Commencement
Step One Permanent Solutions & Companies Acts
[2015] IEHC 284 (06 May 2015)
JUDGMENT of Ms. Justice Baker delivered on the 6th day of May, 2015
1. Application was made pursuant to s. 2(1) of the Companies (Amendment) Act 1990 by Petition presented on 20th April, 1015, for the appointment of an Examiner to this company which is opposed by the Revenue Commissioners. Following the initial ex parte application to me, at which the appointment of a provisional examiner was not sought, directions were given in regard to service and advertisements and Revenue is the sole creditor having an interest in the matter which has voiced opposition to the appointment. The matter proceeded on affidavit evidence on Thursday 30th April 2015 and a number of affidavits have been served on behalf of each party.
Background facts
2. The company is a recruitment company and specialises in the provision of temporary skilled and unskilled employees to a number of sectors, primarily the industrial and catering sectors in a number of spheres including State and private hospitals and other institutional customers. The company was incorporated on the 14th February, 2011 and some time later in October 2011 it took over the business of AGC Temps Ireland Limited, a company was then in liquidation, and avers it gave valuable consideration for that purchase.
3. The company employs 16 permanent members of staff, and up to 400 persons on a temporary basis, and while the company is the employer of those persons it does not directly engage them to work but offers their services to its clients in the hospitality and other service industries. Of significance to the matter before me is that it is the company that is responsible for collecting PAYE and PRSI from its temporary employees, and for passing this onto Revenue. The company takes payment from its clients in respect of each of the persons made available by it for the business of those clients, and the company accordingly charges VAT on invoices to these clients.
4. The company has incurred very substantial revenue debts, both in the form of the VAT that it itself has levied, and the PAYE and PRSI deducted from and payable on behalf of its temporary and permanent employees.
5. The company has its registered office at Unit 1, Block 2, Tallaght Retail Centre, Belgard Road, Tallaght, Dublin 24, described in the Petition as a deprived area of Dublin and the Petition asserts that the loss to that local economy were the company to be wound up would be detrimental to the area.
6. The company is owned as to 99.55% by Julian Smith, who swore three affidavits in the Petition, his grounding affidavit of the 24th March, 2015, a replying affidavit of the 22nd April, 2015 and his second replying affidavit of the 29th April, 2015. The balance of the shareholding is held by the other director Douglas Memery, a young man who is full time student and who plays little or no role in the company. The undisputed evidence of Revenue would suggest that in the course of a Revenue audit Mr Memery showed little or no knowledge of the operation of the company or of its day to day trading or financial status.
7. The company was profitable in the years ended 31st December, 2011, and 31st December, 2012, but it became loss making thereafter and made significant losses in the year ended 31st December, 2014. The affidavit evidence suggests that the company has been profitable for the first three months of this financial year. The company had a turnover of €2.05 million in 2011, and €8.19 million in the 2014.
8. The company is insolvent. The amount of its current liabilities is somewhat less than clear, and for present purposes I note that the estimated statement of affairs prepared as an appendix to the independent accountant’s report (the “IAR”) of Terry Noone shows liabilities of €2.84 million, net assets of €1.7 million, showing a net deficit of €1.14 million. The main asset of the company is its debtor’s book with a value of over €2 million, representing the amount due by its clients in respect of the temporary employees placed through the recruitment process. Its main funding is provided through a company Close Brothers which provides a finance facility on an invoice discount basis, and it has a floating charge over these book debts. In broad terms, one reason identified for the cash flow pressures that the company experiences arises from the time its takes for its clients to pay, an average of 92 days, and the fact that the invoice discounting is available only in respect of 75% of those invoices, subject to a maximum of €1 million.
9. The company has significant historic and ongoing Revenue liabilities, the historic liabilities at 31st October, 2014 being approximately €934,574 which was reduced by €502,247 as a result of an agreed monthly instalment arrangement. However the company has continued to fall into arrears of current Revenue liabilities, and Revenue has in recent weeks sought the repayment of current taxes in full together with payment of the historic debt. Total Revenue liability is stated in the Petition to be €1,312,575 as at 31st December, 2014. The amount of Revenue liability was in dispute at the hearing but it is not doubted that the Revenue liability is considerable and comprises both current and historic elements.
10. The company is acknowledged to be significantly under funded in capital terms, and it is asserted that the absence of a stable financial base is the reason for its current insolvent state. The company also blames the general downturn in the economy, particularly with regard to the cuts in funding of the HSE and other State bodies, which has resulted in significant downward price pressure and the consequent drop in margins. The company also accepts that there has been a deficit in the management of the company, but says that this has been rectified in particular by the putting in place of an arrangement for the preparation of monthly management accounts.
11. Finally, the company asserts that it has a dependable and blue chip client base including the HSE, most Dublin hospitals, and other large commercial companies. Trading projections up to the 31st December, 2015 contained in the IAR suggest that the company will trade profitably in the current financial year and particular emphasis is placed on the fact that the HSE in particular has in place a freeze on the increase in persons employed full time by that organisation which has the direct effect that that body has a need for temporary part time and full time staff which can be provided by the company.
The IAR
12. Mr Noone has expressed a view, having assessed the likely return from creditors and the other factors mentioned in his report, including the position of employees, that an attempt to continue in whole or in part the undertaking of the company is likely to be more advantageous to the members and the creditors of the company and those employees. He has concluded that the company taken as a whole or in part has a reasonable prospect of survival as a going concern and he makes this assessment based on the happening of certain conditions or events as follows:-
a) A restructuring of the invoice finance, in particular to provide more than €1 million in such finance which is the limit of the current facility.
b) Control of the company by implementing more stringent management requirements.
c) The acceptance of a scheme of arrangement by creditors and members to be approved by the High Court
13. Mr Smith in his affidavit is confident these conditions can be met and deposes to the fact that negotiations are ongoing with Close Brothers and with other possible interested parties with a view to making additional or further capital provision and/or direct equity investment.
The attitude of Revenue
14. Revenue opposes the appointment of an Examiner for the following reasons:-
a) That the company does not have a reasonable prospect of survival, and in particular it points to the fact that the company has used its Revenue liability as a form of bank, or “bank of last resort” and that no concrete proposal has been put in place to change its business model
b) That pursuant to s. 4A of the Companies Amendment Act 1990 the court should decline to hear the Petition, as it is asserted that the petitioner has failed to disclose material information and failed to exercise utmost good faith
c) That the court should in the alternative refuse to exercise its wide discretion to grant relief on the grounds that the principals of the company have carried on the existing business of the company with scant regard for their obligations at law, whether under company law, to the Revenue Commissioners under Revenue law and/or to their employees.
d) The Revenue also make a specific argument that the company is a de facto phoenix company, and that the same persons own or have an interest in the undertaking of the company as was previously owned or operated by the company AGC Temps which went into liquidation in 2001 with Revenue debts of over €1.3 million.
The legislative context
15. Section 2(1) of the Companies (Amendment) Act 1990 (as amended) provides for application to the court for the appointment of an examiner in the case of an insolvent company where on application the Petitioner can satisfy the court that there is a reasonable prospect of survival, either in whole or in part. The purpose of the examinership process is to create a period of court protection for such an insolvent company within which the prospects of rescue can be explored and suitable adjustments made, or capital raised, to facilitate its survival.
16. This application to appoint an examiner was made on notice, and the petition was grounded on an affidavit which exhibited an independent accountant’s report (IAR) prepared on the 24th March, 2015 by Terry Noone. Mr Noone’s qualifications and experience in the field are not in doubt. The company by resolution of the 24th March, 2014 at which both of its two members attended and voted resolved by way of special resolution to petition the High Court for the appointment of an examiner, and that Martin Ferris be asked to act as Examiner of the company. The signed consent of Mr Ferris to so act dated 23rd March, 2015 is annexed to the IAR.
17. While Revenue has argued in the course of the hearing of the petition that this company has no reasonable prospect of survival, its counsel has accepted that prima facie at least it is difficult for the court to so conclude at this stage, as offers of investment have no yet crystallised and the various restructuring and adjustment proposals suggested in the IAR have not yet been fully examined in the context of a survival model. Counsel in essence accepts that while the statutory test requires a petitioner to show that a company has a reasonable prospect of survival, that the scheme of the legislation envisages cases where an adjustment might offer prospects for the survival of the company whether in whole or in part.
18. Both counsel accept that the law is as stated by Fennelly J. in re Gallium Limited [2009] IESC 8, namely that the question of whether a company has reasonable prospect of survival is a threshold question, but a petitioner “does not by getting over that threshold, require a right to have an order made”. Fennelly J. made it clear that the section confers a wide discretion on the court, or as he put it in the alternative, that the court should take account of all of the circumstances.
“The establishment of a reasonable prospect of the survival merely triggers the power, which remains discretionary.”
19. The IAR asserts at para. 1.38 the general proposition that the problems of the company are largely as a result of the long term capital financing or equity. The IAR expressed a view that the company has a “robust business model” and expects an increase in turnover arising from what is perceived to be improved market conditions Trading in the first three months of this year have confirmed a projected increase in turnover of 18% when compared with that of last year. It is also suggested that the HSE is likely to continue its freeze on taking on permanent full time staff and that the company is hopeful of succeeding in tendering for HSE work this year. Somewhat elusively the IAR suggests at para. 1.64 that “management” is confident that an increase in turnover and future expansion is achievable.
20. Notwithstanding what I perceive to be some degree of perhaps misplaced optimism, and noting as I do that the prospect of survival is based on a hope that the company will be successful in future tender processes and also noting the fact that the percentage of the company’s business which is attributable to the HSE has fallen from 30% in 2013 to 16% in 2014, I note that a company has been in discussion with a prospective equity investor, and that its current provider of invoice discounting finance is supportive of the process and has said that the invoice finance facility will remain in place in favour of a restructured company, I am satisfied, and take some guidance from this in the approach of counsel for Revenue, that the contents of the IAR suggests that this company has a reasonable prospect of survival.
Discretion
21. It is accepted by counsel for the company that the court has a wide discretion in considering the petition once the initial threshold is crossed, and it is thus established that the company has a reasonable prospect of survival. The broad nature of this discretion was explained by Fennelly J. in re Gallium Limited where at para. 48 he pointed to the fact that the court had to take account “of all relevant interests”, that the range of interests to be taken into account is not limited and that these interests include the members as a whole, the creditors as a whole and the interests of employees.
22. Revenue opposition to this petition is primarily focused on an argument that the court should exercise its discretion under the legislation and refuse to appoint an examiner. The source of discretion is twofold: that the court has a wide discretion is identified by Fennelly J. in re Gallium Limited (noted above) and highlighted in a number of cases. By way of example Murray C.J. in re Vantive Holdings [2009] IESC 68 made the following comment:-
“The fact, if established, that there is a reasonable prospect of survival of the company does not lead automatically to the appointment of the Examiner. It merely triggers the power. The court retains a broad discretion. The court may consider whether one or more creditors will suffer prejudice as a result of the appointment of an Examiner. The interests of the employees of the company and of employment generally may also be relevant….. It is not possible to envisage every circumstance which may bear on the exercise of the court’s discretion. The above are but a number of examples.”
23. The other source of discretion is contained in s. 4A of the Act of 1990 as inserted by s. 13 of the Companies (Amendment) (No. 2) Act 1999.
24. While some overlap may be found in the individual application of these discretionary elements I will deal with the arguments advanced in respect of each heading separately.
Broad discretion of the court
25. As noted, the discretion of the court allows it to take into account the interests of the members, the creditors and the employees. This court has two members only, one of whom, Mr Smith, is the petitioning member and has the bulk of the shareholding comprising 99.55%. The other member has not taken any part. The company is hopelessly insolvent. These members have made relatively little investment in the company, and the only identified investment is a sum of approximately €110,000 advanced by way of a director’s loan by Mr Smith to the company and subsequently converted to equity. The other director has made no financial input.
26. The primary creditors of the company are the Revenue Commissioners and Close Brothers, its finance provider. Close Brothers is secured fully against the book debts of the company and is not likely to suffer any loss on an examinership or indeed on a liquidation. The precise nature of the finance arrangement with Close has not been identified nor has any documentation evidencing that relationship been exhibited. However I have been informed that Close has the power to appoint a receiver over the book debts, as one would expect it to have, and it also has the contractual entitlement to a termination payment of a figure in the region of €100,000. Revenue is the creditor which will lose substantially either in a liquidation or examinership and its interests must be taken into account.
27. The other body the interest of which must be taken into account are the employees. The company employs sixteen full time employees and their positions are directly at risk. The other employees who might be described as being “on the books” of the company “number up to 400” at any one time and these are the persons whose services are provided to the clients of the company. It is their interests which have been the main focus of the argument before me.
28. Counsel for the Revenue relies on the judgment of Kelly J. in re Missford Limited [2010] IEHC 1414 and seeks to characterise the directors of the company as “delinquent directors”, the term coined by Kelly J. in that case. She points to the fact that the directors of this company have failed both historically and currently to meet their Revenue liabilities, and that these liabilities are of a significant scale. The IAR acknowledged that the company has been using Revenue as “a banker of last resort”, and as a consequence Revenue will account for 95% of the creditors likely to be impaired in examinership. I note that the IAR at para. 1.44 points to the fact that a typical invoice raised by the company will usually include 34% payable to the Revenue Commissioners. The company admits wrongdoing and admits that its increased turnover has meant a corresponding increase in Revenue liabilities which necessitated two separate instalment arrangements, the second of which has now failed.
29. I accept the argument by counsel for the Revenue that in the light of the dicta from Fennelly J. in Gallium that “it is natural that the creditors will have the greatest interest in the future if any of the company” does mandate me to give particular weight to the objections of Revenue in this application. I accept what is said by counsel for the company, however, that Revenue is not entirely correct in suggesting that no company law enforcement mechanism is available or can be directed to be considered by the court in an examinership and he points me to the power of the court contained in s. 19 that an examiner may be required to prepare a report for the court in relation to alleged irregularities in the management of the company, and that an examiner may have vested in him by the court the a power under s. 9(4) to make a report to the ODCE. I reject his suggestion however that I should at this stage take account of the fact that any attempt by the ODCE, or indeed by a liquidator should the examinership process fail, is likely not to result in any substantial improvement in the cash position of the company as the two directors are not a “mark”. I also pause to note the apology contained in para. 12 of the affidavit of Julian Smith sworn on 22nd day of April, 2015, and to comment that an apology while welcome, does not take from what seems to me to be considerable mismanagement of this company’s finances, and a considerable disregard on the obligations on the part of the company to make Revenue returns.
