other person named in the title to the Investment Proposal and any solicitor and counsel they may wish to retain for the purposes of hearing submissions as to what if any redactions should be made from the Investment Proposal to avoid unnecessary disclosure of commercially sensitive information prior to disclosure of the Investment Proposal to Vanguard, the Revenue Commissioners and the Companies who were represented at the s.24 hearing.
5. This direction is to be furnished by email to the Solicitors for all parties represented at the s.24 hearing. The Solicitor for the Examiner is to furnish it to Mr Clinton and the other person named in the title to the Investment Proposal.
6. The matter will be listed before the Court for the initial hearing referred to in paragraph 4 above at 2pm on Wednesday 19th February.
KH Kitty Hall Holdings Ltd & ors & Companies Act 2014
, Re: [2017] IECA 247 (04 October 2017)
JUDGMENT delivered by Ms. Justice Finlay Geoghegan on the 4th day of October 2017
1. This judgment is given in the appeal and cross appeal from the order made by the High Court (O’Connor J.) on 15th September, 2017 refusing the appointment of an examiner to, and dismissing the petitions of, Edward Leisure Assets Unlimited Company (“ELAU”), Niche Hotels Unlimited Company (“Niche”), Style City Limited (“Style”) and Radical Properties Unlimited Company (“Radical”) and appointing an examiner to KH Kitty Hall Holdings Limited (“KHKH”), ML Meyrick Limited (“ML Meyrick”) and MT Mono Trading Limited (“MT Mono”). The companies named in the title are collectively referred to as the “companies” or “petitioners”.
2. The respondent to the appeals and appellant in the cross appeal is Deutsche Bank AG (“the Bank”) to whom the companies are collectively indebted in the order of € 684m. It is a secured creditor of most if not all of the companies. It was not the original lender to the companies. It acquired the debt and connected securities and rights from NALM in September 2015. Since that date there have been protracted dealings between the Bank and the companies and their ultimate owner Mr Barrett.
3. I am grateful to my colleague Hogan J who has set out in greater detail in his judgment the factual background to the presentation of the petition, the proceedings before the High Court and the High Court judgment which I do not propose repeating. I am also grateful for his fuller consideration of all the issues raised on the appeal and cross appeal to which I will simply refer to as “the appeal”. I simply wish to address certain issues having regard to the factual position next referred.
4. The unusual factual feature of the position of the Bank is that, in addition to being a secured creditor which has appointed a receiver to five of the companies (on 18th August 2017), it entered into a written agreement with all of the companies, and others, on 22 December 2016 for the purpose as recited therein “of documenting the settlement arrangement which the Bank has agreed with the Barrett Connection in respect of the liabilities of the Barrett Connection to the Bank . . .” (“the Debt Settlement Agreement”).
5. Central to the Bank’s opposition to the appointment of an examiner to the companies is the Debt Settlement Agreement. In the High Court, and also before this Court, it submitted that the presentation of the petition is an abuse of process by reason of the Debt Settlement Agreement. It also submitted on appeal, in the alternative, that if the Court concluded it had jurisdiction to appoint an examiner that it should, in exercise of its discretion, refuse to make the appointment by reason of the Debt Settlement Agreement.
Abuse of process
6. In the High Court, the Bank submitted that the presentation of the petition was an abuse of process by the petitioners by reason of the Debt Settlement Agreement and should be dismissed for that reason. The High Court judge at para. 42 of his ex tempore judgment concluded that it had established an abuse of process. This finding notwithstanding, it is not clear that it formed the basis of his dismissal of the petition in respect of the four companies; it is not referred to in the High Court judge’s conclusion of his reasons for dismissal and of course he appointed an examiner to three remaining companies, all of which were also parties to the Debt Settlement Agreement.
7. The court does have an inherent jurisdiction to dismiss a petition seeking appointment of an examiner under Part 10 of the Companies Act 2014 (“the 2014 Act”) if its presentation is an abuse of process. The Supreme Court in Re Vantive Holdings [2010] 2 IR 118 held that the bringing of a second petition on foot of crucial and material evidence deliberately withheld from the Court in the course of a first petition and the reliance on evidence that could have been produced at the first petition hearing constituted an abuse of the process and prima facie was a bar to the second petition proceeding. As pointed out by Murray C.J. at para. 20 of that judgment “abuse of process may take many forms according to the context or the nature of the proceedings…” However, at the core of actions which constitute an abuse of process are ones which abuse the due process of the administration of justice. On the facts in Vantive it was the behaviour during the first proceedings which made the presentation of the second petition an abuse of process.
8. Section 510(1) of the 2014 Act confers (subject to certain express exceptions which do not apply) a statutory entitlement on a company to present a petition seeking the appointment of an examiner (and thereby obtain protection of the court). That statutory entitlement must of course be exercised for the intended purpose. The commencement or pursuit of proceedings for an improper or ulterior purpose may constitute an abuse of process: Sean Quinn Group Limited v. An Bord Pleanála [2001] 1 IR 505. The evidence before the Court indicates that the companies are genuinely seeking to have an examiner appointed for the statutory purposes of Part 10 of the 2014 Act, namely the rescue of the currently insolvent companies and their survival and that of their undertakings as going concerns. Hence, even if it were to be the position that the presentation of a petition for the appointment of an examiner under the 2014 Act is a breach of their contractual obligations to the Bank under the Debt Settlement Agreement (which I am not holding), it does not appear to me that it should properly be regarded as an abuse of process. I agree for the reasons set out more fully by Hogan J that the Debt Settlement Agreement does not as a matter of contract preclude the presentation of the petition herein by the companies. Clause 4.2 only precludes proceedings against the Bank which the presentation of the petition seeking the appointment of an examiner is not.
9. It is not contended that any of the seven companies had any ulterior purpose or motive in presenting the petition. The companies are exercising a statutory right for the intended purpose of procuring their rescue from insolvency and there is no prior proceeding which makes the presentation of the petition an abuse of the due administration of justice. It is contended that the motive of Mr Barrett as ultimate shareholder and a director is to retain control of the companies. Even if that is so it is in the context of the companies seeking the protection of the Court and the appointment of an examiner with a view to proposals for a scheme of arrangement which, if confirmed, would enable the companies and the whole or a part of their undertakings survive as going concerns i.e. the statutory purpose. Accordingly, I do not consider that the presentation of the petition in the factual context of the Debt Settlement Agreement constitutes an abuse of process as that term is properly understood.
Court’s Statutory Jurisdiction
10. The first statutory jurisdictional issue for the court on the hearing of a petition presented pursuant to Part 10 of the Companies Act 2014 (“The 2014 Act”) is whether the petitioner has satisfied the Court in relation to the matters set out in s. 509(1)(a),(b) and (c) and that “there is a reasonable prospect of the survival of the company and the whole or any part of its undertaking as a going concern” (s. 509(2)). No issue arises on the requirements of s. 509(1)(a),(b) and (c). Where as in this instance the petition is presented by multiple companies, some of which are related companies of the other, and the Court also considers the application pursuant to s. 517 in relation to one or more of the petitioners as a related company then the Court must be satisfied in accordance with s. 517(3) that “there is a reasonable prospect of the survival of the related company, and the whole or part of its undertaking, as a going concern”. In addition, the Court is to have regard pursuant to s. 517(2) as to whether the making of the order “would be likely to facilitate the survival of the company, or of the related company, or both and the whole or any part of its or their undertaking as a going concern”.
11. A company which is a related company and is only a holding company without any separate business may have an examiner appointed to it under s. 517. As Denham J. said in Tivway Limited (in examinership) & Others [2010] 3 IR 49 in relation to the equivalent section in the Companies (Amendment) Act 1990:
“I am satisfied that the court has jurisdiction to admit a holding company, a related company, to examinership, to enable companies in a group obtain the protection of the court – if they comply with the Act of 1990. However, the position of a holding company is dependent upon whether the court is satisfied that there is a reasonable prospect of survival of the related companies as a going concern. Thus in this case the issue is whether the court is satisfied that under the proposed schemes of arrangement that there is a reasonable prospect of the survival of Construction and/or Tivway as a going concern. If there is, then Holdings may also proceed in examinership.”
12. The seven companies fall into three categories. There are three trading companies, MT Mono, Niche and Style, each of which operate the Meyrick Hotel, G Hotel and Eye Cinema respectively. In respect of each of those I am satisfied for the reasons more fully set out by Hogan J. that the petitioners have put before the Court objective evidence that there is a reasonable prospect of survival of each of those companies and their undertaking in accordance with the requirement as set out by Murray C.J. in Re Vantive Holdings (No. 1) [2009] IESC 68. In this respect I would draw attention to
(1) Appendix F of the independent accountant’s report which includes a 12 month trading projection in respect of each, with a significantly positive EBITDAR (Earnings before interest, tax, depreciation, amortization and rent); and
(2) the reasons set out at para. 76 of the independent accountant’s first report; and
(3) the information produced in relation to investment interest and refinancing proposals procured by the companies in the order of €71m albeit rejected by the Bank and the further investment interest demonstrated to the interim examiner since his appointment including from third party investors.
13. I have had regard to the criticism by Mr Gallagher S.C. on behalf of the Bank in relation to the trading projections and in particular the failure to include interest and rent in accordance with the current lease agreements. Each of the trading companies leases the relevant premises from a related property owning company: ML Meyrick; ELAU; or Radical. The evidence before the Court indicates that any scheme of arrangement to be successful is likely to include a consensual variation of the rents currently reserved in the leases. In practice the rents payable in recent years by the trading companies to their related landlord had been significantly less than that in the lease agreements.
