Confirmation
Cases
Traffic Group Ltd -v- Companies Acts
[2007] IEHC 445
Clarke J.
“5. The Law
5.1 That the actions of the principals of the company (who will almost invariably be the petitioners) in the run up to, and during, an examinership can be a factor to be legitimately taken into account in deciding whether to confirm or refuse to confirm a scheme is clear from, for example, the decision of Costello J., in Re Wogans (Drogheda) Ltd (Unreported, High Court, Costello J., 7th May 1992). As pointed out by Costello J., on page 7 of the judgment, creditors whose interests are impaired by a scheme may object to the scheme on the grounds set out in s. 25 of the Act. However, Costello J., went on to note that:-
“…the courts discretion under s. 24(3) to confirm, or to confirm subject to modifications, or to refuse to confirm the scheme proposed is not limited by the grounds set out in s. 25. If an abuse of the court’s processes has been established, I do not think that the court should ignore it and consider on its merits a scheme which had subsequently been prepared. To do so would be to condone the abusive behaviour and encourage similar conduct in the future”.
On the facts of the case before him, Costello J., considered that there had been an abuse of process and, for that as well as other grounds, refused to confirm the scheme under consideration.
5.2 However, the same Judge, in Re Selukwe Ltd (Unreported, High Court, Costello J., 20th December 1991), determined that it was appropriate to approve the scheme under consideration in that case, notwithstanding a finding that the relevant petitioners had failed to act with the utmost good faith at the time of the presentation of the petition and had, to their knowledge, significantly understated the relevant company’s Revenue debt. However, Costello J. came to the view that:-
“…the position in this case is such that these considerations to which I have referred are outweighed by what I consider to be the main consideration in this case, namely, the fact that there are thirty jobs at stake. I do not think the court should turn down the proposals if there is any prospect of saving those jobs. So notwithstanding the doubts which I have expressed I have decided to confirm the proposal subject to the modifications to which I have referred”.
5.3 That the actions of those responsible for running the company in the immediate lead up to the presentation of a petition in respect of an examinership and any failure to properly disclose all relevant facts in such an application , are factors which the court can properly take into account is, therefore, clear. However, there must also be weighed in the balance, as Costello J., pointed out in Selukwe, the underlying object of the legislation.
5.4 It is important to note that the Act is not designed to immunise the principals or shareholders of a company from the consequences of the company concerned getting into financial difficulties. The value which shareholders may have in a company (whether they are involved in its management or not) may, in practise, be extinguished or greatly diminished by bad judgment in investing in the company in the first place, by bad management (either on the part of the investors themselves or those whom they trusted to run the company) or, indeed, plain bad luck. Whatever may be the cause, it does not seem to me that it is any part of purpose of the Act to solve the difficulties of such shareholders howsoever those difficulties may have arisen. If the Act were so designed it might well give some truth to the verse penned at the time of the introduction of limited liability companies into our legal scheme, which suggested that such companies amounted to a conspiracy by gentlemen (and at the relevant time it almost always would have been gentlemen or those who claimed to be such) whereby they met together to decide by how much they would not pay their debts.
5.5 It is clear that the principal focus of the legislation is to enable, in an appropriate case, an enterprise to continue in existence for the benefit of the economy as a whole and, of equal, or indeed greater, importance to enable as many as possible of the jobs which may be at stake in such enterprise to be maintained for the benefit of the community in which the relevant employment is located. It is important both for the court and, indeed, for examiners, to keep in mind that such is the focus of the legislation. It is not designed to help shareholders whose investment has proved to be unsuccessful. It is to seek to save the enterprise and jobs.
5.6 It is as against that background that Costello J. felt that the high prospects of saving a significant number of jobs outweighed the lack of candor displayed by the petitioners in Selukwe. It is also important to note that, in addition to the lack of candor 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.
5.7 It seems to me, therefore, that a court should lean in favour of approving a scheme where the enterprise, or a significant portion of it, and the jobs or a significant portion of them, are likely to be saved. That is not to say that the court should disregard any lack of candor or other wrongful actions. It does, however, seem to me that the courts approach to such matters should take into account the following.
5.8 Firstly it needs to be recognised that there may be cases where the wrongful actions of those involved in promoting the examinership are so serious that the court is left with no option but, on that ground alone, to decline to confirm a scheme which would otherwise be in order. It is necessary, as Costello J. pointed out in Wogans, to discourage highly wrongful behaviour.