30. I note too that application under s. 297 of the Companies Act is one that may be brought by a liquidator and not by an examiner, and overall I am of the view that the enforcement powers or powers to call directors to account are more robust in the case of a liquidation than in examinership.
31. Both counsel rely on the judgment in the case of Star Elm Frames Limited, the Revenue points me to the ex tempore judgment of Charlton J. of the 4th November, 2013 where he refused the appointment of an Examiner in the exercise of his discretion in the case of a company which had not returned to Revenue VAT which it had collected in a period of approximately one year. That judgment was appealed to the Supreme Court, and the evidence before the court had changed somewhat before the judgment of Laffoy J. was delivered on the 10th December, 2013, [2013] IESC 57. She accepted that the case was a “borderline” case but that an examiner should be appointed. She did so on the basis of a different factual picture than that presented to the High Court and made no remark critical of the decision of Charlton J., which was made on the evidence before him. The Supreme Court in the exercise of its discretion, and having taken the view that it was 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”, and noting that no creditor had opposed the appointment of an examiner, and that Revenue in particular was not opposing the appointment, although it had expressed “significant concerns in relation to the evidence”.
32. I note the factors while influenced Laffoy J. in this decision and summarise them as follows:-
a) The “particular relevance” that no creditor had opposed the appointment of an examiner.
b) The major creditors had signified support for the petition.
c) It was reasonable to conclude that an examinership would be more advantageous than a winding up.
d) The interests of the company’s 31 employees favoured continuing the protection of the court.
e) The interim examinership had been in place for two months and a considerable amount of work had been done in examining the affairs of the company in that time
f) The overall picture indicated the continuance of the protection as least prejudicial to the interested parties.
33. This clear statement of the discretionary factors operating in that case informs me in my decision. In essence the only relevant creditor opposes this petition and I must give weight to that opposition. The IAR, and the report furnished by Revenue from Baker Tilly by way of analysis, suggests that the company may survive if restructuring and further finance and capitalisation is available. The evidence before me suggests that the company has virtually for the entire of its existence failed to make VAT returns or returns of its employees, PAYE and PRSI. The failure of the directors has, it seems to me, amounted to gross misconduct and that factor must weigh in my discretion, and the elements found by Laffoy J., and noted at (a) and (b) above are not found.
34. However, one factor, namely the position of the permanent and temporary employees of the company bears further comment and I turn now to consider whether and to what extent the position of the employees guides my discretion, and whether documents of the company which seeks to protect some or all of these jobs displaces the concerns now identified by me and which would suggest that I ought to exercise my discretion against the appointment of an examiner.
35. The company as stated employs 16 permanent employees and up to 400 temporary employees who while they are directly employed by the company from the point of view of the payment of their wages, and the collection of PAYE and PRSI on their behalf, actually work in the service industries already identified. The position of employees in the context of an application for examinership has been examined in a number of cases. Clarke J. in re Traffic Group Limited [2008] 3 IR 253 points to the wider context of examinership as follows:-
“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.”
36. A similar approach is found in Irish Car Rentals Limited [2000] IEHC 235, an ex tempore judgment of Clarke J., where he noted that there were a significant number of jobs at stake and that it would be “disproportionate to take a risk with those jobs” when in the balancing of those jobs and the fact that an enterprise appeared to be viable, tipped any balance against any potential wrongdoing. He took the view that the report prepared by the Examiner should be submitted to the ODCE and that:-
“It seems to me any possible wrongdoing can best be dealt with through that means rather than using same as a basis for declining to approve which action would have the necessary consequence of costing a significant amount of jobs.”
37. Both Irish Car Rentals Limited and re Traffic Group Limited arose in the context of an application to approve a scheme of arrangement which in each case was approved. In each case the evidence was clear-cut that the company had a real prospect of survival in the light of the scheme. Notwithstanding that the considerations of Clarke J. in both of these cases arose at a different stage in the process, and when the court was seeking to balance certain discretionary factors, including the position of employees, against a known prospect of survival, it seems to me that my discretion must properly be exercised by taking into account the concerns of employees as identified by him in these judgments.
38. I accept then that the interests of the employees is a factor which must guide by my discretion, and in that regard I note the large number of employees involved, if one takes in to account both the full time permanent staff and the temporary agency staff on the books of the company. For the purpose of the exercise I accept that the 16 permanent employees are likely to lose their jobs, but I note in passing that even at this early stage in the process the IAR suggests that some of these permanent employees are likely to lose their jobs, and one identified “strategic direction” contained at appendix F of that Report suggested the need to “control the size and cost of the sales in customer teams associated with the business leading to a reduction in overheads”. That sentence it seems to me is suggestive of an anticipated loss of some of the permanent jobs in any survival plan, as is the suggestion at part 2 of that appendix that running costs could be reduced by automation which would “reduce the need for many of the admin staff in the areas of recruitment support, finance and accommodation software”. I regard the IAR as suggestive of some pessimism with regard to the possibility of retaining all of the 16 full time jobs even if the company survives the examinership process in whole or in part.
39. I note too the particular context in which the 400 agency staff are employed by the company, namely that the clients of the company are either not prepared to, nor in a financial position to, employee full time staff and those clients seek to employ agency staff for reasons of flexibility if the service is seasonal, and it is not desired to incur the financial and other costs of taking on full time staff. If the assumption that the IAR is correct that there has been some upturn in the economy, and that demand for the services of the agency recruitment sector is likely to increase, then, it seems to me that the temporary employees of the company are likely to find a place on the books of another recruitment company. I accept what counsel for the company says that there may not be a smooth transition by some or all of these employees onto the books of another company and that some of the employees will struggle to get jobs. It must be recalled however that while the company is the employer of these agency staff these persons de facto work in another company and probably, although this has not been clearly stated, in another part of Dublin, the suggestion therefore that the loss of employment will be felt particularly in Tallaght where the registered office of the company is situate may not be realistic or accurate in fact, and the employees may live in any part of Dublin, or indeed outside of Dublin.
40. I am of the view that because the company does not directly engage the actual services offered by the individual temporary employees that the factor identified by Clarke J. in Traffic Group Limited, namely that these jobs be preserved for the benefit of the community, is not a true concern in this case, and if there is demand for these service workers, whether skilled or unskilled, in the industries which they now serve, then that demand will be met either by the direct temporary employment of those staff in those enterprises or through other recruitment agencies. This is borne out, to my mind, by the fact that this company acquired the recruitment business of the company AGC Limited when that company, with the same or similar business model, took over and purchased from the liquidator some or all of the client base of that company when it went into liquidation. This it seems to me that the evidence points to the fact that the recruitment business itself is one which is flexible, where considerable turnover is achieved as is shown from the figures of the company in recent years, and where these staff are likely to find a place on the books of other agencies.
41. The position of the 16 permanent employees is different however but I cannot fail to recognise the difficulty created for these employees by the failure of the company to return to Revenue the PAYE and PRSI collected on their behalf. This may, I am told, have consequences for them should they be made redundant, or otherwise lose their jobs, and they will have to prove the deduction of the relevant PRSI in particular in any application for future pension entitlements and/or social protection schemes. In my view the company did not offer a sufficiently robust protection to these employees and, while I accept that I must have their interests in mind in exercising my discretion, the fact of the company’s failure to protect their interest arising in their employment is a factor that weighs against the appointment of an Examiner.
42. Thus it seems to me that the factors weighing in my discretion point me to refuse the relief.
Section 4A of the Act of 1990
43. Counsel for the Revenue also points me to the provisions of s. 4A of the Act of 1990 as inserted by the Act of 1999 and contends that I ought not to hear the petition having regard to what she describes as material non disclosure to the court and/or that the petitioner has failed to exercise utmost good faith.
44. Counsel for the company points me to the fact that no case has been identified where the court has refused to hear a petition pursuant to its powers under s. 4A of the Act of 1990. This of course does not mean that a court has not refused to hear a petition on the grounds of non-disclosure and many such judgments might not have come to be reported. I accept his argument however that it is for Revenue to show a failure on the part of the petitioner to disclose material information and/or to act in the utmost good faith. For that reason I turn first to examine the arguments of Revenue with regard to non-disclosure.
45. Revenue argues that the petition fails to disclose the significant overlap between the personnel which owned and operated the company AGC Temps Ireland Limited, now in voluntary liquidation, and in respect of which Garrett McCarthy was appointed Liquidator on the 17th November, 2011. Mr McCarthy has sworn an affidavit on the 17th April, 2015 at the request of Revenue.
46. One particular person with regard to whom Revenue argues I ought to have concern is Sean Finnegan, the Managing Director of AGC from its incorporation until the date of liquidation, and who was involved actively in the day to day operation of the business and a sales representative for that company. AGC was a recruitment agency providing temporary staff placements for a wide range of companies and a variety of business sectors, and its business was broadly speaking the same as that in which the company now engages.
47. I am also asked to note the involvement of Emmett Memery and I will return below to his role in either or both companies.
48. Julian Smith, the main shareholder and one of the two directors of the petitioning company, and who has sworn four affidavits in support of the petition, was a director of AGC from the 16th February, 2010 to the 1st September, 2011, although he remained as an employee of the company until the date of liquidation. He resigned as director some six weeks before the liquidation, but it is pointed out that the B10 was not filed in the CRO until the 26th October, 2011. He was actively involved in the day-to-day operations of the business and in business development.
49. AGC was wound up in the context of significant and ongoing liabilities to Revenue. The liquidator in his report confirms that this comprised PAYE, PRSI of €700,000 and VAT of €600,000, both figures expressed by me here in round figures. The total Revenue liability was €1.3 million at the date of liquidation.
50. Step One was incorporated in February 2011 and its promoters and initial directors and controllers were Sean Finnegan and Laura Finnegan, the directors and shareholders of AGC. They stepped down from that role on the 1st September, 2011 and Julian Smith became a director of Step One, and resigned as a director of AGC, although as noted above the B10 was filed later. All of the employees of AGC were transferred to Step One Permanent, which according to the liquidator “in effect took over the role of AGC as provider of the services”. The liquidator confirms in his affidavit that he did not receive payment in the sum of €311,000 identified in the petition as being the amount paid by the company to AGC for its goodwill.
51. Both Sean Finnegan and his wife Laura Finnegan are restricted directors following order of the High Court made on the 23rd June, 2014. On the 3rd November, 2014 the court declined to make a declaration of restriction against Mr Smith.
52. Revenue points me first to the overlap of personnel between AGC and the petitioning company, and describes the petitioning company as a “phoenix company” in the context of the overlap of personnel and the fact that there seems to have been a seamless transfer of the goodwill from the company in liquidation to the petitioning company. As this characterisation is more properly one confined to its strict definition in s.4 of the Companies (Amendment) Act 1990 that characterisation was not continued through the hearing, but Revenue do persist in the contention that the overlap in the “cast of characters” and the failure to disclose the true extent of those who have a beneficial interest in the company is a matter of concern.
53. Paragraph 9 of the petition makes express reference to the acquisition of the goodwill of AGC Temps Ireland and the payment of the sum of €311,000. It is pleaded that Julian Smith resigned as director of AGC Temps in September 2011, when he discovered that “the managing director had not been providing him with accurate information about the creditors of that company” and in particular with regard to ongoing and historic Revenue liabilities. It is pleaded that Mr Smith “was not aware of these hidden debts” when the company acquired the goodwill of AGC. Catherine Shivnan of Revenue in her second affidavit in these proceedings sworn on the 27th April, 2015 exhibits the affidavit and pleadings in High Court proceedings record number 2013/737OP between Julian Smith & Douglas Memery, plaintiffs v. Sean Finnegan and Laura Finnegan, defendants in which injunctive relief was sought by the plaintiffs, inter alia, restraining the defendants from holding an EGM of the petitioning company and/or from removing or purporting to remove the plaintiffs therein as directors of that company. Julian Smith in a grounding affidavit in those proceedings on the 17th July, 2013, at para. 4 avers that he spent his time as in his role of employee of AGC Temps “involved in cash collection and dealing with the Revenue Commissioners and the County Sheriff”. At para. 9 he identified an agreement between the defendants and the plaintiffs that Step One would take over the staff and goodwill of AGC Temps and in that context Mr and Mrs Finnegan would transfer their interest in the company to him and the other director and shareholder in the percentages agreed. Paragraph 9 of this affidavit has particular a resonance for Revenue and I quote it in full:-
“It was at all times intended that the first defendant [Sean Finnegan] would continue to act as a consultant to the Company [Step One]. It was therefore further agreed between the parties that 30% of the shares in the company would be held in trust for the defendants on condition that the first defendant secured €100,000 worth of new business for the company per annum.”
54. Later in his affidavit at para. 15 he identified what he described as “a serious issue to be tried in these proceedings regarding the ownership of the shares of the company.”
55. Revenue points to the fact that Mr Finnegan is a disqualified director and that the affidavit evidence in the exhibited proceedings point to him having a shareholding or a beneficial interest in the petitioning company, and that it can be discerned from this that Mr Finnegan is in effect seeking to avoid the limitations imposed by him by the High Court by indirectly being involved in the petitioning company.
56. Some argument was had in the course of the hearing before me as to the admissibility of the affidavit of Julian Smith sworn in those chancery proceedings, but I see no reason why the discrepancy between the averments contained in one should not be noted for the purposes of consideration of the question of material non-disclosure. It is not sought to rely on the affidavit in the other proceedings by way of proof of certain facts, but more by way of pointing to certain discrepancies to which I might have regard. Accordingly I accept that Revenue have raised a question with regard to non-disclosure of the role of Mr Finnegan, a restricted director, and with regard to the true ownership of the shares in the petitioning company.
57. Mr Smith in his last affidavit sworn on the 29th April, 2015 responds to the suggestion of failure to disclose the true beneficial ownership of the company by saying that: –
“As far as I am concerned Mr Finnegan failed to secure €100,000 worth of new business for the Company and therefore he is not entitled to any shareholdings.”
In other words, he says if Mr Finnegan was not entitled to any shareholding in the Company there was no “beneficial interest” to conceal.