14. In respect of the three property-owning companies, ML Meyrick, ELAU and Radical, I am also satisfied that there is objective evidence that they each have, in turn, a reasonable prospect of survival as a going concern. Their position is dependent upon the ability of the operating companies to pay rents at a reasonable level and a written down debt liability which is sustainable having regard to the rents receivable under the leases.
15. The reasonable prospect of survival of KHKH, as a holding company whose only undertaking is its shares in the subsidiaries, is dependent, again, upon the reasonable prospect of survival of the trading companies on a profitable basis, the write down of its debt liability as part of a scheme of arrangement such that it can service any debt it retains from the profits of its subsidiary trading companies. As pointed out by the independent accountant at para. 7.1 of his report, this will in part depend upon the structure of any refinanced debt in a scheme of arrangement. There is no doubt that appointing an examiner to the property owning companies and KHKH would facilitate the survival of the trading companies.
16. I have also considered the submission made by on behalf of the Bank by Mr Gallagher S.C., criticising the lack of detail in relation to the level of investment required from a prospective investor that would enable a scheme of arrangement to be formed which would meet the requirements of s. 541(4) of the 2014 Act and which would, in particular, not be unfairly prejudicial to the interests of the Bank.
17. Ms O’Neill submitted, in my view correctly, that as was stated by Clarke J. in the High Court in Re McSweeney Dispensers Limited [2011] IEHC 494, what the Court needs to be satisfied of is “that there is some realistic prospect of an investor being prepared to put up enough money that could generate a scheme of arrangement which might arguably avoid any unfair prejudice”.
18. Whilst neither the independent accountant nor anyone else on the petitioner’s behalf put figures on the level of investment required to avoid unfair prejudice to the Bank he does address the potential availability of investment funds to formulate a scheme of arrangement if an examiner is appointed. I do not consider that on all the facts of this petition the independent accountant or anyone else could have been expected to or should have placed figures on what is required. The correspondence between the Bank and the companies in May/June, 2017 indicate a potential availability of refinance in the order of €71m in aggregate, which undoubtedly was rejected by the Bank. The Debt Settlement Agreement provides for a minimum return to the Bank in the order of €16.7 m from the Meyrick Hotel, but there is no evidence of an anticipated return from the other assets to be disposed of (which term includes “refinance”). I am satisfied on all the evidence put before the Court on this petition that the test as put by Clarke J. in McSweeney was met.
19. In reaching that conclusion I have also taken into account the fact that the Bank did not put before the Court any evidence in relation to its anticipated total realisations from the secured properties or pursuant to the Debt Settlement Agreement nor any other objective evidence which disputed the views expressed as to the availability of investment which would enable an examiner to formulate a scheme of arrangement such that it would not unfairly prejudice any of the creditors of the companies, including the Bank. In saying this I am not in any way seeking to take away the onus which rests on the petitioners in this connection. However, an objecting secured creditor does sometimes offer independent expert evidence disputing the reasonable prospect of survival of the company.
20. Finally, on this issue it is relevant that it was not contended that the existence of the Debt Settlement Agreement precluded the Court being satisfied that the companies and the whole or a part of their undertakings had a reasonable prospect of survival as a going concern.
Section 518 – Failure to disclose
21. I am in agreement for the reasons set out by Hogan J. that having regard to the matters put before the Court in the petition, grounding affidavit and exhibits thereto and the manner in which the application was presented to Meenan J. on the ex parte hearing that there was no failure to disclose or breach of the obligation of utmost good faith either on the facts put before the Court by the petitioners or in the presentation by counsel on their behalf to the judge taking the ex parte application. Accordingly, I have concluded that O’Connor J. was in error in determining that there had been a breach of these obligations such that pursuant to s. 518 of the 2014 Act he should dismiss the petition on behalf of the relevant four companies.
Discretion – s. 509(1)
22. The central question on this issue in the appeal is the impact of the Debt Settlement Agreement on the exercise by the Court of its discretion under s. 509(1) of the 2014 Act. Where the Court is satisfied in relation to the matters in s. 509(1)(a),(b) and (c) and that there is a reasonable prospect of the survival of the company and the whole or a part of its undertaking as a going concern, then in accordance with s. 509(1) the Court “may… appoint an examiner to the company for the purpose of examining the state of the company’s affairs and performing such functions in relation to the company as may be conferred by or under [Part 10]”. The statutory power conferred on the Court is a discretionary power and, as stated by Fennelly J. in Re Gallium [2009] IESC 8 at para. 46 (in relation to the equivalent provision in the Companies (Amendment) Act 1990, it confers a “wide discretion” on the Court. Fennelly J. also stated that “the Court should take account of all the circumstances”and then continued:
“47. The entire purpose of examinership is to make it possible to rescue companies in difficulty. The protection period is there to facilitate examination of the prospects of rescue. However, that protection may prejudice the interests of some creditors. The court will weigh the existence and degree of any such prejudice in the balance. It will have regard to the report of the independent accountant.
48. The Court has to take account of all relevant interests. The independent accountant must consider whether examinership would be “be more advantageous to the members as a whole and the creditors as a whole than a winding-up of the company…” This does not limit the range of interests to be taken into account by the court under section 2. The interests of employees cannot be excluded. In the case of an insolvent company, it is natural that the creditors will have the greatest interest in the future, if any, of the company. The court will take a balanced approach, as suggested by the reference to the creditors as a whole.”
23. On the facts of Gallium there was no opposition in the Supreme Court from anyone interested in the affairs of the company, including secured creditors to the appointment of an examiner. The general approach as stated by Fennelly J. must be considered in that context. Nevertheless it helpfully clearly identifies that what the Court is concerned with at the hearing to appoint an examiner is balancing the prejudice to the interests of some creditors by the appointment of the examiner with the creation of the protection period to facilitate the examination of the prospects of rescue for the benefit of the creditors in general and others including employees. The examination will include the prospects for the preparation of a scheme of arrangement (which in many instances, inevitably involves new finance) which will not be unfairly prejudicial, for presentation to creditors and members and, ultimately, for confirmation by the Court. However the dicta of Fennelly J. indicate that at this stage in the process the Court, once it has been satisfied of the reasonable prospect of survival threshold, is not concerned with the potential prejudice to a creditor by any such scheme of arrangement. That will be a matter for a confirmation hearing under s.541 of the 2014 Act if the examinership survives to that point in the process. It is only concerned with the potential prejudice to the creditor which the appointment of an examiner and extension of the court protection may cause.
24. Mr Cush S.C. for the petitioners relied on the similar approach by Clarke J. in the High Court in McSweeney Dispensers Limited [2011] IEHC 494 in which he distinguished between matters to be considered at the stage of the appointment hearing and at a scheme confirmation hearing. In that case, AIB, a secured creditor, was objecting to the appointment of an examiner. One of its main grounds for objecting was the prospect of a scheme of arrangement under which Mr Hof, a controlling shareholder, would achieve a write down of debt and retain control of the companies without making a significant capital contribution.
25. Clarke J. referred to a well established principle in relation to the purpose of examinership namely that it “is not to absolve shareholders from the consequences of a failed venture”. He emphasised that at appointment stage he was only concerned with reasonable prospects for survival and on the evidence there was a real prospect of others interested in “at least investigating the possibility of making an investment”. He concluded that the opposition of AIB which focussed on the prospect of Mr. Hof retaining control and the terms on which it might be achieved “were not factors to which any great weight should be given at this stage . . .”. It is clear, by implication, that Clarke J. considered these were factors which might carry weight at a confirmation hearing.
26. The second general purpose of the examinership legislation referred to by Clarke J. at para. 6.4 which is relevant to the exercise of discretion to appoint an examiner (as well as in making a decision as to whether to confirm a scheme of arrangement) is that “part of the purpose of the examinership legislation is to prevent the single, large and secured creditor being necessarily enabled to arrange events in a way designed solely to suit its own interest. A debenture holder who has a charge over the entire assets of a company cannot, under the examinership legislation, use that fact to trump, in all circumstances, the interests of other creditors or stakeholders”. In this connection he referred to the comments of McCarthy J. in the Supreme Court in re Atlantic Magnetics Limited (in receivership) [1993] 2 IR 561.
27. Applying the principles set out in Gallium and McSweeney, it appears to me that, where it is satisfied it has jurisdiction to appoint under s. 509 (1), the Court must exercise the statutory discretion given it on all the relevant facts and circumstances from the evidence before it and put in the balance any prejudice to the interest of creditors by the appointment of an examiner and period of protection. It must consider and weigh that prejudice in the context of the statutory purpose of Part 10 of the 2014 Act and with particular regard to the purpose of the appointment of an examiner and a period of protection, being to facilitate the examination, in some detail, of the prospects of in substance rescuing the companies by the preparation and proposal of a scheme of arrangement which is not unfairly prejudicial to any interested party and which may be confirmed by the Court. The preparation of that scheme may of course also include achieving agreement of relevant parties to changes to financial liabilities going forward such as consensual amendment to the rents reserved under the leases between certain of the petitioning companies.
28. It must be recalled that if a court is satisfied that it has jurisdiction under s.509(1) it must have concluded that the company and the whole or a part of its undertaking has a reasonable prospect of survival as a going concern. The statutory purpose of Part 10 of the 2014 Act at the hearing of the petition stage is to enable an examination of “the prospects of rescue” as explained by Fennelly J. in Gallium by the appointment of an examiner and consequent continuation of protection by the court.