5.9 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 candor 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.
5.10 Where there is a high level of likelihood that the company can survive with a consequent saving of a significant enterprise and at least a significant proportion of the jobs at stake, the court should lean in favour of confirmation, especially if appropriate remedial measures can be put in place to mark and deal with the consequences of any lack of candour or other inappropriate action on the part of those charged with the management of the company.”
Re McInerney Homes Ltd
[2011] IESC 31
Supreme Court
O’Donnell J.
“The Test for Unfair Prejudice.
25. Section 24 provides, so far as is relevant, as follows:-
“(3) At a hearing under subsection (1) the court may, as it thinks proper, subject to the provisions of this section and section 25, confirm subject to modifications, or refuse to confirm the proposals.
(4) The court shall not confirm any proposals –
(a) unless at least one class of members and one class of creditors whose interest or claims would be impaired by implementation of the proposals had accepted the proposals, or
(b) if the sole or primary purpose of the proposals is the avoidance of payment of tax due, or
(c) unless the court is satisfied that –
i) the proposals are fair and equitable in relation to any class of member or members or creditors that has not accepted the proposals on whose interests or claims would be impaired by implementation, and
ii) the proposals are not unfairly prejudicial to the interests of any interested party.”
26. So far as is material to this appeal, the relevant provision can be reduced to this: the Court shall not confirm any proposals unless it is satisfied that the proposals are not unfairly prejudicial to the interests of any interested party.
27. The immediate context of s.24 does not itself provide any insight into what is, or is not, unfair prejudice. However this section, like any other piece of legislation, requires to be set in the context of the Act as a whole. Examinership was first introduced into Irish law by the provisions of the Act of 1990. The scheme has been refined since then, but the essential architecture and rationale of the procedure remains intact. Prior to the Act of 1990, when a company got into difficulties, the possible options open were limited and crude. A company which might have had some realistic prospect of survival if agreement could be reached with its creditors was at the mercy of the most obdurate and trigger-happy of its creditors. The process of liquidation provided for the orderly running down of the business of the company, but at a significant cost in direct terms in the cost of the liquidation, and also indirectly in the reduced value that was inevitably achieved in respect of the companies’ assets. It was recognised that these costs created the potential for the process which might be beneficial to all parties. Creditors could be asked to accept a payment of a very significant written-down debt which would still be more than they could expect to achieve after a perhaps lengthy and costly liquidation. The company that was thus restructured might be attractive to an investor who could perhaps be encouraged to pay more to become an investor in a company as a going concern than he or she would pay to acquire the assets after liquidation. This might provide monies to pay the creditors the written-down amount, and to refloat the restructured company. In theory, therefore, if the problems of the company were not prohibitively severe, the process could provide benefits to all interested parties.
28. The conduct of a successful examinership is not easy. The essential issue in every case is the amount of investment that may be secured for a restructured company and the terms of any possible restructuring. Any investor will value a company by reference to the possible value at which the assets may be acquired in a break up. There is only a limited amount more that an investor may pay. The business of the examiner may be to locate an investor, or ideally a number of potential investors, and shuttle between the parties and seek to negotiate a deal which provides benefits to all parties. The essential structure of a successful examinership should, however, be one where the good sense of the proposal should be obvious, but where the examiner has the significant additional weapon that the Court can force a reluctant creditor to cooperate and write-down his or her debt, if the Court is persuaded that the proposal is fair or, perhaps more accurately, if it is satisfied that the proposal is not unfairly prejudicial.
29. Accordingly, the examinership process is not intended to operate to secure the survival of a company at all costs. Instead the only examinerships which can be approved are those which result in proposals broadly beneficial to all reasonable parties. It is telling that s.24 of the Act of 1990 provides in very clear terms that the Court cannot approve a scheme of arrangement unless it is satisfied that it is not unfairly prejudicial to any interested party. However the clarity of the structure of the section is in contrast to the lack of specificity of the concept of “unfair prejudice”. It might be said that the Act contemplates necessary prejudice to creditors, and only prohibits prejudice which is unfair. However, it may be more correct to conceive of any scheme as being prejudicial since it requires a creditor to accept a lesser amount than is, in theory, his or her legal entitlement. For example in this case the scheme was prejudicial in that it required creditors to accept a written down amount for their debt. But it was said to be unfairly prejudicial because that was less than the banks could obtain on a receivership. The question in any particular case is whether that particular prejudice is “unfair”. The essential flexibility of the test appears deliberate. It is very unlikely that a comprehensive definition of the circumstances of when a proposal would be unfair could be attempted, or indeed would be wise. The fact that any proposed scheme must receive the approval of the Court means that there will be a hearing. The Act of 1990 appears to invite a court to exercise its general sense of whether, in the round, any particular proposal is unfair or unfairly prejudicial to any interested party, subject to the significant qualification that the test is posed in the negative: the Court cannot confirm the scheme unless it is satisfied the proposals are not unfairly prejudicial to any interested party.