58. I do not consider that the failure to disclose comes down merely to the failure to disclose whether or not Mr Finnegan has a beneficial interest or has a claim to a beneficial interest in the petitioning company. It is not my role to make a determination on that question here. I do however regard it as relevant to my consideration that Mr Finnegan continued to have at least potentially a claim or an equity in the company after AGC was liquidated and that the attempt to wholly distance the new company from Mr Finnegan, and ipso facto the old company, in para. 9 of the petition fails to truly identify the connection between the two companies, and the significant, and in my view relevant, overlap in personnel. It matters not to my mind that Mr Finnegan failed to secure new business, and might thereby not have acquired a beneficial interest in the petitioning company, but what does matter is the averment at para. 9 of the affidavit of Julian Smith sworn in the injunction proceedings that it was at all times intended that Mr Finnegan would continue to act as a consultant to the company. Mr Finnegan was a restricted director and in my view Revenue is correct to raise the argument that he may be using the company to engage in the business in which he previously engaged and that the new arrangement could be seen as an arrangement to conceal his role from creditors.
59. I am also concerned about the fact that para. 9 of the petition contains a clear statement on the part of Mr Smith, supported by his grounding affidavit, that he knew nothing of the Revenue debt in the former company of which he was a director and that this had been concealed from him. The averments in his affidavit in the injunction proceedings which I have referred to above suggest that it was he who dealt with Revenue on a day-to-day basis and that he took on this role from April/May 2011 until he resigned in September 2011. It is noteworthy that precisely the same frailty in the making of Revenue returns was found in AGC Temps as is now apparent, and admitted, by the petitioning company in this case.
60. I note also the plea in the petition that the company paid the sum of €311,000 by way of valuable consideration for the acquisition of the goodwill of AGC. The liquidator of that company in his affidavit at para. 33 says he does not understand how that sum has been calculated and that during his time as liquidator he did not receive a payment of €311,000. Indeed he suggests that the petitioning company paid to him the sum of €210,000 arising from the incorrect collection by the petitioning company of payment due on invoices which actually belonged to AGC and that this sum was paid “ultimately” after he engaged in correspondence with the petitioning company and their legal representatives. I accept what is said in the various affidavits that the precise identity of the owner of the invoices was unclear, and that some confusion arose among clients, but I regard it as significant that the petitioner claims to have paid valuable and substantial consideration for the purchase of the goodwill in the former company and that the liquidator of that company deposes on affidavit that the money was not paid to him. It is not my role to determine where the truth lies, but for present purposes I note and consider that the petitioner gives an incorrect impression of the degree of distance between itself and AGC, and whatever the true calculation with regard to the invoices, and whatever the true payment, if any, that was made by the petitioning company for the acquisition of the goodwill in AGC, the petitioner purports to show a transaction at arm’s length, and a degree of distance between the two companies, which in my view is not borne out by the evidence. The relationship between Julian Smith and AGC Temps Limited and its directors, whether as director, employee, and the directors and shareholders of AGC is opaque and the concerns expressed by Revenue as to the extent and tone of the disclosure are in my view not misplaced.
61. The other element of non-disclosure alleged by Revenue is the failure by the petitioner to correctly identify the role of Emmett Memery in the company. Mr Memery is the father of the other director of the company, Douglas Memery and the affidavit of John Lyons of the Revenue Commissioners points to the fact that on a Revenue audit when Mr Memery jnr was interviewed he had no knowledge of the company’s affairs, of the amount of its turnover, the number of employees, or his responsibilities as a director. He advised that his father had encouraged his involvement with the company. He is a full time student and he is said to be rarely at the business as a result of his college commitments.
62. The Revenue is of the opinion that Emmett Memery is acting as a “shadow director” and that he has received “consultancy fees” which Revenue believes ought to properly be characterised as director’s emoluments and thereby subject to tax and PRSI. The role of Emmett Memery in the company has been contentious in the course of the hearing of the petition. It is accepted by Julian Smith in his second affidavit sworn on the 2nd April, 2015 that Mr Memery has “a degree of expertise which the company has sought to avail of” and that he has been in the normal way engaged as a consultant for the purposes of “strategy sales development”. Mr Emmett Memery was involved in the management of AGC Temps Limited although he was not a director, and no application could have been made by the liquidator in regard to his involvement. A feature of the case however was that in an affidavit of Mr Emmett Memery, sworn on the 16th July, 2013 in the injunction proceedings affidavit tendered by Julian Smith and Douglas Memery, the plaintiffs in those proceedings, he described himself in para. 1 as a “consultant with and de facto director” of Step One. He showed a considerable knowledge of the business of that company. In response to this Julian Smith at para. 3 of his last affidavit in this application sworn on the 29th April, 2015 states “I do not know why Mr Memery describes himself as a de facto director of the company” and goes onto state that he “never regarded him as a director”.
63. Revenue’s concern arises from the fact that it is believed that Emmett Memery obscured the nature of his involvement with the company AGC Limited and has similarly done so with the petitioning company which further shows the overlap in personnel which, it is contended, ought to have been disclosed in the petition. The replying affidavit of Sean Finnegan sworn in the injunction proceedings on the 22nd July, 2013 says that Mr Memery was “most insistent that he not appear as a shareholder in the company, nor could he be a director”. It is said that he was “concerned to hide his involvement in the company from his creditors”. Again I cannot adjudicate on this dispute, nor do I place reliance on any factual conclusion that might be drawn from this affidavit evidence, but the failure on the part of the petitioner to identify the role of Mr Emmett Memery, and it seems to me more especially the failure of the company to regularise his Revenue arrangements following the Revenue audit as conducted in the summer of 2014 is a matter of concern. I appreciate that the audit is ongoing and that para. 6 of the replying affidavit sworn on the 22nd April, 2015 of Julian Smith avers to the fact that he is “surprised” by the suggestion that Mr Memery is an employee and that no notice had been received by the company of this assessment by Revenue, it cannot be doubted that Emmett Memery has played a part in his company, that the liquidator of AGC Temps has engaged with him, in what is described by Garrett McCarthy at para. 28 of his affidavit at a number of “contentious meetings” points to in my view to an obligation on the part of the company to disclose the role of Mr Emmett Memery, and to identify fully that role albeit the true characterisation of it may still be in issue.
64. I consider that there has been a failure to disclose certain material matters, in particular the true involvement of Mr Finnegan and Mr Emmett Memery in the two companies, the true nature of the takeover of the goodwill of AGC by the petitioning company, the true role taken by Emmett Memery, whether as a consultant or director, and the fact that this company is to a large extent, albeit it has a separate legal personality as a matter of law, a continuation of AGC, or there is a sufficient degree of overlap between personnel, to have required full disclosure and the utmost good faith by the company with regard to that involvement and that overlap in the presentation of this petition. The business models of the two companies would seem to be identical, or at least to have thrown up what seems to be an inevitable degree of Revenue liability, and the directors of this company are related by blood to the directors and/or shareholders and/or persons involved in the operation of AGC. In that regard I note that Douglas Memery is the son of Emmett Memery, and that Douglas Memery plays no role in this company, and his role is nominal. Further, Julian Smith the main shareholder who has sworn all of the affidavits is the son of Andrew Smith, who provided funds to AGC in or around November 2009 which were repaid between January 2011 and August 2011 in respect of which proceedings under s. 286 of the Companies Act 1963 were instituted by the liquidator and compromised on consent. The overlap of personnel it seems to me is a significant factor in my consideration of the bona fides of the applicant, and of whether the stewardship of this company has been performed in a manner that now warrants the exercise of my discretion in favour of the appointment of an examiner.
The approach of the court if failure to disclose is shown
65. I am conscious of the dicta of Clarke J. in Irish Car Rental Limited at para. 3.5 where notwithstanding what he described as “wrongdoing potentially disclosed in the Examiner’s report”, he took the view that a degree of proportionality had to be engaged and that in that case he considered it “disproportionate to take a risk with those jobs and that enterprise in balancing those factors against any potential wrongdoing”. I do not consider that the failure to disclose in this case could be characterised as arising from flawed human processes regarded as insignificant by Barrett J. in JD Transpeed Express Portlaois Limited (in examinership) [2014] IEHC 544, relied on by the company, and I note also that Barrett J’s comments were obiter and that he did not on the facts available to him find any breach of the duty of good faith by the directors. Further, I do not regard the dicta of Clarke J. as being particularly helpful having regard to the stage of the process in which he came to consider the consequence of non-disclosure and I have already identified that above. The consequence of non-disclosure in that case had to be balanced against the undoubted identified chance of the company surviving and the jobs being preserved, such that the balance of interests at that stage had swung quite clearly towards the approval of the scheme of arrangement. Similar considerations are implicit in the judgment of Laffoy J. in Star Elm Frames Limited (mentioned above).
66. I am more persuaded by the judgment of O’Flynn Construction v. Carbon Finance Limited [2014] IEHC 458 where Irvine J., albeit she was dealing with an argument of non-disclosure in the context of an ex parte application where the obligation of utmost good faith is at its highest, and I am aware that the imperative of utmost good faith must be said to arise in any application ex parte having regard to the constitutional guarantee of fair procedure identified as relevant to the initial stages of examinership by Hogan J. in re Belohn [2013] IEHC 157. I adopt the dicta of Irvine J. in O’Flynn who stressed the statutory requirements of s. 4A as not merely being good faith but utmost good faith and made the following point:-
“In this regard the behaviour of the petitioner in relation to disclosures is highly relevant. It is not a defence to a failure to exercise the utmost good faith to say that the companies are suitable for the examinership process in any event. Suitability for examinership is a separate issue to the standard of disclosure required both by the nature of an order granted ex parte and the specific statutory requirements under s. 4A of the 1990 Act.”
67. While noting that her comments were made in the context of an application where an examiner had been appointed ex parte, her comments are equally apposite to any application where s. 4A is engaged. The test of utmost good faith and full disclosure are ones which are taken separate from the test applied by the court at the initial stage of the examinership process. The questions of proportionality do indeed come to be engaged, they are more properly speaking questions which are engaged in their separate spheres and separate individual statutory contexts. For that reason it seems to me that the failure of disclosure is a factor which feeds my general discretion under s. 2 to which I now return.
Conclusion
68. I have come to the conclusion that there has been poor stewardship of this company, and that there is a significant overlap with similar failures in AGC, now in liquidation, which overlap was not identified at the initial stages of this application.
69. I am also of the view, and this is a weighty factor in my consideration, that the bulk of the 400 persons who are employed on a temporary basis as agency staff by the petitioning company, while their transition is not likely to be seamless from one employer to the next, are not likely to be lost either to the economy as a whole or to the economy of Tallaght where the petitioning company has its registered offices. These persons do not work for the petitioning company, and will in my view find their way onto the books of other recruiting companies. If the temporary skilled and unskilled services that they provide are in demand then they too will be in demand in what seems to be a very active and growing agency recruitment sector in the economy. This cannot readily be said of the 16 permanent employees, but I consider their positions to have been identified as vulnerable in any event even at this early stage in the examinership process, where talk of “automation” and “reduction in costs” has already been noted by me.
70. I take particular note of the fact that Revenue is the only creditor likely to be affected by the examinership, and as it is the only such creditor, and as it is owed a significant amount of money, its concerns cannot be easily ignored. It is in that context that I consider my discretion as engaged, and also in that context that I consider that the failure to fully disclose the true identify of the personnel involved, whether at an equity level, consultancy level or otherwise, in the management and or ownership or financing of this company comes to have particular resonance. Revenue’s argument may be summarised as saying that this company has used its Revenue liabilities as a bank of last resort, the same complaint is made of the previous company AGC, and a significant overlap has been identified in the personnel of the two companies, which was neither disclosed nor fully explained in the considerable amount of affidavit evidence available at the hearing of this petition.
71. I note that some of the permanent employees were present in court at the hearing of the petition and have considered their obvious concern and distress at the prospects of losing their jobs. However, in my discretion and on the grounds here identified, I decline the petition and refuse to appoint an examiner.
In the Matter of Bookfinders Ltd (in interim examination) & In the Matter of the Companies Act 2014
[2015] IEHC 769 (26 November 2015)
JUDGMENT of Ms. Justice Costello delivered on 26th day of November, 2015.
1. On Friday, 13th November, 2015, the Directors of Bookfinders Limited (“the Company”) having its registered office at 81 Ocean Wave, Salthill, Galway, H91 E2YK, presented a petition seeking an order pursuant to s. 509(1) of the Companies Act 2014 (“the 2014 Act”) admitting the Company to the protection of the High Court together with an order appointing the proposed Examiner to act as Examiner to the Company. The Petitioners also sought an order pursuant to s. 512(7) of the 2014 Act and O.74A, r.6(2) of the Rules of the Superior Courts appointing the proposed Examiner as Examiner to the Company on an interim basis until the hearing of the Petition or such other date as the High Court should deem necessary.
2. On 11th November, 2015, at 12.40 p.m. KBC Bank Ireland plc (“the Bank”) appointed Mr. Shane McCarthy to be the Receiver and Manager of all of the assets comprised in and charged and assigned in its favour pursuant to a mortgage dated 10th April, 2015, containing mortgages, fixed and floating charges and assignments granted by the Company to the Bank’s predecessor, IIC Bank plc.
3. This Court originally fixed Friday, 20th November, 2015, at 11.00 a.m. as the date and time for the hearing of the Petition but by reason of the delays on the part of the Petitioners in serving documents upon, inter alia, the Bank with the consequential delay in the Bank furnishing a replying affidavit to the Petitioners, the matter was adjourned for hearing to 24th November, 2015, at 10.00 a.m.
4. The Petition was opposed by the Bank on the basis that there had been a failure to disclose information available to the Petitioners which was material to the exercise by the Court of its powers under Part 10 of the 2014 Act in both the Petition and in the verifying affidavit of Mr. Alan Bundschu. It was also said that there was a similar failure to disclose information which was material to the exercise by the Court of its powers in the Independent Expert’s Report (“IER”) which was exhibited by Mr. Bundschu. It was said that this amounted to a breach of the terms of s. 518 of the 2014 Act and on this basis the Petition should be dismissed.
5. In the alternative it was argued that the Court cannot be satisfied that the Company has a reasonable prospect of survival on the basis of the evidence that was presented to the Court and therefore the Petition ought to be dismissed.