29. All the relevant facts on the hearing of this petition include the position of the Bank as a secured creditor with the additional contractual benefits it claims pursuant to the Debt Settlement Agreement and the appointment by it of a receiver to seven of the nine companies. Accordingly, I have concluded that the Court in exercising its discretion as to whether to appoint an examiner must take into account the Debt Settlement Agreement. However it should do so in the context of, and as part of, the balancing exercise referred to above.
30. Mr McCarthy S.C., in reply, on behalf of the petitioners submitted that the only prejudice relied upon on behalf of the Bank in relation to the appointment of an examiner as such was the potential costs of the examinership. Further that this probably arises only if the examinership fails as it is quite typical for new investors to make provision to discharge costs of examinership separate to funds being invested and available for a scheme of arrangement.
31. This is a potential prejudice. In accordance with s. 554(2), unless the Court otherwise orders, the examiner is entitled to be indemnified in respect of remuneration, costs and expenses and pursuant to s. 554(3) they must be paid in full prior to any other claim, secured or unsecured. This, however, is a potential prejudice for most secured creditors on the appointment of an examiner, but it is nevertheless something which must be taken into account.
32. It is important to note that no submission was made that the Bank would suffer prejudice to its interests under the Debt Settlement Agreement specifically by the appointment of an examiner. That appears to be correct. The presentation of the petition seeking the appointment of an examiner is a “Termination Event” under Clause 1.1, however a Termination Event does not automatically bring to an end the Debt Settlement Agreement, rather it permits the Bank terminate the agreement by notice in writing pursuant to Clause 8.1. The Bank has not done this. Accordingly, the Debt Settlement Agreement remains in place. The contractual position of the parties under the Debt Settlement Agreement is the same after the appointment of an examiner as it was before. The Bank is of course precluded from taking certain enforcement steps and the companies may not pay certain debts pursuant to ss.520 and 521 of the 2014 Act. However it is not contended and there is no evidence of any intended step required or permitted to be taken under the Debt Settlement Agreement in the proximate period which if not done will result in particular prejudice to the Bank. I recognise that any scheme of arrangement proposed by an examiner following new investment may impact on the position of the Bank under the debt settlement agreement. However, that appears to be a matter for consideration when and if an examiner proposes a scheme of arrangement. I am conscious that there are disputes between the parties in relation to alleged breaches of the debt settlement agreement and I only intend these comments as identifying that the time at which prejudice to the Bank having regard to the existence of the Debt Settlement Agreement may require to be considered is at the time when the Court comes to consider the approval of a proposed scheme of arrangement. It is not a determination of the current status of the Debt Settlement Agreement it is rather, simply, to state that there is no change in its contractual status by the appointment of an examiner.
33. I have also considered potential prejudice to the Bank both having regard to the Debt Settlement Agreement and the appointment of receivers by delay in the event that the examinership fails. However, having regard to the time limits for the examinership; the obligation on an examiner to come back to court immediately, if it appears to him that he is unable to formulate proposals for a scheme of arrangement; the fact that under the terms of the Settlement Agreement the date by which the consensual disposal of non-core assets was to be achieved is 31st October, 2017; and the absence of any specific prejudice such as loss of a negotiated sale by a receiver, delay is not a matter to which particular weight should be given on the facts herein. As already stated, no specific submission was made of prejudice by reason of delay by reason of the appointment of an examiner.
34. I have concluded that the position of employees is better protected by the appointment of an examiner with a reasonable prospect of survival of their employer companies than if the Court refuses the appointment of an examiner and the receivers appointed continue the trading of the Meyrick Hotel, the G Hotel and the Eye Cinema with a view to asset sales. This is particularly so in the case of the employees of MT Mono to which no receiver is appointed. There will be a continuity of contracts of employment with the same employer.
35. In relation to the general creditors I have noted the significant support for the appointment of an examiner but also the undertakings from the Bank as to how it will treat trade creditors during a receivership in the event that the appointment of an examiner is refused. If the examinership is successful the companies will survive and the general creditors would have the opportunity of a continuation of trading with the same persons which would not happen in asset sales by a receiver. This benefit to general creditors is part of the statutory purpose of examinership: to enable a company and its undertaking survive for the benefit of the economy as a whole.
36. The final issue on discretion relates to the submission in reliance on the public policy to uphold settlement agreements. That is part, as submitted by Mr Cush SC, of a wider public policy to uphold agreements. It is for this reason that I have carefully considered the impact of the appointment of an examiner on its terms and the potential prejudice to the Bank of such an appointment as distinct from any proposed scheme of arrangement. That appears to me to be what is required at this point in the statutory scheme of examinership enacted by the Oireachtas in the 2014 Act.
37. I have concluded, balancing the potential prejudice to the Bank in relation to the costs of a failed examinership and some limited delay in recovering amounts anticipated by the performance of the Debt Settlement Agreement with the statutory purpose of examinership and the scheme of the 2014 Act on all the facts herein (including those relating to the employees and general creditors), the Court should exercise its discretion in favour of appointing an examiner to all seven companies named in the title.
Conclusions
38. In summary, my conclusions on the issues in the appeal and cross appeal considered in this judgment for the reasons set out are:
1. The presentation of the petition by the companies who are parties to the Debt Settlement Agreement of 22 December 2016 was not an abuse of process.
2. The Court is satisfied, in accordance with the tests set out by Murray C.J. in Re Vantive Holdings (No. 1) [2009] IESC 68 and Clarke J. (as he then was) in the High court in Re McSweeney Dispensers Limited [2011] IEHC 494 that each of the companies and all or part of its undertaking has a reasonable prospect of survival as a going concern. The trading companies and property owning companies each have an undertaking. Insofar as KH Kitty Hall Holdings Limited is a holding company only and is to be treated as a related company under s.517 of the 2014 Act, it has a reasonable prospect of survival dependant on the survival of its subsidiaries and the making of the order would also facilitate the survival of its subsidiaries.
3. The existence of the Debt Settlement Agreement between the Bank and the companies is a relevant matter to take into consideration in exercising the Court’s discretion under s. 509(1) of the 2014 Act as to whether or not to appoint an examiner.
4. The Court should on all the facts herein exercise its discretion under s.509(1) of the 2014 Act in favour of appointing an examiner to all seven companies. This conclusion is reached having regard to the general statutory purpose of Part 10 of the 2014 Act and its scheme. Specifically, at the appointment stage the purpose of the legislation is to provide a period of protection to enable the examiner conduct a detailed examination of the affairs of the companies and, if feasible, formulate a proposal for a scheme or schemes of arrangement which will not be unfairly prejudicial to any interested party and which, if confirmed, would ensure the survival of each of the companies and its undertaking as a going concern for the benefit of the economy as a whole, including the general body of creditors and employees. This conclusion is reached having considered and put into the balance the prejudice to the Bank from the appointment of an examiner as distinct from any scheme of arrangement having regard to its position as a secured creditor which has entered into the Debt Settlement Agreement with the companies (and others) in December 2016 and appointed a receiver to five of the companies on 18 August 2017.
5. The appeal should be allowed and the cross appeal dismissed. JUDGMENT of Mr. Justice Gerard Hogan delivered on the 4th day of October 2017
1. Where a creditor and corporate debtor arrive at a binding agreement as to how the excessive debt levels of the company should be dealt with by means of asset sales and, if necessary, debt re-structuring, to what extent (if at all) is the existence of such an agreement a consideration to which the court ought to have regard in determining whether to appoint an examiner under the provisions of Part 10 of the Companies Act 2014 (“the 2014 Act”)? This is, in many ways, the principal issue which arises in these appeals and cross-appeals.
2. Given that the system of examinership has been part of our law since the enactment of the Companies (Amendment) Act 1990 (“the 1990 Act”), one might have thought that this question would have been fully considered in the considerable jurisprudence on the topic of examiners that has built up over the years. Rather surprisingly, however, in the case-law to date this issue has been at best but imperfectly explored. This Court is now as a consequence called upon to determine this difficult question which – despite the apparent paucity of case-law – is nonetheless of very considerable practical importance for lenders and corporate borrowers alike. It is, however, first necessary to set out the background to the present appeals and cross-appeals.
The background to the present appeals and cross-appeals
3. On the morning of Saturday, 19th August 2017 the seven petitioning companies (“the companies”) mentioned in the title of these proceedings applied ex parte to the High Court for an order appointing an interim examiner pursuant to the provisions of Part 10 of the 2014 Act. A receiver had been appointed to five of these companies by Deutsche Bank AG (“Deutsche”) on the previous day. Following a hearing which lasted about 90 minutes, Meenan J. made an order appointing an interim examiner to the companies in question. One of the complaints made by Deutsche is that there was material non-disclosure of certain facts at that ex parte hearing and I propose presently to consider that contention.
4. There then followed a further hearing in the High Court on 12th September 2017 where the companies applied for the appointment of an examiner pursuant to s. 509 of the 2014 Act. The application was opposed by the major secured creditor, Deutsche, while the Revenue Commissioners adopted a neutral position. The other unsecured trade creditors indicated by letter that they supported the application for examinership. On 15th September 2017 O’Connor J. delivered an ex tempore judgment in which he ruled in favour of the appointment of an examiner to three of the companies, namely, KH Kitty Hall, ML Meyrick Ltd. and MT Mono Trading Ltd., but he refused to make an order in respect of the other petitioning companies. These four other companies, namely, Edward Leisure Assets Unlimited Company (“ELAU”), Niche Hotels Unlimited Company, Style City Ltd. and Radical Properties Unlimited Company, have all appealed against the decision not to appoint an examiner, whereas Deutsche have in turn appealed against the order appointing an examiner to Kitty Hall, Meyrick and MT Mono Trading.