6. Counsel for the Petitioners, Mr. Mulloy S.C., disputed the fact of, or the degree of, the failure to disclose certain information and stated that there was evidence before the Court to establish that there was a reasonable prospect of the survival of the Company and the whole or any part of its undertaking as a going concern.
Alleged material non-disclosure.
7. Mr. Eoin McGrath, a corporate banking manager of the Bank, identified the following issues which he said were not disclosed to the Court by the Petitioners and which ought to have been disclosed:
• The Petition omitted the material fact that the floating charge over the entire Company and its assets had been converted into a fixed charge on 9th November, 2015, before the presentation of the Petition, though he accepted that the letter was exhibited but no where referred to in either the Petition or the affidavit of Mr. Bundschu.
• The Petition omitted the material fact that the Directors of the Company had personally guaranteed the debts of the Company to the Bank and that those guarantees had been called in. The sum claimed as of 2nd November, 2015, was €3,693,578.52.
• The Petition and the IER suggested that the Directors’ remuneration and the wage bill generally had declined in recent years. The Petitioner glossed over the fact that in 2015 both had increased in absolute terms and that they had both increased in terms of percentage of turnover.
• The IER referred to the secured assets as being solely the Company’s premises in Letterkenny, Co. Donegal. The Company had three other shops which it rented. He pointed out that it was unclear if the Independent Expert was even aware that the floating charge had crystallised.
• The Petition relied upon projections in a report prepared by KPMG made in January, 2015 (based on information provided by the Company) but failed to point out that they were made on the basis of reforms that were never introduced and on the basis of the Petitioner’s own information and that the projections for 2015 had already proven to be in the words of one of the Petitioners “wildly over optimistic”.
• The Petitioners disclosed a valuation of 1st October, 2015, prepared by Sherry Fitzgerald Rainey in respect of the Company’s premises at the Courtyard Shopping Centre, Main Street, Letterkenny, Co. Donegal valuing the premises at €288,450.00. The Petition did not disclose the Report of Charlie Robinson Limited dated 22nd May, 2015, which valued the property as of 22nd May, 2015, at €600,000.00.
8. The IER exhibited by Mr. Bundschu stated that the author relied on information/documentation provided by the Company’s Directors. It noted that turnover declined from a high of €8.8 million in 2007/08 to just under €4.8 million in 2014/15. It stated that the Statement of Affairs of the Company shows excess of liabilities over assets of €2,280,206.00. The majority of the deficit consisted of debts due to the Bank, the Revenue Commissioners and trade creditors generally. The IER stated that the names and addresses of the creditors of the Company were contained in Appendix 3 but when one turns to Appendix 3 not a single creditor is listed. The details of the secured creditors set out in Appendix 4 referred to the Bank and suggested that the Independent Expert believed that the security was confined to the freehold property in Letterkenny, Co. Donegal.
9. At para. 6.1, his Report stated as follows:-
“I have reviewed the shareholders and management projections of the Company and discussed with them the assumptions upon which those projections were prepared. In my opinion the Company would have a reasonable prospect of survival as a going concern subject to the following conditions:
– The acceptance of an appropriate scheme of arrangement by the creditors and the members of the Company and its approval by the High Court.
-The successful completion of negotiations to secure new investment which would guarantee the Company’s future cash requirements.
– A full in-depth review of each site to determine the profitability and/or contribution being made to the fixed costs of the company and the review to highlight any further possible cost savings.”
10. In reply to Mr. McGrath’s affidavit, the second Petitioner, Mr. Mark Bundschu swore an affidavit on 22nd November, 2015, in relation to the complaints that there had been non-disclosure of material information. Mr. Bundschu pointed to the fact that as the Receiver had been appointed at 12.40 p.m. on Wednesday, 11th November, 2015, the Directors had less than two working days in which to present a petition to the High Court on Friday, 13th November, 2015. He said that:-
“this abbreviated timetable, barely two-thirds of the intended duration allotted by the legislation, meant that the Company’s Directors were not as thorough as would have been optimal in ensuring that full and complete details of all information relevant to the Company’s business were set out in the Petition and the Verifying Affidavit”.
11. In relation to the non-disclosure of the notice of conversion of the floating charge to a fixed charge, he conceded that the text of the Petition and the verifying affidavit did not make the scope of the Bank’s security explicitly clear. He said this was not a deliberate omission. He said it arose from the Company’s Directors’ interpretation of the Deed of Appointment. He said the letter of 9th November, 2015, was exhibited in the verifying affidavit.
12. In relation to the non-disclosure of the personal guarantees of the two Petitioners, Mr. Bundschu stated:-
“Following the appointment of the Receiver on 11 November 2015, it is regrettable that in the short time period available, precise distinctions between liquidation, receivership and examinership could not be brought home to the Company’s Directors for Alan Bundschu and myself to fully appreciate, with sufficient force, the nature of our contingent liability as personal guarantors.”
13. He denied that there had been non-disclosure of an increase in wage costs and the Directors’ salaries between 2014 and 2015. The Bank had acknowledged that the increase in the Directors’ salaries had to be considered in the light of the passing of a Director, Ms. Caroline Bundschu, during that period and he pointed out that the Petition and verifying affidavit clearly stated that the salaries were in the process of being cut by the sum of approximately €56,000.00. He stated that the wage increases were set out clearly in para. 16 of the Petition and the verifying affidavit and the increase was attributable to the fact that the Company’s average number of employees increased from 43 to 49 between 2014 and 2015.
14. He said the reason the May, 2015 valuation of the Letterkenny premises was not disclosed was because the Bank itself had objected to a valuation prepared by an expert who was not on the Bank’s panel of valuers. The Directors were of the opinion that the later Sherry Fitzgerald Report superseded the earlier valuation. It is to be inferred that for this reason the earlier Report was not presented to the Court.
15. At para. 31 of his affidavit, Mr. Bundschu stated that the Company’s Directors “believed the KPMG Report to be incomplete, inaccurate, misleading and had an unduly negative outlook for the Company.” This, despite the fact that the Petitioners relied upon the projections for the years 2016 and 2017 set out in the KPMG Report in both the Petition and the verifying affidavit and invited the Court to rely upon them.
Addendum to the IER
16. Mr. Bundschu exhibited what was described as an addendum to the IER made by the Independent Expert. In the Addendum, the Independent Expert stated that he made the amendments to his Report dated 12th November, 2015, to take into account matters that had come to his attention since 12th November, 2015, to 20th November, 2015. He did not explain any further why very significant alterations to his Report were required or how they arose. It is to be inferred that he was of the view that his original Report was incorrect in respect of those items he changed.
17. He stated that the excess of liabilities over assets had changed from €2,280,206.00 to €3,252,977.00, a difference of €972,771.00. The explanation for the very great change is to be found in the new Appendix 1.
18. Appendix 1 set out the Statement of Affairs at 31st October, 2015. Trade debtors were stated to be €398,603. In the new Appendix they were stated to be €120,347. Trade creditors and accruals had been (€215,469) but they were now stated to be (€780,891). Taxation marginally increased and other creditors and accruals went from (€110,000) to (€192,622). This lead to a change in the net asset deficiency from €2,280,206 to €3,252,977.
19. He also made very considerable changes to the critical para. 6.1. He deleted one of the three conditions he identified as necessary for the survival of the Company as a going concern (his condition that there be the successful completion of negotiations to secure new investment which would guarantee the Company’s future cash requirements). He did not explain why this was no longer a condition for the survival of the Company, though the deficit had increased by more than 40%. On the other hand, he added considerably to his list of conditions for the survival of the Company. Section 6 now runs to three pages.
20. He also revised the examinership cash flow forecast. Originally it was for the period November, 2015 to January, 2016. In the Addendum to the IER, the cash flow projections were from 20th November, 2015, to 19th February, 2016. Set out the differences in tabular form:
13th November 2015 23rd November 2015 Difference
Cash Sales
Total Payments
Supplier Payments
€837,131
€954,436
€612,090
€865,495
€858,175
€577,781
€28,364
(€96,261)
(€34,389)
21. There are further discrepancies in relation to the question of net assets as follows:
Bookfinders Limited
Comparison of Net Assets
31 OCT 2015
(12 NOV Version)
31 OCT 2015
(22 NOV Version)
Difference
Current Assets
Stock
Debtors
Cast at Bank
Current Liabilities
Trade Creditors
Revenue Commissioners
Accruals
Bank Overdraft
€’000’s
670
399
354
1,423
215
15
110
0
340
€’000’s
625
120
354
1,099
780
16
192
0
988
-45
-279
0
-324
565
1
82
0
648
Net Position 1,083 111 -972
The Report now disclosed that there were rates due to Donegal County Council of €71,975 and arrears of rent in respect of the premises at Calbro House of €61,667.
22. These significant changes coupled with the failure to adequately explain how the errors arose in the first place and why the Independent Expert is now satisfied that the information is correct and reliable raise the issue as to whether the information now presented to the Court is such that the Court can rely upon the Report of the Independent Expert to satisfy itself independently that the Company has a reasonable prospect of surviving as a going concern and what are the conditions which require to be satisfied to achieve that goal.
23. This issue is particularly acute in light of the evidence and submissions of the Bank. The Bank instructed Mr. Jim Luby of McStay Luby, a firm specialising in corporate recovery and insolvency, to review the papers including the KPMG Report, the IER and the Addendum to the IER. He pointed to the significance of the changes to the figures, the lack of any explanation for the changes to both the figures and the conditions in s. 6 of the IER and concluded that, in his opinion, the Company does not have a reasonable prospect of survival.
24. The Interim Examiner, Mr. Michael McAteer, prepared a report dated 23rd November, 2015. In s. 2 of the Report, he dealt with the initial assessment of the Company’s prospects. He noted the amendments to the IER of 12th November, 2015, made on 22nd November, 2015, showing that stock for resale was overstated at €45,097; trade debtors were overstated by €278,256, trade creditors were understated by €565,422 and that other creditors and accruals were understated by €82,622. Furthermore the amended estimated Statement of Affairs indicated that the deficiency on a going concern basis was €3,252,977 and on a liquidation basis was €3,510,235.
25. Notwithstanding these amendments he stated that at this early juncture he believed that the conditions identified by the IER and summarised in his Report were reasonably and achievable. He stated:-
“[w]hile it is early in the process, I believe that the evident support for the Examinership process from customers and certain trade suppliers and along with expression of interests already received in relation to a potential investment suggest that a Scheme of Arrangement can be formulated, put to and agreed by Creditors. Key to this is the formulation of a scheme which will ensure that the secured creditor is not prejudiced in terms of outcome when compared with the anticipated outcome in the receivership. I will arrange for a valuation to be carried [out] in respect of the property in Letterkenny, with the identity of such valuer to be agreed with secured creditor.
At this stage in the process I am unable to estimate the level of capital investment the Company requires. From my initial discussions with the Company Directors, the Directors have indicated to me that they have received expressions of interest from potential investors.
I have received one written expression of interest from a related party company to the directors.
I have reviewed the cost cutting measures and changes introduced by Company Directors (and identified in the IER) and if implemented in full have formed the opinion that these measures are reasonable and will have a positive impact on the Company. However, I am of the view that more can be done and will be carrying out an extensive review of what possible further measures can be taken, including the possibility of store closures if appropriate and consideration of the matters raised in KPMG’s and McStay Luby’s report. I will also review management performance and make such recommendations as to change both as to personnel and remuneration in this respect as I view to be appropriate.”
He concluded his Report by stating that based upon his discussions with customers, trade creditors, staff and the Directors and subject to the implementation of conditions as outlined in the IER which he believed to be achievable he was of the opinion the Company had a reasonable prospect of surviving as a going concern.
Section 518 of the Companies Act 2014
26. Counsel for the Bank, Mr. Dunleavy S.C., submitted that there were seven material matters which were not disclosed when the Petition was presented and an application to appoint an interim examiner was made on an ex parte basis. These are:
• That a receiver had been appointed over all of the assets of the Company;
• That the Petitioners had personally guaranteed the liabilities of the Company to the Bank and payment on foot of the guarantees had been demanded in the amount of approximately €3.6 million;
• There had been increase in the salaries paid to the Directors;
• There had been a failure to disclose all of the valuations of the Company’s premises at Letterkenny;
• The Company was significantly in arrears of rent in relation to one of its premises;
• The Company owed significant rates to Donegal County Council; and
• The KPMG Report constituted independent evidence upon which the Court could rely in relation to projected cash flows for 2016 and 2017 but in the subsequent affidavit of Mr. Mark Bundschu the Report was described as incomplete, inaccurate and misleading.
27. Mr. Dunleavy submitted that any one of these non-disclosures amounted to a breach of the provisions of s. 518 of the 2014 Act. Section 518 provides:-
“[t]he court may decline to hear a petition presented to it or, as the case may be, may decline to continue hearing such a petition if it appears to the court that, in the preparation or presentation of the petition or in the preparation of the report of the independent expert, the petitioner or independent expert—
(a) has failed to disclose any information available to him or her which is material to the exercise by the court of its powers under this Part; or
(b) has in any other way failed to exercise utmost good faith.”
28. Counsel relied upon the decision of Irvine J. in the case of O’Flynn v. Carbon Finance Limited [2014] IEHC 458. Irvine J. noted that the section placed a duty upon all associated with the preparation and presentation of a petition for the appointment of an examiner to disclose all relevant information to the court and to exercise utmost good faith. Failure to do so gives the court power to dismiss a petition entirely. At para. 95 of the judgment she stated:-
“[i]t is necessary, when considering the appropriate standard of disclosure required by s 4A of the 1990 Act [the precursor of s. 518] and the consequences of non-disclosure under this section, to have regard to the nature of the application made by the petitioner. The orders obtained, namely of interim protection, the appointment of an interim examiner, and directing cooperation by the directors of the companies, were sought and granted on an ex parte basis, as is the procedure required by Ord 75A of the Rules of the Superior courts. The granting of the orders ex parte is significant when considering the requirements of s 4A of the 1990 Act and the consequences of a finding thereunder.”
29. Irvine J. distinguished the situation where an application is made to set aside the orders made ex parte on the grounds of non-disclosure from that pertaining in Re Traffic Group Limited [2008] 3 IR 253. At para. 111 of her judgment she stated that the nature of orders granted ex parte place a high standard of disclosure on the shoulders of a party who seeks such an order to ensure that it will not be set aside when reviewed inter partes. Irvine J. continued at para. 113 as follows:-
“[i]n terms of considering appropriate consequences for breaches of this duty of utmost good faith and material non-disclosures, there is a need for clarity on the powers being exercised by the court in response to the application of the companies. The purpose of the hearing [of] these applications is not so as to engage in some form of pre-petition hearing; it [is] to consider whether the orders granted ex parte should be set aside. In this regard the behaviour of the petitioner in relation to disclosures is highly relevant. It is not a defence to a failure to exercise the utmost good faith to say that the companies are suitable for the examinership process in any event. Suitability for examinership is a separate issue to the standard of disclosure required both by the nature of an order granted ex parte and the specific statutory requirement under s 4A of the 1990 Act. If the companies are suitable ones for examinership then a petition complying with the good faith obligations of the 1990 Act should be brought so that the court may consider the appointment of an examiner to the companies at the inter partes hearing of that petition.”
It is clear that Irvine J. took the view that the objectives of the legislation were not a relevant consideration in response to the exercise by the court of its discretion in response to breaches of what was then s. 4A of the examinership process.
30. In that case Irvine J. felt that the appropriate consequence for the petitioners’ breaches of its obligations under s. 4A of the Act of 1990 was to discharge the interim examiner and to dismiss the petition. It is important to note that unusually the petition in that case had been presented by a creditor of the company and that the main threat to the continued survival of the company came from the petitioner itself.
31. I accept that the Petitioners have failed to comply with their obligations of disclosure to the Court as set out in s. 518 of the 2014 Act. The failure to disclose the fact that there were personal guarantees by the Petitioners which had been called in a few days earlier claiming approximately €3.6 million is a material fact that ought to have been disclosed. Likewise, the Court should have been informed that the floating charge had been crystallised by the Bank the previous week and that the Receiver was therefore appointed to the Company’s undertaking, and not just to the freehold premises in Letterkenny. The Court should not have been invited to rely upon the projections for future turnover set out in the KPMG Report if the Petitioners themselves believed that the Report was inaccurate and misleading. Both valuations carried out to the secured property in 2015 should have been before the Court. The arrears of rent and the outstanding rates ought to have been disclosed to the Independent Expert and included in his Report. Clearly there was a very considerable issue with the accuracy and reliability of the figures presented in the IER but, without further information, I cannot conclude that the correct figures were not disclosed in the sense that they were known and withheld from the Court.
32. I hold that there was a breach of the requirements of s. 518 by the Petitioners in respect of these matters. Therefore the Court has power on that basis to decline to hear the Petition. The question then is to determine the appropriate consequences for the breach of the duty of utmost good faith and material non-disclosure. If this were simple inter partes litigation I am of the opinion that non-disclosures such as those that occurred in this case would disentitle the offending party from obtaining equitable relief such as an interlocutory injunction and they would justify the discharge of an interim injunction.
33. But the relief sought here has ramifications and implications for many persons other than those concerned directly with the hearing of the Petition. I accept that the question of whether a company is suitable for the examinership process is not relevant to the assessment as to whether or not there has been a failure to comply with the requirements of s. 518 or the duties of utmost good faith in relation to ex parte applications as was held by Irvine J. However, that is not to say that it is not a factor to be taken into account in considering the appropriate consequences for the breaches. After all, a primary, if not the primary, focus of the examinership jurisdiction is the preservation, where possible, of jobs that might otherwise be lost by the failure of a company. It is the basis for the justification of impairing the rights of creditors of a company. It seems to me therefore that it is appropriate to have regard to the fact that the purpose of the application should be to preserve employment and the reasonable prospect of a successful outcome to a possible examinership with the resultant saving of jobs is a factor that should be taken into account in deciding the consequences that should flow from the beaches of s. 518 and the duty of full disclosure that I have found occurred in this case.
34. In this case I believe that a refusal by the Court to hear the Petition would be a draconian response to the particular failures in this case. It would be disproportionate to the gravity of the offence. It would have the result of imperilling the employment of 49 people who were in no way responsible for the offending behaviour. I therefore refuse the application to refuse to hear the Petition pursuant to s. 518.
Reasonable prospect of the survival of the Company as a going concern
35. Mr. Dunleavy, on behalf of the Bank, submitted that the report of the independent expert is absolutely critical in the context of examinership. The court relies upon an independent expert to make his or her own assessment of the company’s prospect and to present his or her own independent analysis to the court. The court then tests the report and asks whether or not it is based upon objective evidence. He referred to the decision of In Re Vantive Holdings [2009] IESC 68 at p. 20 where Murray C.J. stated:-
“[t]he 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.”
36. Mr. Dunleavy states that the Court cannot place any reliance upon the evidence from the IER in the circumstances of this case. The fact that the Addendum was filed making such radical changes to the terms of the Report amounts to an acceptance that the first Report was incorrect. In substance the Report is now a new report. The difficulty is no explanation has been forthcoming from either the Independent Expert or the Petitioners explaining why the erroneous or inaccurate information was originally presented to the Court, how the errors were discovered and why the Court can now rely on the evidence presented 10 days later to the Court. It is submitted that where the Report was changed there was no explanation as to why it was changed; where new figures were inserted there was no explanation as to why they had not been included in the original Report. It was also submitted that there was no objective analysis apparent from the Report. On the contrary, there were two versions of the Addendum sent to the Bank’s solicitors. In the first Addendum certain matters were said to be in the opinion or belief of the Directors. In the second version, forwarded within 24 hours, these opinions of the Directors morphed into the opinion of the Independent Expert without any explanation. In the circumstances, it is submitted that it is difficult for the Court to accept that the new version is right or that the Independent Expert exercised his own independent judgment in reaching his conclusions including his conclusion that the Company has a reasonable prospect of surviving as a going concern.
37. There is much force in these submissions and if the only evidence before the Court were the affidavits of the Petitioners and the two IERs I would have concluded that I was not satisfied on the evidence that the Company had a reasonable prospect of survival. However the Report of Mr. McAteer is not subject to the same criticisms or frailties. He has been the Interim Examiner since 13th November, 2015. While I acknowledge that his Report is couched in cautious terms, nonetheless he clearly concludes that:-
“[b]ased upon my discussions with customers, trade creditors, staff and the Company Directors, and subject to the implementation of conditions as outlined by the Independent Expert which I believe are achievable, I am of the opinion that the Company has a reasonable prospect of survival as a going concern.”
He reaches this conclusion while taking note of the concerns of the Bank. I have already cited his initial assessment of the Company’s prospects and why he believes that there is a reasonable prospect of the Company surviving. I particularly note the fact that customers, staff, creditors and suppliers are supportive of the examinership. He has already received one written expression of interest from a potential investor, albeit one related to the Directors. He is confident that the Christmas trading period will have a significant positive impact on the turnover and trading performance of the Company.
38. I find the Report of the Interim Examiner to be persuasive and I am satisfied that his reasons are arrived at independently and his opinions are based on his assessment of the Company as he has found it and his considerable experience in previous examinerships. Upon express instructions, counsel for Mr. McAteer informed the Court that the Interim Examiner had been involved in preparing the projections for the period of the examinership, if confirmed by the Court, and he was satisfied that they were realistic. They show a small positive over the period. In the circumstances, I am satisfied that there is evidence that the Company has a reasonable prospect of surviving as a going concern. It is appropriate that an effort should be made to save some or all of the jobs of the 49 employees and the examinership process offers the best prospect of achieving that end. I therefore place the Company under the protection of the High Court and I appoint Mr. McAteer as Examiner to the Company.
Pelko Holdings Ltd & anor & Companies Acts
[2014] IEHC 226 (28 April 2014)
JUDGMENT of Mr. Justice Hogan delivered on 28th April, 2014
1. Where it is plain that the petitioning company is unable to pay its debts and that it has a reasonable prospect of survival, in what circumstances – other than misconduct on the part of the officers or lack of candour in the course of the making of the application – should the court decline to exercise its jurisdiction to appoint an examiner to that company under s. 2 of the Companies (Amendment) Act 1990 (“the 1990 Act”)? This is essentially the issue which is presented here.
2. There is no doubt at all but that Pelko Ltd. (“Pelko”) is insolvent. It is equally clear that, if admitted to examinership, it has a reasonable prospect of survival. The major creditor, Bank of Scotland, maintains that the present application is, however, premature and that the court should decline to exercise its jurisdiction on that ground, not least having regard to the further consideration that the costs of the examinership are likely to be excessive and disproportionate.
The extent of the court’s discretion under s. 2 of the 1990 Act
3. Section 2 of the 1990 Act (as amended) provides in relevant part:
“(1) Subject to sub-section 2, where it appears to the court that –
(a) a company is or is likely to be unable to pay its debts, and
(b) no resolution subsists for the winding-up of the company, and
(c) no order has been made for the winding-up of the company,
it may, on application by petition presented, appoint an examiner to the company for the purpose 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 this Act.
(2) The court shall not make an order under this section unless it is satisfied that there is a reasonable prospect of survival of the company and the whole or any part of its undertaking, as a going concern.
(3) For the purposes of this section, a company is unable to pay its debts if—
(a) it is unable to pay its debts as they fall due,
(b) the value of its assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities, or
(c) section 214 (a) or (b) of the Principal Act applies to the company.
(4) In deciding whether to make an order under this section the court may also have regard to whether the company has sought from its creditors significant extensions of time for the payment of its debts, from which it could reasonably be inferred that the company was likely to be unable to pay its debts.”
4. It is clear from the language of s. 2(1) and s. 2(2) that the court has no jurisdiction to appoint an examiner save where the essential jurisdictional requirements of these provisions have been satisfied. The Court cannot appoint an examiner save where it is satisfied as to the actual or prospective insolvency of the petitioner (s. 2(1)(a)) and it is positively precluded (“…shall not make an order…”) from appointing an examiner (s. 2(2)) unless it is clear that the company (or some part of it) has a reasonable prospect of survival. Subject to this, s. 2(1) is permissive (“…may…appoint an examiner”). Indeed, the contrast between the permissive “may…appoint” in s. 2(1) and the positive prohibition of “shall not” in s. 2(2) underscores the discretionary character of s. 2(1).
5. This very point was made by Fennelly J. in Re Gallium Ltd. [2009] IESC 8, [2009] 2 ILRM 11:
“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.”
6. It is, I think, nevertheless true to say that 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 ILRM 407).
7. Nevertheless, the overall tendency of the courts has been to appoint examiners in the light of these policy objectives. As Clarke J. explained in Re Traffic Group Ltd.[2007] IEHC 445, [2008] 3 IR 253, 261:
“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.
It is as against that background that Costello J. felt [in Re Seluwke Ltd., High Court, 20th December 1991] that the high prospects of saving a significant number of jobs outweighed the lack of candour displayed by the petitioners in Selukwe. It is also important to note that, in addition to the lack of candour displayed in Wogans, it is clear from the remainder of the judgment of Costello J., in that case that he was also motivated by what he perceived were significant deficiencies in the scheme then under consideration. In addition Costello J. characterised the scheme as one which was in reality a proposal for a new commercial enterprise whereby, in truth, the existing enterprise and existing jobs would have been written off.
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 courts approach to such matters should take into account the following.
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 Wogans, to discourage highly wrongful behaviour.
However, in addition it seems to me that the court should consider the extent to which it may be possible (either by virtue of the provisions of the scheme as presented or modifications suggested by the court) to, as it was put by counsel for the petitioners, “neutralise” the effects of any such wrongful actions. The extent to which measures can be put in place to ensure that those who may have been guilty of a lack of candour or other wrongful action do not, themselves, benefit by it, is a factor to which significant weight should be attached. It is important, in my view, that in an appropriate case, examiners should have regard to such factors in formulating schemes for presentation to the court.
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.”
8. It is with these principles in mind that I accordingly propose to consider the manner in which this discretion should be exercised.
The background to the application
9. Pelko is a quite typical small and medium enterprise which was incorporated in 1977. The company specialises in the manufacture and supply of high quality office and auditorium seating and furniture. Its clientele typically consists of large institutional purchasers, such as the Health Service Executive, Government Departments, Universities and banks. The company was profitable prior to the economic crash of late 2008. Since then – almost like every SME in the country – it has struggled as the business demand for its products plummeted. It was accordingly necessary for the company to reduce its cost base, reducing from 17 to 11 employees and restructuring its costs base. It managed to make a small profit in 2010 and 2011.
10. In this respect, the report of the independent accountant prepared by Ms. Myra Finnegan is extremely helpful. She has noted these developments and has commented that Pelko is “capable of benefitting from any improved trading improvements upcoming in the Irish market.” If, however, an examiner is not appointed, then the likelihood is that the company will be placed into receivership in the not too distant future. The assets of the company are likely to be sold in order to pay down the company’s debt and the 11 jobs are likely to be lost.
11. The principal difficulty facing the company remains, however, the unsustainable debt to Bank of Scotland of some €515,000. This is a debt which was generated from the acquisition of leasehold premises in North Wall, Dublin 1 in 2003, which is the company’s current manufacturing base. In strictness, the lease has been transferred to Pelko Holdings Ltd. and Pelko itself is a wholly owned subsidiary of Pelko Holdings. There is, however, no formal lease between the two companies and Pelko discharges the payments under the facility letters. The application in relation to Pelko Holdings is made pursuant to s. 4(1) of the 1990 Act as a related company.
12. Bank of Scotland has a first fixed charge over the property, a floating charge over the assets of the companies and a guarantee from Pelko Holdings in respect of Pelko. The difficulty is that following the calamitous decline in commercial property values in recent times the property is now in substantial negative equity. While the property itself has been recently valued at €330,000, this was on the basis that the company had freehold title. A further complication, however, is that although the Circuit Court ruled in 2009 that Pelko could enlarge the leasehold to a freehold on payment of some €11,000, in the event this was not done at the time due to considerable trading difficulties experienced at that stage. If, however, appropriate funds could be found to enlarge the interest to a freehold this would enhance the value of the proprietary interest. At the moment, however, given that all that remains of the balance of a leasehold interest which will expire in 2045, the lease is valued at about €90,000.
13. Ms. Finnegan has further identified the problem with a sale is that Pelko are likely to be left with a substantial residue of debt to Bank of Scotland, along with the removal of Pelko from its current trading base. Pelko have, however, also located two other possible sites to which they might be able to move. She considers that that the companies have a reasonable prospect of survival provided in particular that the debt of Bank of Scotland and the other creditors are either partially written down or otherwise re-structured.