5. It is next necessary to say something about the companies themselves. They are part of a group of some 36 companies controlled by Mr. Gerry Barrett (and members of his family), a Galway-based entrepreneur and the group owns assets in both Galway, Louth and elsewhere. There are three principal trading assets held by the companies, namely: (a) the Meyrick Hotel; (b) the G Hotel; and (c) the Eye Cinema. The Meyrick Hotel is owned by ML Meyrick and is leased to and operated by MT Mono. ML Meyrick and MT Mono are in turn are wholly owned subsidiaries of Kitty Hall, which company is controlled by members of the Barrett family.
6. The G Hotel is owned by ELAU, but it is operated by Niche Hotels, under a lease from ELAU. Niche Hotels is owned by Gerry Barrett (1 share), and by ELAU (99 shares). The Eye Cinema is part of Wellpark Retail Park, which is one of several assets owned by Radical Properties. It would seem that Radical Properties provides administrative services to other companies in the group. The Eye Cinema is leased to and operated by Style City.
7. It is understood that Kitty Hall, ML Meyrick and ELAU have no employees. Kitty Hall is simply a holding company and the other two companies (Meyrick and ELAU) are property-owning companies who receive rent from the other group companies in respect of those properties. Radical Properties has seven employees who are involved in the provision of group administrative services to the companies, along with services to members of the Barrett Group of companies that are not the subject of the petition. There is, however, no doubt but that the other companies which are the subject of the present appeals are themselves significant employers in their own right. Thus, MT Mono has 127 employees (including 42 full time); Niche Hotels has 163 employees (including 57 full time) and Style City has 36 employees.
8. It is plain that the staggeringly large legacy debts incurred by the companies are at the heart of their present financial difficulties. The companies were originally indebted to Anglo Irish Bank, but this debt was acquired by the National Asset Management Agency. This debt was ultimately sold by NAMA to Deutsche in July 2015 for an undisclosed sum. The petition presented by the companies acknowledges a combined debt to Deutsche from the Group companies of approximately €698m. As the companies’ tax affairs appear to be up to date, this figure represents approximately 98% of the companies’ total liabilities. In perfect fairness it should be recorded that the combined debt of the petitioning companies – while still extraordinarily large – is admittedly somewhat less than this figure at some €412m., since some €286m. of the total Group debt is in the name of other companies who are not the subject of the present petition.
9. One is hardly surprised to learn that the market value of the assets held by the companies is insufficient to cover the full value of the Deutsche debt. As I have, however, already hinted at the outset of this judgment, one unusual feature of the present case at least so far as the experience of examinership petitions is concerned is that an agreement had already been put in place in December 2016 (“the 2016 agreement”) by the parties to provide for the orderly disposal of certain key assets for the purposes of the reduction of the Deutsche debt and, ultimately, to address the unsustainable nature of the companies’ debt by providing at the conclusion of that process for a form of debt write-down. It is next necessary to describe the nature of that agreement.
The 2016 Agreement
10. The 2016 agreement provided for the refinancing of certain core assets and the orderly disposal of other non-core assets and, critically, the assignment by the Deutsche of any residual debt to a Barrett nominee for the nominal consideration of €100. The 2016 agreement thus effectively provides for a mechanism of effectively writing down the Deutsche debt once certain assets were disposed of and the proceeds transferred to Deutsche.
11. In this period the Barrett Group have re-financed the Deutsche debt in relation to the Scotch Hall Shopping Centre and has sold assets including the D Hotel and a site in Waterford City to repay part of the Deutsche debt. The aggregate sum repaid to Deutsche from the re-finance and realisation of these assets is just under €38m.
12. There is no doubt but that the settlement agreement (which was executed on 22nd December 2016) was arrived at after lengthy deliberations and each side was represented by professional advisers of the highest calibre. Clause 5 of the 2016 agreement provided for what was described as a consensual sales programme, including the sale of ML Meyrick. By virtue of clause 5.1 of the agreement the companies irrevocably undertook “to effect the consensual disposal of all non-core assets as soon as practicable after the date of this agreement” and, in any event, no later than 31 October 2017.
13. In that regard it should be noted that clause 5.2 of the 2016 agreement provided that:
“each of the Meyrick Companies hereby irrevocably and unconditionally undertakes to the Bank that it will use best endeavours to have in place executed and legally valid, binding and enforceable agreements (to include a contract for sale in respect of the freehold and leasehold interests of the Meyrick Companies in the Meyrick Hotel together with a business transfer agreement relating thereto) for the sale of the Meyrick Hotel (and the associated trade on a going concern and vacant possession basis) to Shinebur Limited for a consideration of not less than €16,700,000 (the ‘Meyrick sale’) as soon as practicable after signing this agreement.”
14. Clause 5.3 provided that the companies irrevocably undertook to remit the net sales proceeds of each of the non-core assets into a nominated account in reduction of the Deutsche facilities. Under clause 5.6 the parties agreed to cooperate and act in good faith with each other with regard to the operation of clause 5.
15. Between January and August 2017, there was further extensive correspondence between Deutsche and Mr. Barrett regarding the sale of the non-core assets, the details of which need not trouble us. Mr. Barrett indicated that he wanted to advance a proposal for the refinancing of non-core assets. Deutsche was concerned at the delay, particularly in relation to the sale of the Meyrick Hotel, and, in a letter of February 2017, it objected to Mr. Barrett’s marketing for refinancing of non-core assets, as it contended that this was likely to have an adverse effect on value. In June 2017 Deutsche rejected a refinancing proposal, again expressing concern that Mr. Barrett was marketing assets for refinancing, without its consent. It was at this time that Mr Barrett raised an additional – and, it would seem, previously unanticipated – taxation issue concerning the sale of the Meyrick Hotel, since there was reason to believe that the company would have to suffer a large VAT clawback in the event that the hotel asset itself was sold separately.
16. By August 2017 matters had deteriorated to the point where Deutsche was accusing Mr. Barrett of not acting in good faith to complete the consensual sales programme and reserved its right to appoint a receiver to effect a sale of the non-core assets. On 17th August 2017 Deutsche stated it would appoint a receiver to the non-core assets under the 2016 agreement. On 18th August 2017 Shane McCarthy of KPMG was appointed by Deutsche as receiver of certain assets of several of the companies. The present petition for the appointment of an examiner was presented to Meenan J. on the following day.
The jurisdiction to appoint an examiner under Part 10 of the 2014 Act: whether there is a reasonable prospect of the company as a going concern
17. The first question which this Court must consider is whether the companies themselves (or any of them) have a reasonable prospect of survival in the event that that an examiner is appointed. This is a key jurisdictional proviso, because it is clear from the provisions of s. 509(2) of the 2014 Act that the court is positively precluded from appointing an examiner unless this pre-condition is satisfied. This is not only clear from the statutory wording (“..the court shall not make an order this section….”), but this point had, in any event, been confirmed by the Supreme Court in several key cases in relation to the corresponding provisions of the earlier 1990 Act: see, e.g., Re Gallium Ltd. [2009] IESC 9, [2009] 2 ILRM 11 and Re Tivway Ltd. [2010] IESC 11, [2010] 3 IR 49.
18. Under s. 509 of the 2014 Act an examiner may be appointed to a company where: (i) the company is, or is likely to be, unable to pay its debts; (ii) no resolution for the winding-up of the company subsists and no order has been made for the winding up of the company; and (iii) the Court is satisfied that there is a reasonable prospect of the survival of the company and the whole or any part of its undertaking as a going concern. It is accepted that the first two conditions have been satisfied in the present case: the dispute here concerns the question of whether the companies can show that they have a reasonable prospect of survival as a going concern.
19. Section 517 provides for the appointment of an examiner to a “related company”, under conditions which include the Court’s satisfaction that there is a reasonable prospect of the survival of that related company, and the whole or any part of its undertaking, as a going concern (s. 517(3)).
20. What constitutes a reasonable prospect of survival as a going concern for this purpose? As Murray C.J. explained in Re Vantive Holdings Ltd. (No.1) [2009] IESC 68, [2010] 2 I.L.R.M. 156, 172-173:
“In order to be satisfied that a company has a reasonable prospect of survival as a going concern the Court must have before it sufficient evidence or material which will permit it to arrive at such a conclusion on the basis of an objective appraisal of that evidence or material. Mere assertions on behalf of a petitioner that a company has a reasonable prospect of survival as a going concern cannot be given significant weight unless it is supported by an objective appraisal of the circumstances of the company concerned and an objective rationale as to the manner in which the company can be reasonably expected to overcome the insolvency in which it finds itself and survive as a going concern.
The opinion of the independent accountant as set out in the report which a petitioner is required to provide to the Court under the provisions of the Act, must be given due weight. Again, the weight to be attached to the accountant’s opinion will depend on the degree and extent to which he supports that opinion by his or her own objective reasoning and the appraisal of material or factors relied upon for reaching his or her conclusions.