14. Here it may be observed that the loan from the Bank of Scotland expired as long as ago as 26th January 2013 and is presently in operation outside of agreed terms. The Bank “agreed to bear with the position” until 31st March 2014, subject to certain conditions. These conditions included the conversion of the leasehold interest to freehold title and the sale of the property at an auction of (largely distressed) properties at a reserve acceptable to the Bank. Moreover, the payments which the company has been able to pay have been interest only, with no reduction in the capital.
15. The other major creditor is the Revenue Commissioners who have adopted a neutral stance on this application. They are owed at least the sum of €37,520 in terms of arrears of taxes, but the full sum due may indeed be closer to €52,000. It was indicated to me that absent the protection of the Court, these sums would be regarded as immediately payable by Revenue, something which Pelko would presently be unable to do. It was, however, open to company to apply to Revenue for a staged payments option. Given, however, the acute cashflow problems which Ms. Finnegan has identified, even this option is likely to be problematic for the company.
16. While to their credit, Bank of Scotland has preserved with this SME company, the blunt reality is that the company is already insolvent, whether this is approached on either a balance sheet or, indeed, a cash flow basis. It cannot, therefore, be said that the application for examinership is premature, not least given that, as counsel for the petitioner, Mr. Gorman noted, noted, s.2(1)(a) provides that the jurisdictional threshold is satisfied simply where it appears to the court that the company “is likely to be unable to pay its debts.” It is clear from the report of Ms. Finnegan that this situation is imminent, if, indeed, it has not already come about. One might add that s. 2(4) expressly empowers the Court to have regard to the forbearance shown by creditors. Here there has been significant forbearance shown by Bank of Scotland and (to an admittedly lesser degree) by the Revenue Commissioners.
17. These are all factors which strongly argue for the appointment of an examiner. Even if the company could trade for a few more weeks, the end result is more or less inevitable. Given that some restructuring of the company’s debt is necessary, it is better that this should be done now in the course of an examinership while the company still has some prospects of survival, rather than at some later stage when any reserves of lingering goodwill and forbearance on the part of creditors might have been exhausted and the risk of disorderly collapse was all the greater.
18. Indeed, it may be fairly be observed that the real objection to the examinership in the present case on the part of the Bank is not untypical on the part of secured creditors, namely, a general dislike of the process. It places their security in jeopardy and the costs of the examinership must often in practice be indirectly borne by the secured creditors. These are, of course, understandable concerns, but they are not a reason in themselves which would justify the court refusing to make an order under s. 2 of the 1990 Act on general discretionary grounds if all jurisdictional conditions are satisfied and it was otherwise appropriate to do so. If the process of examinership is thought to be excessively burdensome or otherwise unfair to the rights of secured creditors, then the question of any reform of the 1990 Act is one which should be addressed to the Oireachtas and is not a matter for the courts.
Conclusions
19. In conclusion, therefore, it is clear that Pelko is a company which is insolvent and which is either presently unable to pay its debts as they fall due or, at least, will be shortly in a position where it will be unable to do so. It is plain from the report of the independent accountant that it has a reasonable prospect of survival if certain debt re-structuring takes place.
20. While it is true that a petitioning company is not entitled to the appointment of an examiner as of right under s. 2 of the 1990 Act even if the jurisdictional requirements are satisfied, here this step is appropriate, as the speedy appointment of an examiner mitigates the risk of a disorderly collapse were this necessary re-structuring to be delayed. There are, in any event, no real countervailing factors of substance which would justify the court declining to make such an order on general discretionary grounds. The mere fact that the secured creditors generally dislike this process given that they will often fare better with the appointment of a receiver at the time of their own choosing is not in itself a factor which would justify the court refusing to make the order sought.
21. In the event, therefore, I will appoint an examiner in respect of both Pelko and Pelko Holdings.
JJ Red Holdings Ltd & Companies Act 2014
[2016] IEHC 524 (15 September 2016)
JUDGMENT of Ms. Justice Baker delivered on the 15th day of September, 2016.
1. This judgment is given in an application to confirm the appointment of an examiner to the petitioning company, which is opposed by a substantial creditor.
2. Tom Murray was appointed interim examiner of JJ Red Holdings Limited (“the Company”) by order of Costello J. on 18th August, 2016. The application to confirm his appointment as examiner is opposed by Henciti Limited, a limited liability company which owns the landlord’s interests in the occupational lease under which the Company occupies the hotel and bar premises from which it conducts the entire of its business. I will refer to the creditor who opposes the petition as “the landlord”. The petition is supported by all of the employees who have signalled their approval in writing, and by the trade creditors. Revenue is neutral.
3. The petitioner argues that it has a very strong core business, which is now in profit and this argument is supported by the report of the independent expert, and his supplemental report in response to a report adduced by the landlord.
The Company
4. The Company was incorporated on 28th April, 2006 for the purpose inter alia of the management of a hotel and ancillary hospitality services. The directors and shareholders of the Company are two brothers, Emmet McDermott and Donie McDermott, both of whom reside in Ireland. The Company is the trading operator of a hotel named Dublin Citi Hotel and Bar, trading from premises at 46 to 49 Dame Street, Dublin 2, a 27 bedroom hotel with licensed bar, a dance area and restaurant. The Company occupies the hotel premises on foot of a lease made on 31st December, 2006 with the predecessors in title of the landlord for the term of 35 years from 1st January, 2007 at a rent subject to five-year rent reviews. The Company has 54 employees of whom 40 are full time. In addition, the directors and the child of one of the directors are also employees of the Company.
5. It is fair to say that the Company entered the hospitality sector at what was possibly the worst time to commence such a business, and during the recession that began soon after the business opened, the Company made losses for a number of years. In the first year the losses were a quarter of a million euro and the quantum of losses increased up to 2010 and declined thereafter. The Company returned to profit, albeit a small profit, in 2013, and in 2015 showed a before tax profit of €403,000. It anticipates a greater profit for the calendar year 2016, as profits of €312,000 are shown for the first six months of this year.
6. In the course of the recession the directors made substantial loans to the Company inter alia, to discharge staff wages, and during that the time the directors themselves took no remuneration as directors. Some of these loans have been repaid.
The current balance sheet shows net shareholder total liabilities of €1,836,435, of which €387,195 represents directors’ loans. The statement of affairs contained in the IER shows that the Company has a surplus of liabilities over assets in the sum of €1,451,385. A statement of affairs prepared on a winding up basis shows a deficit of €1,744,605.
7. The up-to-date balance sheet shows creditors standing at €836,435, in addition to €1.1 m owed to the landlord for rent, full particulars of which will appear below.
8. It is not disputed that the Company is insolvent.
The landlord
9. The landlord is a limited liability company incorporated in Ireland, owned by Paul Hennebry and his brother, Denis Hennebry, who identify themselves as having upwards of 25 years experience in owning and operating hotels and licensed premises. The primary basis on which the landlord opposes the petition is that the examinership process is said to be “designed to frustrate and evade” a settlement entered into between the landlord and the Company three weeks before the petition was presented.
10. The landlord purchased the reversionary interest from a receiver appointed by Bank of Ireland by agreement made on 31st August, 2015 which was closed on 1st October, 2015. The arrears of rent were said then to be in the region of €1m, and the landlord took the benefit of these arrears by separate assignment. The landlord has frankly said on affidavit that it was anticipated at the time of purchase that it would rely on the forfeiture clause in the lease to take possession of the premises from which it was intended to continue the hospitality business.
11. The purchase of the premises was funded by a loan from a US/Irish hedge fund, and the landlord’s indebtedness is in the region of 111% of the purchase price, the landlord having borrowed an additional €500,000 for the purposes of providing it with working capital in anticipation of taking over the business.
12. Almost immediately after closing the sale, and after correspondence with the solicitors then acting for the Company had failed to achieve an agreement regarding the arrears, the landlord served a forfeiture notice on 21st October, 2015, in reliance on the arrears of rent, and sought to re-enter the premises on foot of the notice. The Company then commenced proceedings seeking declaratory and injunctive relief on the pleaded grounds that the Company had a bona fide belief that the landlord, and later the receiver appointed to the landlord, had agreed a permanent reduction in rent, (from €520,000 to €260,000 per annum) and that, as the reduced rent was not in arrears, forfeiture did not lie. The Company obtained an ex parte injunction restraining the landlord from taking possession on foot of the forfeiture notice, and the landlord opted to pursue the approach of seeking to bring the proceedings on for hearing through the fast track process available in the Commercial Court.
13. The proceedings came on for hearing before Barrett J. on 19th July, 2016 when the case was called on for hearing for several days. Negotiations led to a written compromise being entered into between the parties at the end of the first day.
The settlement agreement
14. The settlement agreement entered into between the parties was made on 19th July, 2016 and, insofar as it was possible to do so, the terms thereof were made an order of the court by Barrett J.
15. The agreement contained an acknowledgement by the Company that the passing rent was the annual amount of €520,000, the figure claimed by the landlord, and also provided for the payment of an agreed figure for arrears of rent totalling €850,000, an immediate payment of €115,000 by way of the balance of rent for the current quarter, €100,000 by way of security deposit and €150,000 as a contribution to the costs of the landlord.
16. The settlement agreement also contained detailed provisions for enforcement, including a provision that the landlord could immediately obtain an order for possession and a declaration that the lease was validly forfeited on the happening of any event of default. Also included was a provision that the landlord could forthwith, upon the happening of any default, enter judgment against the directors of the Company in the amount of €730,000.
17. The primary argument advanced by the landlord in opposition to the application to confirm the appointment of the examiner is that the presentation of the petition was an abuse of process in that it is an attempt by the Company and/or its directors to avoid the obligations arising under the settlement entered into only three weeks prior to presentation of the petition. The argument is that no other problem or litigation is apparent from the operation of the Company or from the matters outlined in the petition save the dispute between the Company and its landlord, and the settlement of that dispute in July, 2016. It is argued that the petition is a collateral attack on a concluded agreement and court order, and that the effect of the examinership will be a write-down of that agreement and the reduction of the liabilities of the Company and the arrears of rent agreed to be paid thereby.
18. The landlord also points to the history of the Company and to the fact that a petition was presented to wind up the Company in 2012 by a receiver appointed to the landlord in the context of substantial arrears of rent. It was only after the receiver presented a winding up petition that the arrears of rent were paid on 23rd October, 2012. The landlord says that the Company has been historically in default of its obligation to discharge rents pursuant to the lease. The landlord asserts that the Company has been in profit only because it did not pay the full amount of the reserved rent under the lease for any of the relevant years.
The report of the independent accountant
19. For the purposes of the presentation of the petition an independent report was prepared pursuant to s. 511 of the Companies Act 2014 (“the Act”) by Neal Morrison, partner in McInerney Saunders, (“the IER”). The IER shows the view of the expert that the Company has a reasonable prospect of survival as a going concern, the threshold test under the Act. But that view is conditional.
20. Several conditions are identified as essential to ensure the survival of the Company as a going concern as follows:
a. “An immediate renegotiation of repayment basis of the settlement arrangement with the landlord”
b. “Securing of additional finance to meet the cash flow requirements of the Company in meeting the renegotiated schedule”
c. “The acceptance of an appropriate scheme of arrangement by creditors in the approval of the High Court”
21. A key to the prospects of success is a requirement to renegotiate the agreement with the landlord and the securing of additional finance. The independent expert also reports that the interests of the creditors as a whole, and the members, are best served by avoiding a winding up.
22. It is suggested that additional rooms are hoped to be opened in late 2016 and that no additional capital requirement will arise as these rooms are in an adjoining premises and are already suitably furnished. The view of the independent expert is that the Company does have a reasonable prospect of survival as a going concern having regard to demand in the hospitality industry in Dublin generally, but provided what is called the “cash flow demands arising from the historic overhang on rental levels in the lease and the upward only rent clause” are dealt with.
23. The IER proposes a business plan with indicative write down to c. 80% of unsecured debts with the main body of creditors and an “achievable arrangement being made with the landlord”, as well as a commercial loan to provide cash flow to meet the obligations arising from the settlement.
24. The IER identifies what must be presumed to have been the instructions received by Mr. Morrison that the directors had “hoped to meet their obligations on payment of arrears through the raising of a commercial loan from a financial institution”, but that the result of the settlement had been to “crystallise an additional €1 million debt” on the balance sheet and that the payment plan demands of the terms of settlement “would have had a severe impact on the cash flow of the business”. The IER suggests that the directors had “commenced an application with their financial institution” for funds to meet the settlement but that the funds were not secured “in time”.
25. It is quite clear that the Company cannot meet the obligations under the settlement without a loan or cash injection from some source as well as an achievable arrangement to reschedule at least the time frame for discharge of the obligations in the settlement, if not a write-down on quantum.
26. I consider below whether the evidence in the IER is credible with regard to the prospect of obtaining finance, and whether the Company has any reasonable prospect of securing finance.
Evidence of the landlord’s expert
27. The landlord engaged Neil Hughes of Baker Tilly Hughes Blake to review the IER and he has furnished an affidavit and a report and supplemental report to the Court for the purposes of the hearing. He expresses the view that the landlord is unlikely to compromise having regard to the closeness of the settlement and that the settlement represented a fairly considerable concession on the rent claimed by the landlord in the Commercial Court proceedings. He also points to the obvious fact that the proposed payment to unsecured creditors of €669,148, representing 80% of the €836,435 said to be owed to unsecured creditors on the last balance sheet, will have to be funded from additional borrowings or cash investments.
28. Mr. Hughes expressed the view that the condition requiring funding cannot be met and that the figure required to be raised of €1.7 million is far outside the capacity of the Company in all the circumstances.
29. The cash flow projections in the IER are criticised by Mr. Hughes on a number of grounds, the most important one for my decision being that the cash flow projections, which are described as somewhat optimistic even by the independent expert, make no provision for the payment of the settlement amount, or the payment of the 80% dividend in respect of past creditors, and as Mr. Hughes points out, the net results of a scheme of arrangement which provided for a mere 20% write down, would have the effect that the Company would be exiting the examinership process insolvent on a balance sheet basis.
30. The IER suggests that the projected cash flow figures have been stress tested over the projections for twelve months, and so tested, the opinion of the independent expert is that the Company would remain cash positive in 2017, albeit only if 2016 sales levels were achieved.