Since, the court may not make an order appointing an examiner unless it is satisfied that there is a reasonable prospect of the survival of the company as a going concern, it follows that there is an onus on the appellant to satisfy the court that such a reasonable prospect exists. The applicant must provide objective evidence to satisfy the court of this fact. Examinership is a process designed to facilitate the rescue or survival of companies in financial difficulties. Whether the appointment of an examiner is supported by creditors of the company and the extent and reasons for that support is a relevant consideration but not determinative in considering whether there is a reasonable prospect of survival.
It is not necessary, at the stage of application for the appointment of the examiner to show that the company will probably survive…”
21. To this one may add the comments of Clarke J. in Re McSweeney Dispensers Ltd. [2011] IEHC 494 that in practical terms what a court needs to be satisfied is “that there is some realistic prospect of an investor being prepared to put up enough money to generate a scheme of arrangement which might arguably avoid any unfair prejudice” to the secured creditor.
22. In the High Court O’Connor J. observed that he was sceptical “that each and every one of the companies will secure such investment and that a proposed scheme of arrangement will emerge that can improve on the settlement agreement.” This seems to have been a factor which weighed heavily with him, since he refused to make an order for examinership in the case of four of the petitioning companies.
23. For my part, I take a different view of this question. It is clear that the trading companies are potentially viable in their right, provided that the enormous legacy debt can be written down. If these companies are potentially viable, the same can be of the various property companies (and the holding company, Kitty Hall) whose financial health is itself entirely dependent on the viability of the trading companies. Indeed, I might break off here to observe that at the hearing none of the parties seriously disputed that the seven petitioning companies should be treated differently for the purpose of appointing an examiner: there was either a reasonable prospect of success in the case of all the petitioning companies or in none of them.
24. Writing down debt is, of course, a legitimate – and, some might say, in many instances, an inevitable – feature of the examinership process, provided, of course, that any scheme of arrangement involves proposals which are “not fairly prejudicial to the interests of any interested party”: see s. 542(4)(b)(ii) of the 2004 Act and the comments of O’Donnell J. in Re McInerney Homes Ltd. [2011] IESC 31 and those of Clarke J. in McSweeney Dispensers. As Baker J. put it in Re Regan Developments Ltd. [2017] IEHC 156:
“There is nothing in principle wrong with a scheme of arrangement which might have the effect that debt, whether secured or unsecured, is refinanced, subject to the overriding requirement that the scheme of arrangement must be one which does not unfairly prejudice the creditors or class of creditors. A refinancing on more advantageous terms can have an impact on the prospects for the survival of a company and its enterprise, and is often a factor explored by an examiner.”
25. It is clear from the reports of the independent expert and, indeed, the report of the interim examiner of 25th September 2017 (which was supplied without objection to this Court) that the trading companies may be capable of generating sufficient cash which would be sufficient to remunerate capital and to service loans, provided, of course – and it is an admittedly critical proviso – that the debt was written down sufficiently and that this could be done in a manner which was not unfair to the owner of that debt, Deutsche. Both the independent expert and the interim examiner have expressed confidence in the capacity of these companies to survive should an appropriate scheme of arrangement be ultimately put in place.
26. While counsel for Deutsche, Mr. Gallagher S.C., was critical of what he submitted were various omissions and errors in the report of the independent expert which – or so the argument ran – undermined its utility and cogency, there was no expert report from Deutsche such as might have undermined the general thesis of the petitioning companies, namely, that they had a reasonable prospect of survival as going concerns provided that the legacy debt could be written down. Deutsche have also made it clear that it was intended that the receiver which it appointed was going to operate as a trading receiver, i.e., to permit the companies to continue to trade pending asset sales and possible re-structuring. As Clarke J. observed in McSweeney Dispensers, this in itself a strong indicator of the existence of a reasonable prospect of survival as absent special or unusual circumstances, it seems unlikely that “a bank would favour a trading receivership where the bank did not consider that the company had a reasonable prospect of survival.”
27. To all of this one may add that the various testimonials exhibited in the High Court from employees, trade creditors and others all attest to the fact that both the G Hotel and the Meyrck Hotel are well run and well known hotels in Galway. The Eye Cinema is itself an important cinematic venue in Galway city and its nine theatres cater for both popular and art house cinema taste alike. The interim examiner has further confirmed that the companies enjoy strong support from trade creditors and suppliers alike and he has further informed the Court that Niche, Style City, Radical and Mono Trading are all trading successfully with cash surpluses which are “in excess of the projections for the protection period to date.”
28. It is true that all of this is contingent in the present case on the existence of potential investors who are prepared to inject sufficient capital into some or all of these companies. The interim examiner supplied both the High Court and this Court with a list of 17 potential investors who had expressed interest in some or all of these companies, all bar one of whom had signed the non-disclosure agreement and who had been given the information memorandum. None of the potential investors have withdrawn interest even though the investment process has been temporarily suspended pending an appeal to this Court.
29. At this juncture it would be premature to express a view as to what might materialise, save to say that these developments cannot be viewed as otherwise than promising. One must accept, of course, the possibility that no satisfactory offers will come to hand and, if so, any examinership process would thereby end in failure. As, moreover, I have already observed, the High Court cannot confirm the scheme of arrangement unless it is satisfied that it is fair to all classes of creditors, not least, in this instance, the rights and interests of Deutsche.
Conclusions in respect of the reasonable prospect of survival as a going concern issue
30. Summing up, therefore, on this point, I consider that in the light of all of these considerations that the statutory test of reasonable prospect of survival as a going concern has been satisfied so far as all of these petitioning companies are concerned. Insofar as O’Connor J. took a different view in the case of ELAU, Niche Hotels, Style City Ltd. and Radical Properties, I find myself in respectful disagreement with this conclusion.
31. For all of the reasons I have already expressed, I think that having regard to the facts of this case the Court is at this stage at least faced with what amounts to a binary choice, namely, that either all of the petitioning companies have a reasonable prospect of survival or that none of them do so. For the reasons which I have already set out I am of the view that the statutory test has been satisfied in the case of all of the petitioning companies.
32. Even if this jurisdictional threshold has been satisfied, Deutsche argue that this Court nonetheless should not exercise its discretion to appoint an examiner by reason of the existence of the prior settlement agreement. It is accordingly necessary next to consider the issue of discretion regarding the appointment of an examiner.
The discretionary nature of the jurisdiction to appoint an examiner
33. The language of s. 509(1) of the 2014 Act is admittedly permissive in nature (“…may appoint an examiner…”). Indeed, the contrast between the discretionary character of this language and the positive prohibition contained in s. 509(2)(“…shall not…”) simply underscores the discretionary character of s. 509(1).This very point was made by Fennelly J. in Re Gallium Ltd. [2009] IESC 8, [2011] 2 I.L.R.M. 11, 21:
“A petitioner does not, by getting over that threshold, acquire a right to have an order made. I still think it is fair to say that the section confers a “wide discretion” on the court, or alternatively, that the court should take account of all the circumstances. The establishment of a reasonable prospect of the survival merely triggers the power, which remains discretionary.” (emphasis supplied)
34. There are, of course, cases where the court might refuse on discretionary grounds to appoint an examiner even where the jurisdictional threshold prescribed by s. 509(2) of the 2014 Act has been satisfied. These include cases where there has been a manifest fraud on the creditor: see, e.g., Re Missford Ltd.[2010] IEHC 11, [2010] 3 I.R. 755. There may also be other cases, for example, where the very act of appointing an examiner might have the effect of frustrating a sale of assets by a receiver for the benefit of a secured creditor which was otherwise just on the point of completion. In such circumstances the appointment of an examiner might well be regarded as unfairly prejudicial.
35. In view, however, of the statutory requirement contained in s. 512(4) of the 2014 Act to the effect that a petition for examinership must be presented within three days of the appointment of a receiver, in practice the main prejudice to a secured creditor is generally like to be brought about by the inevitable delays and postponement of debt while the company remains under court protection (s. 520) and the often burdensome costs associated with examinership. Inasmuch as Deutsche will be prejudiced by the appointment of an examiner, it will be by reason of the costs associated with examinership as well, doubtless, by the fact that the companies will remain under court protection during the relevant statutory period.
36. It is clear, therefore, that while the discretion is a broad one, but the exercise of that discretion will normally be measured against the underlying objective of the examinership system, namely, that of rescuing potentially viable enterprises and protecting employment, so that the potentially prejudicial effects of debt postponement and the extra costs associated with the examinership process will rarely in themselves be dispositive so far as the exercise of discretion is concerned. Accordingly, it remains true to say that, as I put the matter in Re Pelko Holdings Ltd. [2014] IEHC 226:
“…..in the vast majority of cases the courts have exercised the jurisdiction to appoint an examiner where these threshold requirements have been met. This is doubtless because of the public policy imperative of endeavouring to save as many viable outlets and businesses as possible. Yet it is equally clear that the court has a discretion not to make an order where creditors have been defrauded and where no real prejudice would otherwise be caused to the employees (Re Missford Ltd. [2010] IEHC 11) or where there has been a lack of candour on the part of the petitioner (Re Wogans (Drogheda) Ltd., High Court, 7th May 1992, Re Belohn Ltd. (No.2) [2013] IEHC 157, [2013] 2 I.L.R.M. 407). Nevertheless, the overall tendency of the courts has been to appoint examiners in the light of these policy objectives: [see] Re Traffic Group Ltd. [2007] IEHC 445, [2008] 3 IR 253, 261…..”
37. Against this background, how, then, should this discretion be exercised in the present case? Several grounds have been advanced as to why the court should not on discretionary grounds make an order providing for the appointment of an examiner. First, it is said that the examinership petition is tainted by an improper motive on the part of Mr. Barrett and, specifically, that it is all part of a stratagem on his part to retain control some or all of these companies. Second, it is suggested that there was material non-disclosure on the part of Mr. Barrett when moving the initial ex parte application before Meenan J. on 19th August 2017. Third, Deutsche point to the inevitable delays and costs associated with the examinership process. Fourth, it is said that it would amount to an abuse of process on the part of the companies to apply for examinership in the face of the binding agreement of December 2016 whereby the creditor and the debtors agreed a mechanism for resolving the debt issue and that, in any event, given the importance of the courts upholding settlement agreements, the Court should refuse in such circumstances to appoint an examiner on discretionary grounds. It is probably fair to say that it was the latter argument which was the one which was pressed most vigorously at the hearing before this Court on 26th September 2017. I propose now to consider each of these arguments in turn.
38. Before doing so, however, it is necessary to observe that abuse of process operates independently of any statutory matrix, since this a fundamental and judicially-created doctrine designed to maintain control of the court system and its processes. The control of court process may ultimately be viewed as an inherent feature of the courts’ duty to uphold the integrity of the administration of justice in accordance with the judicial mandate prescribed by Article 34.1 of the Constitution. In strictness, therefore, this duty accordingly operates independently of any discretion conferred by s. 509(1) of the 2014 Act, although, of course, any question of actual or potential abuse of process in practice also has a bearing on the exercise of that discretion.
Mr. Barrett’s motives
39. There seems to be little doubt but that one of the reasons why Mr. Barrett has now elected to present this petition is to seek to preserve his control over the petitioning companies. In the light of the difficulties that subsequently emerged in relation to a potentially large VAT clawback, along with a potential capital gains tax liability in the event that the Meryck Hotel were to be sold, he appears now to have concluded that the 2016 agreement was not perhaps as advantageous to him and his companies as he might first have thought. Put bluntly, he seems to have concluded that examinership now seemed a better option than the 2016 agreement.
40. It must be stressed, of course, that the present petition concerns an application to the High Court to request it to exercise a statutory discretion conferred by an Act of the Oireachtas. There is, admittedly, some authority for the proposition that even in the case of a judicial exercise of a statutory power, the motives of the applicant may nonetheless be relevant if the object of the proceedings is to ensure that the statutory power is exercised for collateral or even improper purposes.
41. Thus, for example, in Leen v. Aer Rianta [2003] 4 IR 394 – a case where the applicant had sought a planning injunction pursuant to s. 160 of the Planning and Development Act 2000 – McKechnie J. considered that the motives of the applicant were relevant to the exercise of his discretion as to whether to grant mandatory relief against the respondent. The essential complaint in that case was that a particular building in Shannon Airport was being operated in a manner contrary to the terms of its planning permission. McKechnie J. nonetheless considered it relevant that the applicant’s real motive did not concern the planning status of Shannon Airport at all, but rather that the proceedings were simply an opportunistic vehicle whereby he could make it difficult for the Airport to operate, thereby advancing his real objective, which was to prevent or hinder the use of these transport facilities by US troops on their way to theatres of war in Afghanistan and Iraq respectively. One can find similar traces of a potential abuse of rights/good faith doctrine in other s. 160 cases, such as where developers have the invoked s. 160 process in order to prevent or delay their competitors finishing other developments which might be in competition with the applicants’ own projects: see, e.g., the comments of O’Sullivan J. in Altara Developments Ltd. v. Ventola Ltd. [2005] IEHC 312.
42. The decision of the Supreme Court in Re Bula Ltd. [1990] 1 I.R. 440 is perhaps even more germane. In that case a particular company, Munster Base Metals Ltd. (“MBM”) had secured a judgment against Bula Ltd. which was itself hopelessly insolvent. MBM then proceeded to register a judgment mortgage against certain properties of Bula thereby becoming a secured creditor in the process. The other secured creditors sought to forestall this by applying to the High Court to have Bula wound up. In these special circumstances the Supreme Court held that the presentation of the petition was abusive in that the conduct of the secured creditors was tainted by their improper motives of seeking to defeat MBM’s status as a secured creditor as distinct from seeking to recover the banks’ debts: see [1990] 1 I.R. 440, 447, per McCarthy J.
43. In my view, however, it is unnecessary to explore for present purpose the extent to which – if at all – there is a general abuse of rights doctrine in our law or the extent to which motive can be relevant to the exercise of statutory power such as in the present case. This is because so because in the first instance it was the companies – and not Mr. Barrett – who were the petitioners. But even if the subjective motives of Mr. Barrett can be ascribed to the companies (a point on which it is unnecessary to express any view) and even if Mr. Barrett was indeed principally actuated by the motive of ensuring that he and his family retained control of his companies, this could not be regarded as objective collateral to the entire examinership process. It is true that, as Clarke J. observed in Re Traffic Group, the principal object of the examinership system is to rescue otherwise viable enterprises – thereby safeguarding employment and the general economic welfare of the community in the process – and not to protect shareholders from the consequences of poor business decisions. But the Oireachtas is not so naïve as to believe that the examinership process is triggered for purely altruistic motives by disinterested petitioners who are simply anxious to save the jobs of employees or to protect the general economic welfare of the community. It is to be expected instead that all those involved in the examinership process – whether it be the directors of insolvent companies, unsecured trade creditors or secured credit institutions such as banks – will all be actuated by the ordinary commercial instincts of making a profit and avoiding a loss. This is all part and parcel of the ordinary commercial and business life.
44. It is, perhaps, possible to envisage circumstances where the examinership process was indeed triggered for an improper purpose, such as, for example, where the process was initiated in a spiteful and malicious fashion for the sole and exclusive purpose of damaging a business rival. Indeed, the decision of the Supreme Court in Bula may well be regarded as an example of where an application for a winding-up was improperly made for the purpose of disadvantaging a rival creditor. By definition, however, the facts of such a case would have to be exceptional. It is, in any event, unnecessary, to consider this question any further because nothing of the kind arises in the present case.
45. Baker J. took a similar view of this question in her judgment in Re Regan Developments Ltd. [2017] IEHC 156 where she rejected the argument that the fact that the owners of the petitioning companies wished to retain family ownership of at least some of the business was itself evidence of some ulterior or improper motive. In any event, as she observed, the wishes and expectations of the family could not be:
“…central to the considerations of the examiner who must engage with the financial difficulties facing these companies in the light of reasonably available investments and restructuring, and in the context of the statutory role.”
46. I entirely agree with this analysis which is readily applicable to the present case. It is sufficient to say, therefore, that even if Mr. Barrett was prompted by his anxiety to retain control of the companies, this could not in itself be regarded as an improper motive which was relevant to the exercise of a judicial discretion as to whether to appoint an examiner under s. 509(1) of the 2014 Act.
The allegation of on-disclosure
47. It is clear that there is a duty of utmost good faith on both petitioner and independent expert in the preparation and presentation of the petition and in the preparation of the independent expert report. Such an obligation is inherent in any ex parte application (see, e.g., The State (Vozza) v. Ó Floinn [1957] I.R. 227, 251 per Kingsmill Moore J.) and this is also true of the examinership process as well (see, e.g., Re Wogans (Drogheda) Ltd. (No.3), High Court, 9th February 1993; Re Bookfinders Ltd. [2014] IEHC 769). In any event, s. 518 of the 2014 Act expressly imposes such an obligation of utmost good faith on both the petitioner and the independent expert.
48. So far as the allegation of non-disclosure is concerned, Deutsche contend that there was material non-disclosure in the following respects
(a) Mr Barrett failed to disclose his significant personal liabilities to the Bank and those of Talebury (a related company) and the security granted by them.
(b) It was not disclosed that the Bank agreed to the majority of the requested amendments to the settlement agreement, which included an increased provision of funding for Head Office expenses and the redemption of some of Mr Barrett’s existing director’s loans.
(c) It was not disclosed that, although the settlement agreement provided for a long-stop date for the re-financing of core assets , the Bank acceded to a request for an extension, enabling the core assets to be refinanced.
(d) There was a failure to disclose that the settlement agreement provided significant benefits to the companies and to Mr Barrett, which cannot be replicated through an examinership process, including effectively limiting the Bank’s recourse to the secured assets, with the possibility of the release of certain secured assets.
(e) It was not disclosed that the Bank had agreed to assign any residual debt (which inevitably will be substantial) to a nominee of Mr Barrett for nominal consideration, thereby effectively eliminating the Bank as a secured lender.
(f) The fact that there was nothing more than an oral and uncertain offer to refinance the Meyrick Hotel was not disclosed.
(g) It was also (wrongly) suggested that there was an obligation on the Bank to engage in dialogue with Mr Barrett regarding the sale of the Meyrick Hotel, which suggestion was contrary to the provisions of clause 5.2.
49. In his judgment O’Connor J. said that he considered that:
“… the petitioners should have been more forthcoming about the considerable latitude already given by Deutsche and could have engaged with Deutsche in advance of the petition to obtain Deutsche’s view and assurances about preserving jobs. The primary motivation of Mr. Barrett and his companies to retain control was not alluded to specifically.”
50. The judge added that that there was a lack of candour on the part of the petitioners and that the breach of s. 518 of the 2014 Act (the good faith obligation) was not saved by an application of a proportionality test.