31. I accept the argument of Mr. Hughes that cash flow projections are a key element in the considerations of the court under its examinership jurisdiction, a key indicator that the company has a reasonable prospect of survival. The suggestion that insurance was omitted from the figures has been partly explained in the supplemental IER, that the insurance is met under general expenses. Be that as it may, the cash flow projections contain no provision for the payment of the historic liabilities of €1.7m, or thereabouts, nor any provision for interest on any loan that might be secured to deal with these liabilities.
32. In response, Mr. Morrison in his supplemental IER, points to the fact that his projections included a contingent provision of €20,000 per month, that his projections are based on an improbable scenario that there would be no increase in turnover from the 2016 figures, and do not include the anticipated revenue from the additional fifteen rooms. He says he does not envisage all three of these negative scenarios arising, and is now even more of the view in his second report that the cash flow projections do include the higher rent. Taking all anticipated elements into account he expects the cash holding of the company at the end of the twelve month period to December 2017, to be €140,000, €84,000 less than what he projected in his first report. He says he is satisfied the Company could meet an additional €130,000 increase in rent, or even more.
Possible investors
33. Counsel for the petitioner points to the fact that two private persons have written letters expressing interest in investing in the Company in consideration of the transfer of shares. These expressions of interest are couched in the usual terms one would expect, and are made subject to the usual due diligence and other conditions. There is nothing in these letters that points to the amount of information the investors had when they wrote the letters, and whether they knew of the historic debt of almost €2m, including the €1.1m to the landlord which the Company now carries. Having regard however to the fact that these potential investors did know about the examinership process, it can be expected that they knew there was some historic debts and that the company is currently insolvent.
34. With regard to the possibility of securing additional finance to meet cash flow requirements, the supplemental IER says that the writer was “advised that funding is available in the form of investor funding in the amount of €500,000 which was made available immediately and that a further €250k is to be made available during the period of protection”. Mr. Morrison was told that a letter and evidence of funding would be available to the court, and while evidence of funds was available from the potential investors and each of them provided a letter, the letters from each were no more than indicative, contingent and conditional letters of support and of a general interest to invest in the company in consideration of the transfer of shares. While Mr. Morrison is correct that funding to meet the cash flow problems of the Company can come from sources other than formal lending institutions, the best that the company can provide at this stage is evidence of possible funding for €500,000, less than a third of what would be required to meet all creditors, and broadly speaking a third of what would be required to meet the full payment to the landlord and the 80% payment to unsecured creditors.
35. The total funding that would be required to achieve the proposed payment to the unsecured creditors and the full payment to the landlord, even if the dates for payment to the landlord are extended is €1.7 million, and this does not include the costs of the examinership.
36. I accept the evidence of Mr Hughes that the absence of evidence to support the likelihood that commercial finance would be available is somewhat remarkable in an application of this type. Furthermore, it is apparent on the figures presented to the Court that the possible available investment of €500,000, together with the rather elusively described €250,000 said to be “available during the examinership process”, is nowhere near sufficient to meet the cash flow demands and the payments under the terms of settlement.
37. In all of the circumstances I consider that there is no real prospect that funding will be available to meet an arrangement with creditors that would protect the quantum of the arrears and other payments agreed to be made to the landlord. The evidence does not in the circumstances suggest that the Company has a reasonable prospect of survival unless the quantum of the arrears and a variation on the due dates are both achieved.
38. The threshold test to be met by a petitioner under the Act is that a company has a reasonable prospect of survival following the approval of a rescue plan. The evidence in the present case is that any scheme of rescue will require substantial funding, either by investors or commercial lenders. The standard of proof may be said to be relatively low, and all that is required is evidence of a reasonable prospect of survival, not a probability that a company will exit the protection with some or all of its undertaking intact. As I noted in In re Claremorris Tourism Limited [2015] IEHC 796:
“The test is whether a reasonable prospect of success of the company is shown, not whether all factors that might lead to that success have been established”. (para. 26)
39. In the circumstances and having regard to the standard to be met, I consider that the IER does point me to the Company having a reasonable chance of survival, but conditional upon the Company being inter alia in a position to renegotiate and fund the payment to the landlords. The Company and its directors say that it is their intention to meet all of the obligations of the settlement agreement, but that more time is needed. This seems to me to be a misunderstanding of the role of the examiner in the process to which I now briefly turn.
The role of the examiner
40. The directors of the Company and the independent expert both predicate their arguments on an assertion that it is the intention of the Company to discharge the full amount due to the landlord, albeit some rescheduling of the €1.1m owed to the landlord is essential for the company to survive. However, while the IER is a fundamental document for the purpose of an examinership, it is for the examiner to determine a fair and reasonable means by which the liabilities of the company can be met so that it can survive as a going concern. The preliminary report of Mr. Murray sets out his view that the “repayment basis” of the terms of settlement must be agreed. He says he has engaged Messrs. Morrissey’s, auctioneers and valuers, to “prepare a report”. The landlord points to this fact as indicative of a view on the part of the examiner that the quantum is to be reviewed, or at least that a review must be considered. While no further evidence was available, counsel for the interim examiner suggested that the reason why Messrs. Morrissey’s was engaged was to advise on the likely result of a rent review, but having regard to the fact that the rent review is not due until October, 2016, and that it is clear that the review provision is a “upwards only” provision, it is difficult to see why a formal report would have been obtained at this juncture by the examiner, mainly to deal with the likely additional rent post examinership.
41. Further, Mr. Murray does not say in his report that it is his view at this stage that payment of the full amount of the arrears agreed to be paid to the landlord would result in a fair and accurate basis on which the creditors could be expected to agree a scheme of arrangement.
42. It is not to be forgotten that while the directors in the Company may hope and intend that the examiner would achieve the result by which the landlord would receive all monies due under the settlement agreement, the examiner, as an independent person, charged with the interests of the creditors as a whole, is not bound by such an assumption or even agreement, and having regard to the fact that €1.7m in accrued liabilities had to be dealt with in a scheme of arrangement, a very substantial cash injection would be required to achieve that end. Mr. Morrison fairly points this out in his supplement report at p. 6, where he points to the fact that: –
“It is not for the landlord to determine that there will be no agreement with the examiner in relation to the terms of the scheme of arrangement yet to be drafted. A scheme would be prepared and considered by all creditors in accordance with their particular classifications within the scheme. The Companies Act provides for a relatively mapped voting on a Scheme and the landlord would be entitled to vote in accordance with the practice and procedures set out in the Companies Act.”
43. This accurately states the legal position and neither the Company, its directors, it shareholders nor the landlord may determine the course of the examinership and it is for the examiner to prepare a scheme which is fair and equitable to all creditors, and to present an appropriate funding for a scheme to the creditors.
44. Counsel for the Company also points to the fact that the interest of the secured or large creditor cannot be the governing or single factor which guides the court in considering whether to appoint an examiner. Counsel relies on para. 26 of my judgment in In re Claremorris Tourism Limited: –
“The position of a large creditor, while it cannot be ignored, and while the argument it makes must be met, cannot be allowed to be the single or governing factor in the court’s considerations.”
45. Thus the effect of the process cannot be directed or preordained by the Company, its directors or shareholders. The process is to be independently carried out in the interest of all creditors. As Denham J. noted, quoting from the judgment of Cooke J. in the High Court, in In re Vantive Holdings [2010] 2 I.R. 198, the legislation has the effect that a scheme devised by an examiner may radically alter the structure and ownership of a company, and the future interest not merely of those persons but also of distant creditors.
46. The confirmation of the appointment of the examiner engages the exercise of discretion. If the result of the process intended to be, or is likely to be, a variation of the settlement agreement, I turn now to consider whether it can be said that the petition is presented for a collateral and improper purpose.
The motivation in presenting the petition
47. The landlord argues that the petition ought to be dismissed in the exercise of my discretion. It is argued that the petition was presented for an ulterior motive and without good faith, that the settlement was a sham and that the petition is an attempt to renegotiate or avoid its terms. Counsel for the petitioner argues that the only relevant motivation for the purposes of the hearing before me is the motivation of the Company in bringing the petition for examinership.
48. Irvine J. in O’Flynn & Anor. v. Carbon Finance & Ors. [2014] IEHC 458, identified an improper motive in the presentation of the petition, and both counsel rely on her judgment, and her decision to refuse to confirm the interim protection.
49. It is argued that the settlement was not a sham or device in order to buy time, and that had that been so, the Company would have no useful purpose in making the first payment, and the bona fides of the Company is further borne out by the fact that no proposal is made by it to reduce the quantum of its liability to the landlord, and that what is proposed is a variation in the timeframe.
The law
50. The Supreme Court decision in In re Gallium Limited [2009] IESC 8, [2009] 2 ILRM 11 is the starting point for the analysis of the jurisdiction of the court to appoint an examiner to an insolvent company, and the statement at para. 46 of the judgment of Fennelly J. remains the key proposition with regard to the discretionary nature of the remedy. A petitioner must show that the company has a reasonable prospect of survival if examinership is to be granted, but
“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.”
51. The landlord relies in particular on the judgment of the Supreme Court in the second judgment in In re Vantive Holdings. An application to appoint an examiner to Vantive had been rejected by Kelly J. in the High Court and his decision was upheld on appeal. The same petitioners sought to present a second petition to the High Court founded on factual material, expert opinion and evidence either available to or obtained by it at the time of the hearing of the first petition which the Court held was consciously, deliberately, and contrary to legal advice withheld from the Court. The Supreme Court allowed the appeal from the decision of Cooke J., who had allowed the presentation of the second petition, on the basis that the presentation of the second petition was an abuse of process. While the Supreme Court accepted that the then relevant Act of 1990 did not prohibit the presentation of the second petition for the appointment of an examiner, the Court considered that special circumstances and explanation would be required. Of relevance for the subject application was the proposition stated by the Court, that a petitioner must present all relevant information to the Court and the fact that the Supreme Court rejected the second petition in its inherent jurisdiction to protect the integrity of the due process and of the administration of justice.
52. Of critical importance to the decision of the Supreme Court was the proposition that, while the interests of those who might benefit in the examination process must be taken into account under the legislation, the legislative considerations and the interests of those persons could not of themselves override the obligations on the petitioner not to abuse the process of the Court.
53. Murray C.J. said the following at para. 29 of his judgment:
“[29] The appointment of an examiner on foot of a petition has laudable objectives which in general terms are designed to facilitate the survival of a company as a going concern notwithstanding its insolvency if it demonstrates that it has a reasonable prospect of survival. Once the petition is lodged the company is entitled to the protection of the court which may be to the serious detriment of its creditors and that protection continues while the matter is pending before the court. It comes to an end once the application is refused (subject to any stay which keeps alive the petition pending an appeal) or, if successful continues for up to 70 to 100 days. The protection of the court could be artificially obtained if it were possible for a petitioner, after its first petition had failed, to proceed (even though such a step was not envisaged at the time of the first petition) with one or more successive petitions on the basis of additional evidence, notwithstanding it had been available and deliberately withheld, at the first petition, and thus extend further the protection of the court from its creditors pending at least a hearing which resulted in its refusal. Again, to permit a party to make the same application on foot of withheld evidence by way of petition, without excusing exceptional circumstances, would undermine the principle of finality, which the courts have always considered essential to the integrity of the administration of justice. As Hamilton C.J. observed in In re Greendale Developments Ltd. (No. 3) [2000] 2 I.R. 514 at p. 528 ‘… the finality of proceedings both at the level of trial and possibly more particularly at the level of ultimate appeal is of fundamental importance to the certainty of the administration of law, and should not lightly be breached’”.
54. While the judgment in the second petition in In re Vantive Holdings was concerned primarily with the finding of the Court that the presentation of a second petition was an abuse of process, the judgment of Murray C.J. made it clear that he considered it wrong in principle that the protection of the court could be “artificially obtained”.
55. Denham J. in her judgment stressed that, while Cooke J. was correct that the statutory test did require the Court to consider whether the Company could survive, it was not the “overriding consideration”, the statutory test was one factor to be weighed in the balance of all other relevant factors and principles which included the finality of litigation and the actions of the petitioner. The interests of creditors are not the determinative overriding considerations (para. 83). A court would not reject a petition and examinership merely for the purposes of disapproval of misjudgement, past mistakes or even misconduct on the part of directors, but it was a factor to be weighed.
56. The Supreme Court relied to a considerable extent on the principle from Henderson v. Henderson [1843] 3 Hare 100, that there be finality in litigation.
57. While one could argue that the judgment in In re Vantive Holdings is confined to the particular facts of that case, where the litigation in respect of which finality was thought to be desirable was the presentation of a petition for examinership, the approach of Denham J. was more far-reaching and does not confine itself to repeat or successive applications for examinership which ought not to be permitted to drag on or be prolonged. At. para. 87 she said the following:
“The court has an inherent power to prevent the misuse of its procedures which would be unfair to a party to litigation or which would bring the administration of justice into disrepute.”
58. The emphasis therefore, was not merely on the desire to have finality in the individual type of process contemplated, but also to ensure that the administration of justice was not brought into disrepute, and as she put it later in her judgment, that there be “closure on an issue”.
59. I consider that In re Vantive Holdings 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. This is consistent with the approach of the court in the other cases to which I turn.
60. In In re Traffic Group Ltd. [2007] IEHC 445, [2008] 3 IR 253 Clarke J. did confirm the appointment of an examiner, notwithstanding what he found to be wrongful actions or lack of candour on the part of the petitioners in the immediate run-up to the presentation of the petition, because there was, in his view, a high chance of successfully preserving the enterprise and most of the jobs concerned, and because he considered it possible for him to make the order, if the petitioners gave an undertaking not to have any role in respect of the company for the period of 18 months, which was given. However, Clarke J. regarded lack of candour as a relevant factor to be weighed with other factors.
61. Counsel relied also on my judgment in In re Step One Permanent Solutions Limited [2015] IEHC 284, where the failure to disclose relevant material facts was regarded as one factor which engaged my discretion to decline the petition and refuse to make the appointment, and where I considered that an obligation of utmost good faith arose at all stages of the process.
62. The landlord also relies on a judgment of Kelly J. in In re Missford Limited [2010] IEHC 11 in which he accepted that the company had met the threshold that there was a reasonable prospect of the survival of the company and the whole or any part of its undertaking as a going concern, but refused in the exercise of his discretion to confirm the appointment of an interim examiner.