51. Some of these suggested omissions cannot be regarded as material or relevant. Thus, for example, the fact that Deutsche may have agreed to the majority of Mr. Barrett’s requests in respect of the draft settlement agreement is immaterial, given that what the parties agreed counted was the agreement itself. The fact that the Bank agreed to an extension of the long stop date (thereby facilitating re-financing) is at most a detail in the context of the overall agreement. While O’Connor J. considered that the failure to allude to Mr. Barrett’s motivation in presenting the petitions on behalf of the companies to be the most material omission of all, yet for the reasons set out elsewhere in this judgment, I do not, with respect, consider that the issue of motive of the petitioning companies was a dispositive, at least so far as the present case is concerned.
52. But beyond all of this it is clear that in a highly complex matter such as the present application, the essential features of the history of the inter-action between the parties were fully disclosed to Meenan J., not least if all due allowances are made for the exigencies of the situation having regard to the urgent and out of hours nature of the ex parte application, It is clear from the transcript of the digital audio recording of that hearing before Meenan J. that counsel for the petitioner was at all times acutely conscious of his obligations to make proper disclosure to the Court and to alert the judge to possible or potential arguments which Deutsche might be expected to make if the matter were later to proceed to an inter-partes hearing. It is only fair to record that in the course of the appeal hearing Deutsche fully acknowledged that counsel for the petitioners had fully discharged that professional duty before Meenan J.
53. The petition which was presented to the High Court was itself a relatively lengthy document. It was accompanied by verifying affidavits along with detailed exhibits. Critically, however, the 2016 agreement was exhibited, along with some – admittedly not all – of the extensive correspondence which had been exchanged between the parties in the wake of that settlement. It would, of course, be difficult for any judge to absorb all the details and nuances of a highly commercial dispute of this in the course of even an extended ex parte hearing such as the present one. In the aftermath of such hearings it is almost always possible to point to the existence of other issues which might with advantage have been explored at greater length or in respect of other arguments might have raised.
54. Taken in the round, therefore, it is nonetheless clear that the substance of the dispute and the issues likely to be raised were fairly disclosed to Meenan J, at that ex parte hearing, I would accordingly reject the argument that there was a lack of candour or failure to make proper disclosure.
Whether the court should decline to appoint an examiner by reason of the prior settlement agreement
55. The principal argument advanced by Deutsche regarding the exercise of the discretion argument is that the parties had already entered into what amounted to a freely negotiated scheme of arrangement to address the legacy debt issue by reason of the provisions of the December 2016 agreement. It submits that in these circumstances the Court should not, in effect, permit the companies to walk away from that agreement through the mechanism of the examinership process simply because that agreement is no longer perceived to be quite as advantageous as had been previously thought, whether by reason of the subsequent emergence of the VAT clawback issue and capital gains tax liability in relation to the potential sale of the Meyrick Hotel on a stand alone basis in the manner provided for by that agreement or otherwise. It points to the importance which the courts routinely attach to settlement agreements of this kind.
56. There is no doubt but that in this respect Deutsche have raised a very important and weighty point. As I indicated at the outset of this judgment, the fact that – with one possible exception – this precise issue does not appear to have featured in the otherwise extensive examinership jurisprudence is perhaps somewhat surprising. The issue is, however, squarely presented by these appeals and cross-appeals. One of the reasons why this issue is so troubling is that the Court is effectively faced with a clash of important policy values, namely, the importance of upholding settlement agreements on the one hand and the effective operation of the examinership process as embodied in the 2014 Act on the other. It does not seem possible – at least so far as the present case is concerned – to achieve a resolution of these issues without at least to some degree compromising one or other of these principles.
57. The importance of upholding settlement agreements is obvious and does not require any real elaboration. This was recognised by O’Connor J. in his judgment in the High Court as a ground for refusing the appointment of an examiner on discretionary grounds:
“Applications for the appointment of examiners should not be encouraged by professionals or the Court to undermine the terms of debt settlement agreements for groups of companies or to initiate renegotiations of such agreements.”
58. The decision of Baker J. in Re JJ Red Holdings Ltd. [2016] IEHC 524 is, however, perhaps the only other case to date where this question has been explored in the context of the examinership process. In JJ Red Holdings the petitioning company was a tenant which had ran up substantial arrears of rent. The landlord’s interest was then acquired by a new investor, who then sought to forfeit the lease. This prompted a spate of litigation, which was compromised with the tenant agreeing to pay a reduced sum in respect of arrears, an acknowledgement of the passing rent, and various provisions in relation to enforcement. Baker J. held that in these circumstances the presentation of the examinership petition by the company amounted to an abuse of process. She said:
“I consider that In re Vantive Holdings (No. 2) [2010] 2 I.R. 118 is authority, not merely for the propositions that there not be successive unexplained and unjustified petitions seeking the protection of the court in respect of the same company, but also that if the presentation of the petition has the effect of re-opening an issue between parties which had already been determined that it may be an abuse of process to permit that to happen.” (emphasis supplied)
59. Baker J. went on to comment that a court would have cause for concern if the sole purpose of examinership were to protect shareholders. If it were:
“to protect the company from being required to perform obligations freely, and [the landlord] says irresponsibly, entered into only three weeks before the petition was presented, then the motive for the presentation of the petition could be seen as one by which the company seeks to avoid those obligations and is less focused on the protection of the enterprise than on a desire to reschedule or renegotiate that agreement.”
60. With great respect to Baker J., I fear I cannot agree with her reasoning in this case. It is true that in Vantive Holdings (No.2) the Supreme Court held that the presentation of a second examinership petition amounted to an abuse of process. But that was in a context of where the petitioner had omitted key information in the first unsuccessful petition for examinership. It is clear from the Supreme Court judgments that the Court considered it necessarily implicit in the statutory scheme that an applicant for examinership would normally put the entirety of its case in the first petition and not litigate in a piecemeal fashion. Viewed thus, Vantive Holdings (No.2) can be regarded as a classic example of what is sometimes described as litigation misconduct.
61. Contrary to what O’Connor J. suggested in the present case and what Baker J. said in JJ Red Holdings, I do not think that the presentation of an examinership petition in the face of a prior settlement or agreement can in itself be regarded as an abuse of process properly so called, since the petition was presented for entirely proper motives and objectives. If, however, the existence of such a settlement agreement were to operate as either precluding the presentation of a petition on the one hand or as justifying on discretionary grounds the non-appointment of an examiner on the other, it could only be by reason of what amounted to a contractual commitment on the part of the petitioning company that it would not seek to have an examiner appointed.
62. In considering this question it is first necessary to examine whether the 2016 agreement precluded the companies from the presenting the petition in the first instance. It is only in the event that the 2016 agreement did not have this effect that it will then be necessary to go to consider the question of whether the court should, in any event, decline to exercise its discretion to appoint an examiner by reason of the existence of the prior agreement.
Whether the 2016 agreement precludes an application for examinership
63. For my part, I do not consider that the 2016 agreement has the effect of precluding an application for examinership. First, it does not seek positively in terms to exclude or to prevent applications for examinership, although it might have sought to do so. Indeed, clause 1(j)(ii) of the 2016 agreement contemplates that this might occur, since it provides that an application for examinership is to be regarded as a “terminating event” which would in principle entitle the Bank to terminate the agreement. Second, great emphasis was laid by the Bank on the wording of clause 2.4 whereby the companies agreed “not to take any legal action of any nature….against the Bank in respect of the total liabilities or in connection with the loan documents.” (emphasis supplied) Yet, as Murray C.J. made clear in Vantive Holdings (No.2), an application for examinership cannot be regarded as inter partes litigation of the traditional kind, so that such an application cannot be regarded as an action against the Bank as such.
64. There is, of course, in any event, a constitutional right of access to the courts: see, e.g., Macauley v. Minister for Posts and Telegraphs [1966] I.R. 345. Given the importance of that right, it would be necessary to ensure that any exclusion of that right by contract would have to be done in the clearest of terms. Moreover, as Finlay Geoghegan J. observed in her judgment in Treasury Holdings v. National Asset Management Agency [2012] IEHC 297, for such a contractual waiver of the constitutional right of access to the courts to be effective, it would, in the words of Walsh J. in Murphy v. Stewart [1973] I.R. 97, be necessary to show that the companies “had a clear knowledge of what [they were] doing and with that knowledge, deliberately and freely decided to make such a surrender or waiver.”
65. In Treasury Holdings one of the issues was whether an agreement not to contest the validity of the appointment of a receiver. Applying Murphy v. Stewart principles, Finlay Geoghegan J. then observed:
“As the non-contest undertaking may constitute a waiver or surrender of Treasury’s right of access to the courts to challenge the decision appointing receivers, it appears to me that to be enforceable the Court must be satisfied that Treasury had knowledge of what it was doing and freely decided to make such waiver.”
66. Applying these principles here, it seems to me that even if it were to be accepted (contrary to my view) that the 2016 agreement excluded the companies’ statutory right to apply for examinership, it would also have been necessary to show that such a right of access to the courts had been waived with full knowledge on the part of these self-same companies for such a clause to be effective. Deutsche has not, to my mind, advanced evidence such as would have enabled this Court to be so satisfied as to the existence of any such waiver.
67. In these circumstances it is unnecessary to explore any wider questions which might be thought to arise, such as, for example, whether a company can validly contract out of its right to apply for examinership. That issue was not directly before the Court and it would be inappropriate in these circumstances to express any view on this question.
Is the fact that an application for examinership would be inconsistent with the performance of the 2016 agreement a relevant factor which the court should weigh in exercising its discretion whether to appoint an examiner under s. 509(1) of the 2014 Act?
68. Even if the 2016 agreement did not have the effect of excluding the right of the petitioning companies to apply for examinership, a related question is whether by reason of the existence of that settlement agreement this Court should decline on discretionary grounds to make an order appointing an examiner in this case in view of the general importance of upholding agreements of this kind.
69. It must first be accepted that, as Deutsche strongly argue, examinership would be inconsistent with the orderly and timely performance of the companies’ obligations under the 2016 agreement. Instead of a consensual disposal of various assets for the benefit of Deutsche by reference to an agreed time-table, the process is thereby changed to a court-supervised process with a somewhat different time-frame. The entire process involves a consideration of the rights of third parties such as unsecured trade creditors and employees and it may ultimately involve a scheme of arrangement which cuts across key provisions of the 2016 agreement. Most fundamentally of all, the process is transformed from the realm of contract involving two parties to a judicial process governed by Part 10 of the 2014 Act.
70. Is this fact, then, a relevant consideration which the court should take account in considering whether to exercise the discretion to appoint an examiner conferred by s. 509(1) of the 2014 Act?
71. In assessing this issue, it must be recalled that the courts must ensure that the effective operation of Part 10 of the 2014 Act is not stultified. It is, perhaps, easy to overlook the fact that the 2014 Act is, in many respects, quite radical in its method of operation. While lawyers and judges alike frequently speak of the importance of upholding contracts and consensual agreements, no one will get very far with an examinership system if this principle – which is otherwise of first importance in the operation of the rest of the legal system – were to be applied rigidly within the confines of Part 10 of the 2014 Act.
72. The system of examinership contained in Part 10 of the 2014 Act involves in the first instance debt postponement during the currency of the examinership period and the court protection thereby entailed (ss. 520 and 521) and, in the event that a scheme of arrangement is judicially approved under s. 541, this will inevitably involve debt abatement, debt restructuring and debt write-offs as part of any such scheme. After all, the entire premise of the scheme of arrangement provisions of s. 541 is that some or all classes of creditors will suffer debt impairment as part of the end result of the examinership process. The very act of the confirmation of the scheme of arrangement in turn entails a significant variation – and, in some instances, the effective destruction – by judicial decision of a variety of contracts, loan agreements and debentures, all of which contain the obligation – many expressed in solemn form – to pay or to repay money in a timely fashion.
73. In passing I might observe that none of this is to offer any view as to whether any scheme of arrangement will, if proposed, ultimately receive judicial approval under s. 541. The requirement, however, contained in s. 542(4)(b)(ii) of the 2014 Act that any such proposal must be fair to all classes of creditors is the ultimate statutory safeguard for creditors such as Deutsche. At that hearing, it will be able to point to the fact to a range of factors such as that it is the owner of significant debt, to its existing security, the agreement of 2016 coupled with the fact that its appointment of a receiver was overtaken by the appointment of an interim examiner along with such other factors as it may wish to marshal in support of its argument that any such proposed scheme would be unfair to it. I stress again that it would, of course, be entirely premature to offer a view on any of these arguments: I mention this point simply to observe that the statutory requirement that any such proposal must be fair to all classes of creditors is the ultimate safeguard for creditors such as Deutsche.
74. Returning now to the issue at hand, for my part, however, I do not think that the comments of Baker J. in JJ Red Holdings can be taken quite literally so far as the rest of the examinership system is concerned. Take the following not untypical example: let us suppose that company A sues company B for €2m. Company B disputes the debt on a variety of grounds and is perhaps even partially successful in defending the proceedings, so that the High Court ultimately gives judgment against company B for €1.5m. Company B realises immediately that it cannot survive if it has to pay this debt, but it is clear that it otherwise has a viable business if the debt is partially written-off or otherwise re-structured. Is to be suggested that company B could not successfully apply to have an examiner appointed merely because the examinership could only be successful if a High Court judgment for a money sum was somehow varied, negated or set aside in any proposed scheme of arrangement that it might ultimately be proposed under s. 539 of the 2014 Act? That question answers itself, because if it were to be answered otherwise than in the negative, it would mean that examinership system envisaged by the 2014 Act simply could not function effectively.
75. Against that background it seems to me that it is all a question of degree. Take the present case: if Deutsche had sued the companies to recover the legacy debt, could it matter for examinership purposes that the companies had acknowledged the debt in correspondence or that they had submitted to judgment or, indeed, purported to dispute the debt in judicial proceedings before judgment was ultimately entered against them following a judicial determination? Again, all these questions must in principle also be answered in the negative if the examinership system is to work at all.
76. It is true that the present case there was an express agreement as to how the debt issue would be addressed and nor do I overlook the fact that the agreement had been freely entered into by both parties in recent months. It is clear that the companies gained valuable time as a result of this agreement and that some of the Barrett Group companies who are not the subject of the petition successfully re-financed during this period. It is also true that it could be contended that an application for examinership would be inconsistent not only with the performance of that agreement in good faith as required by clause 5.6 of the 2016 agreement, but also with many other features of that agreement.
77. Yet even if all of this is so, much the same could also have been said if, for example, the 2016 agreement provided for a debt re-financing agreement with a promise by the companies to repay a particular sum by a given date. Neither the fact that the companies would have benefited from such an arrangement nor the existence of an agreement to repay debt by a given date could be regarded as precluding the companies from either applying for examinership in the first instance or justifying a court not appointing an examiner on discretionary grounds.
78. Measured, therefore, against the statutory objectives of Part 10 of the 2014 Act, I can accordingly see no real difference in principle between the two types of contractual agreements so far as the appointment of an examiner is concerned. Of course, it may be said that such an application for examinership is inconsistent with prior contractual agreements and commitments on the part of the petitioning company or companies, but, as I have already sought to explain, this is true almost by definition of every application for examinership.
79. Putting this another way, I cannot find anything in the 2014 Act which enables a court considering an application for examinership to distinguish between the inevitable breach of a loan agreement (with, for example, a promise to repay a loan by a given date) on the one hand and a breach of the obligations contained in a debt settlement agreement regarding the orderly disposal of assets for debt reduction purposes on the other. One cannot really beautify by fancy words or nice phrases that which for some – and for secured lenders in particular – must be an unpalatable feature of the examinership process, namely, that it involves the judicial variation and dishonouring of all types of commercial contracts.
80. The fact, therefore, that an application for examinership would be inconsistent with the performance of the obligations imposed on a company under the terms of a settlement agreement cannot in itself – and I stress these words – be a dispositive consideration for a court determining whether to appoint an examiner under s. 509(1) of the 2014 Act, precisely because the entire examinership system is premised on the assumption that pre-existing commercial contracts (of whatever kind) will be overridden, varied, negated and dishonoured in the wider public interest of rescuing an otherwise potentially viable company.
81. Once it is accepted that these companies have a reasonable prospect of survival as going concerns if admitted to the examinership process, then the existence of a prior debt settlement is not in itself a reason to refuse to appoint an examiner on discretionary grounds. Some may think that desirable that debt settlement agreements of this kind should fall outside the scope of Part 10 of the 2014 Act since the very possibility of examinership at a later date may well be thought to undermine the clear public policy objective of encouraging and facilitating the resolution of disputes by the parties themselves. I will merely say that if this case is considered to have to exposed a weakness in the manner in which the examinership system can operate that is ultimately a matter of policy for the Oireachtas to address.
Conclusions
82. Summing up, therefore, I am of the view that the:
83. First, the companies have demonstrated that they have a reasonable prospect of survival as going concerns in the sense envisaged by the Supreme Court in Re Vantive Holdings. As the reports of the independent expert and, indeed, the report of the interim examiner of 25th September 2017 demonstrate the trading companies are well capable of generating sufficient cash which would be sufficient to remunerate capital and to service loans, provided, of course – and it is an admittedly critical proviso – that the debt was written down sufficiently and that this could be done in a manner which was not unfair to the owner of that debt, Deutsche. Both the independent expert and the interim examiner have expressed confidence in the capacity of these companies to survive should an appropriate scheme of arrangement be ultimately put in place. The prospects of survival of the other companies stand or fall with the prospects of survival of the trading companies.
84. Second, for all the reasons set out in the judgment I do not think that there was any lack of candor or failure to make appropriate disclosure when moving the original ex parte application before Meenan J.
85. Third, the fact Mr. Barrett may subjectively wish to retain control or some of the assets of his group is not a material consideration so far as the exercise of the s. 509 discretion is concerned.
86. Fourth, while it is true that the present application for examinership is inconsistent with the performance of the obligations imposed on the companies under the terms of the 2016 settlement , this fact cannot in itself – and I stress these words – be a dispositive consideration for a court determining whether to appoint an examiner under s. 509(1) of the 2014 Act, precisely because the entire examinership system is premised on the assumption that pre-existing commercial contracts (of whatever kind) will be overridden, varied, negated and dishonoured in the wider public interest of rescuing an otherwise potentially viable company. None of this, of course, is to express any view whatever as to whether any scheme of arrangement (if one should be proposed) should ultimately be confirmed: it is simply to say that the existence of the present 2016 debt settlement arrangement cannot in itself preclude the appointment of an examiner, whether on some ex ante basis on the one hand or as to the exercise of discretion on the other.
87. It follows, therefore, I would appoint an examiner to all of the petitioning companies pursuant to s. 509(1) of the 2014 Act. I would accordingly allow the appeals of the companies and dismiss the cross-appeal of Deutsche.