63. In refusing the application Kelly J. was in particular influenced by the egregious breaches of company law, revenue law and the obligations that the company owed to its employees and the likely “beneficial effect for delinquent directors”. The analysis of Kelly J. involved him considering the interests of the various creditors and the employees and weighing those against the egregious behaviour that he found.
64. Clarke J. delivered judgment in In re McSweeney Dispensers Ltd. [2011] IEHC 494 and did appoint an examiner notwithstanding an argument by a substantial creditor, AIB, that the principal purpose behind the petition was to enable the existing shareholders to retain control of the company by means of a significant reduction in bad debt but where the business had been badly run and significant capital extracted.
65. At para. 4.5 of his judgment, having considered the judgments of the Supreme Court in In re Gallium Ltd. and In re Vantive Holdings Ltd., and his own judgment in In re Traffic Group Ltd., he pointed to the fact that the “purpose of examinership is not to absolve shareholders from the consequences of a failed venture” and that the Court must analyse with some care “the extent to which the scheme as a whole is fair not only as and between the various categories of creditors but also between the creditors on the one hand and shareholders on the other.” Clarke J. considered that as his concern was to assess whether there was a reasonable prospect of survival and as he was not satisfied that the only possible outcome of examinership was the one for which AIB contended, that the appointment should be confirmed.
66. While Clarke J. in In re McSweeney Dispensers Ltd. was dealing with the argument of AIB that the interests of shareholders were those which were sought to be protected, not much difference is evident with regard to the interests of the shareholders and those in a small privately owned company such as the one in issue in these proceedings which is jointly owned by two brothers. If the sole purpose of the examinership process is to protect the company for their benefit as opposed to the interests of the company and its undertaking, a court might have cause for concern. If, as is argued by the landlord, the sole purpose of this petition is to protect the Company from being required to perform obligations freely, and it 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.
67. The exercise of examining the “motive” in presenting the petition does not in my view involve the court considering the subjective intention or conscious purpose of the petition, but can involve looking at the probable outcome of the petition and whether that might have as a collateral effect the mischief to which Denham J. referred. It is not necessary for the court to rest its discretionary approach on a finding of actual subjective motive in the true sense. If the effect of the appointment of an examiner is to set at naught a court order or compromise of court proceedings recently entered into, there is a real risk that the process would in its practical effect fail to further the administration of justice, and amount to a collateral attack on previous judgments, orders or compromise.
The presentation of the petition: good faith?
68. After describing the terms of settlement entered into on 19th July, 2016, the petition identifies what is described as “the sources of the present difficulties of the company” as follows:
22. The directors had intended that the Company was to meet its obligations in the Terms of Settlement through raising a commercial loan from a financial institution. The result of this legal action by Henciti was to crystallise an additional €1 million debt on the Company’s balance sheet and the payment plan has had a severe impact on the cash flow of the business.
23. While the directors of the Company progressed an application with their financial institution the Company could not draw down funds in time and the payment due on 9 August 2016 was not made. As a result by letter dated 10 August 2016 the solicitors for Henciti wrote to indicate that they intended to re-enter the matter in the Commercial List of this Honourable Court and to seek the orders set out in Clause 2 of the Terms of Settlement. By further letter dated 12 August 2016 the solicitors for Henciti wrote to indicate that the matter had been re-entered and listed before Costello J. on 19 August 2016.”
The correspondence I refer to below was fully exhibited.
69. In his first replying affidavit on behalf of the Company, Emmet McDermott says that it was “the immediacy of threatened actions by the landlord”, and not an attempt to “frustrate and evade the Settlement Agreement”, that precipitated the presentation of the petition, and that Costello J. was fully appraised of the terms of settlement, of the default and the immediacy of the threat that the lease would be forfeit.
70. The affidavit also avers that at the hearing of the application before Costello J., it was stated that it was not the intention of the Company that the amounts due to the landlord on foot of the terms of settlement be reduced, and that the approach of the Company to the settlement is that it will require a rescheduling of payments rather than a reduction in quantum.
71. At para. 10 of this affidavit, Mr. McDermott continues:
“The reason for the Company not complying with the terms of the settlement were not foreseen at the date of entering into the agreement and the examinership process was not considered as an option at the time that the terms of settlement were concluded nor was it subsequently embraced as a mechanism for frustrating the rights of the Landlord to the sums payable on foot of the terms of settlement”.
72. Counsel for the landlord argues that an inevitable conclusion to be drawn from these averments is that at the time the settlement was entered into the Company did not have funding from a bank or other source to meet the substantial obligations which it undertook, and which involved the payment of half a million euro within weeks of its date.
73. To assess this proposition I need to examine the events that occurred after the settlement was agreed on 19th July, 2016. The first tranche of payment in respect of current rent was paid by the due date, 29th July, 2016, in the sum of €115,000, and that brought the rent up to date to the end of September, 2016. At the date of the presentation of the petition the sum of €425,000 being half of the agreed arrears of rent of €850,000 was not paid. At the date of the hearing of the application before me the payment of €100,000 by way of security deposit then due was also not paid, and there remains now owing to the landlord by the company the sum of €1.1 million euro (€850,000 in respect of the agreed sum for arrears of rent, €150,000 in respect of costs, and €100,0000 by way of security deposit).
74. The landlord places particular emphasis on the letter of 9th August, 2016 from Moran & Ryan Solicitors, then acting for the Company, sent on the day when the first of the two payments of €425,000 was to be met. I quote the letter in full:
“Dear Sirs,
We have been instructed by our client that while the funds of €425,000 in respect of the payment due today are in place, their bank is unable to transfer the funds today.
Accordingly, the Bank has informed our client that payment will leave our client’s account shortly.
In the light of the above, our client would ask that your client please grant a short extension of time in order to allow for the funds to be transferred to your client account.”
75. The solicitors for the landlord rejected the application for an extension and indicated that the matter would be re-entered in the Commercial Court and that orders for judgment in accordance with the default provisions in the settlement would be sought. A date of 19th August, 2016 was notified the following day as being the date when the matter was to be heard by the Commercial Court.
76. In trenchant terms counsel for the landlord argues that the letter contained a number of untruths, and that evidence points clearly to the fact that the money was not “in place” and that at best false instructions were given to Messrs. Moran & Ryan by their client.
Finding on funding
77. I find on the evidence that funds to pay the first tranche of the arrears were not in place, there was no facility available from a bank or any other person on 9th August, 2016, payment of which had been delayed by administrative matters. The letter did contain untruths.
78. The tone of the IER suggests that the “crystallisation” of the debt to the landlord caused an immediate cash flow difficulty it is hoped to resolve, but I consider that the evidence on affidavit points me to a different view. Assuming that the directors have put their best foot forward in their replying affidavit to the opposition of the landlords, at best the Company can say that it negotiated with the bank before the settlement was reached and before the landlord and tenant case came on for hearing. One must assume that the negotiations with the bank happened at a time when the directors were hopeful of succeeding in the litigation and thus putting the Company in a position where no arrears of rent had accrued, and where its cash flow or insolvency problems were much less than they now are.
79. I agree with counsel for the landlord that the company was reckless in entering into the settlement agreement and was equally reckless in instructing its solicitor to write to the landlord’s solicitor saying that the money was “in place”. This is for the following reasons.
80. The evidence points to the directors having met with their bank in June, but no formal loan sanction, or even conditional loan sanction, had issued. The directors have identified on affidavit a bank official with whom they were dealing and, this evidence not having been cross-examined, the uncontested evidence is that the company was dealing with an identified bank official in an identified bank. The directors met with their bank in June before the landlord and tenant case came on for hearing in the Commercial Court and before it was compromised. The evidence does not show engagement in regard to the performance of the settlement.
81. Mr. McDermott’s evidence is that in June, 2016 he and his brother met with an identified official of Bank of Ireland to “discuss finance for the Company” and that this bank official “seemed confident that the bank would be in a position to provide finance”. Documentation was furnished to the bank between the end of June and early July. He goes on to say that “however the finance did not ultimately become available although we were firmly of the view that it would”.
82. No correspondence with the bank, or no correspondence or memoranda of meetings or resolutions of the company are exhibited. Nothing is said of what precisely the Company said to its bank, and the reason it said it required funding, or the amount sought. I have accordingly no means by which I can ascertain the nature of the discussions, the amount of funding sought, or the reasons given. I consider it relevant that the engagement with the bank continued only up to early July, i.e. before the case came on for hearing in the Commercial Court, and extrapolate that the Company at that stage was confident it would succeed in obtaining the declarations that it sought in those proceedings and would therefore be in a position to continue to trade from the premises at the reduced rent for which it contended, one half of the rent expressly provided in the lease. No engagement with the bank close to the time of the settlement, or thereafter, is said to have occurred.
83. The affidavit evidence points in my view to the Company not being in a position to meet the terms of settlement negotiated on 19th July, 2016, and while I can do no more than extrapolate from the facts, the engagement with the bank was in June and early July, and did not continue up to the date of the settlement, when the agreement to pay over a million euro was formulated and made. I find it remarkable, for example, that there is no averment in the affidavit that in the course of the lengthy negotiations leading up to the settlement, the brothers made contact with the Company’s bank or other possible investors to discuss whether funds would be available to meet the payments which were agreed in the settlement.
84. I conclude that the engagement with the bank did not include a proposal or request that the bank would provide funding for the settlement, and accordingly that the averments in the second affidavit of Mr. McDermott that he believed the finances would become available is not based on a realistic view of the options and that it is unlikely in the circumstances that finances to meet the settlement would now become available, or were reasonably believed to be available on 9th august 2016 when the letter seeking indulgence was sent to the landlord.
85. It is clear that when Mr. McDermott went to negotiate with his bank the company was already insolvent, and the context of the negotiations appears to me to more probably have been the insolvency and general financial needs of the Company in that context where it had liabilities excluding rent in almost a million euro, and the perceived need to operate and control rooms in an adjoining premises, rather than a perceived need to deal with the arrears of rent which that stage the Company appears to be confident that it would not be required to pay.
86. A fundamental element of the undertaking of the Company also is the fact that it has little asset value, and the occupational lease that it enjoys contains a standard upward only rent review clause in respect of which it is common case that the rent is likely to increase by a substantial amount, and an increase of €160,000 per annum was mentioned in the course of the hearing albeit this was no more than an indicative figure. I accept the evidence of Mr. Hughes that the possibility of raising finance on this leasehold interest is limited in the light also of the historic losses of the Company and because the Company was unable to meet the terms of the settlement in the last month. The Company has little to offer in the way of fixed security. This makes it less likely that commercial funding will be available.
87. The Company did discharge the first payment due under the settlement agreement on time, and the payment of the sum of €115,000 offered no benefit to the directors personally as the amount they agreed to pay under the settlement agreement was agreed not to be reducible by any amount paid under that clause. In circumstances where there was no useful purpose to be served in making the first payment as a matter of objectively ascertainable fact, it is argued that the Company did have an intention at the time of the settlement agreement to perform the obligations. I disagree, as the amount of the payment was small enough to have been readily payable from current account, and had the first payment been missed the landlord could have re-entered the matter in the court before the Long Vacation. A longer delay was inevitable once the Vacation had started. I do not for that reason take much comfort in the fact that the first payment was made.
88. I consider that the language used in the petition wrongly gives the impression that the funding was expected and unforeseen circumstances led to the cash flow problems identified. The funding was not in place, no reasonable prospect existed that it would be obtained, and the petition was an attempt to buy more time to meet the obligations of the settlement agreement.
89. For the reasons explained above I consider it probable that the examiner will not be in a position to raise funding to meet the settlement terms and that the result of the process is likely to be the variation to the detriment of the landlord of its terms.
90. Thus the collateral effect of the examinership will in my view be to allow the Company to avoid a recently negotiated and complex settlement of proceedings, and would fail to respect the principle of finality of litigation, or the solemnity of the entering into a compromise and having its terms ruled by a court.
The employees
91. Unusually perhaps, in this examinership, the evidence points to the fact that the permanent employees are unlikely to loose their jobs even were an examiner not to be appointed. The directors of the landlord have indicated in their affidavit that they intend to continue the employment of all permanent employees other than the directors and the son or child of one of them. They are prepared to give an undertaking under oath to the court that this would be so. Some time was taken in the course of submissions to me as to whether the employees would have the benefit of the European Communities (Protection of Employees on Transfer of Undertakings) Regulations 2003, S.I. 131 of 2003, but having regard to the clear position being adopted by the landlord, I consider that the position of the employees is secure irrespective of the result of this application. Indeed, some of the supporting letters from unsecured creditors points to the high calibre of staff in the business and in maintaining a very high level of service.
92. I am satisfied that the interests of the employees will not be adversely impacted by the refusal to confirm the appointment.
Conclusion
93. The majority of cases in which examinership is sought are where a company has historic unsustainable liabilities that are required to be met if the company is to continue as a going concern. This was the position in In re Claremorris Tourism Limited and recent applications have emerged in the context of significant historic debt arising from the banking and property price collapse. However, examinership is a broad remedy and the mere fact that a debt or liability is recent does not of itself mean that the protection of the court may not be given. It is the purpose or effect of the appointment that raises issue of improper motive in the instant case, not the recent nature of the liability giving rise to the need to call for protection. However, it can readily be seen that to seek protection in regard to a threat arising from a very recent debt may require the court to be satisfied that its process is being fairly and properly engaged.
94. I am satisfied that the effect of the appointment of an examiner in the present case is that a very recent settlement of contentious litigation is likely to be avoided or varied, and that the true purpose of the petition is to avoid the onerous terms of that settlement. I consider that the petition was an attempt to buy time but that time has run out for this company.
95. I reject the suggestion that the approach of Clarke J. in In re Traffic Group Ltd., where arrangements were put in place to neutralise the wrongdoing of the directors is appropriate in the present case. The court has a power in the course of the examinership process to direct an inquiry into the behaviour of a director, to make certain orders or provisions with regard to the ongoing engagement by the directors with the company, the payment of directors remuneration etc. I consider that the motive was that of the Company and not merely a personal motive or purpose of its directors, and that no process or order I might make would avoid the consequences in respect of which I have concern.
96. The petition is to be dismissed in the exercise of my discretion. I am not satisfied that it was presented in good faith.