30. In this case, the trial judge’s approach to the question was to view the scheme against the likely return to affected creditors under the likely alternative in the event that there was no examinership, and no successful scheme. I agree that that is a vital test. Furthermore, as the trial judge recognised, there may well be circumstances where a creditor may be required to accept less than would be obtained in such circumstances on liquidation or a receivership, but those circumstances would normally require weighty justification. However, as this case illustrates, there may remain considerable difficulty in determining the value which a creditor, and in particular a secured creditor, might otherwise obtain, by reference to which the proposal can be judged.”
Re Lodgewood Engineering Ltd
[2016] IEHC 51
McGovern J.
“8 There is no doubt that the deficit of the company on a going concern basis is significantly less than on a winding up basis and the outcome is likely to be better for creditors in an examinership than in a winding up. I cannot ignore the fact that the bank debt is far greater than any other debt of the company and that the bank is a secured creditor. Having considered the evidence and the submissions in this case, it does not seem to me that there is any unfairness in the treatment of the different categories of creditor. The different treatment of the various classes of creditors does no more than reflect the position that would arise on a winding up having regard to the fact that some are secured and some are unsecured. In a winding up, the unsecured creditors would have recovered nothing.
9. The court has been asked to consider the position if the examinership fails and the company goes into liquidation. It is argued that in that event the bank – having cleared off all the other debtors – would find itself in a better position than before, absent the examinership. While this is theoretically possible, the evidence would suggest that this is unlikely to happen and therefore I do not regard it as a factor which I should take into account in coming to my decision. There is no evidence to suggest that the bank’s statements in support of the company cannot be taken at face value.
10. If the scheme is approved, it will ensure the continued employment of at least sixteen employees of the company and this is a factor which I am entitled to take into account in reaching my decision. Insofar as some of the projected turnover has not been achieved in the final months of 2015, this can be attributed to the very mild weather and drop in sales of stoves manufactured by the company.
11. I have had regard to the matters outlined in the replying affidavit of the examiner sworn on 19th January, 2016, in response to the objections of the Revenue Commissioners. The affidavit addresses the concerns of the Revenue Commissioners and I accept the explanation of the examiner as to why the company has a reasonable prospect of survival under the proposed scheme and that it does not unfairly prejudice any particular creditor.
12. While there are some issues to be resolved between the company and the bank, I am satisfied that the bank is supportive of the company. I do not have to be certain that the scheme will achieve its purpose. But I am satisfied that the scheme, if approved, offers the company a reasonable prospect of survival. Accordingly, I approve the modified scheme presented to the court.”
Re Mc Enaney Construction Ltd
[2008] IEHC 43
Finlay Geoghegan J.
“The proposal, therefore, was that the Company would, as part of the scheme of arrangement, cancel its existing 100 issued ordinary shares. There was no indication, in the proposals, of the steps intended to be taken by the Company to effect the cancellation of its shares. Upon inquiry by the Court, counsel for the Examiner indicated that if the Court confirmed the proposals, he would seek an order from the Court pursuant to s. 24(8) of the Act that the existing 100 issued ordinary shares in the Company be cancelled.
Section 24(8) of the Act provides:
“Where the court confirms proposals under this section it may make such orders for the implementation of its decision as it deems fit.”
I formed the view that:
1. The Court should not confirm proposals which include a provision that the Company cancel issued paid-up shares unless the consequent reduction of capital is expressly authorised by the Companies Acts, 1963 – 2006; and
2. Section 24(8) of the Act does not give the Court jurisdiction to make an order that the issued shares in the capital of the Company be cancelled .
My reasons for so concluding are as follows. The effect of the cancellation of issued paid-up shares in the capital of a company limited by shares is to reduce the capital of the company. Section 72(1) of the Companies Act, 1963 (as amended by s. 231(1)(c) of the Companies Act, 1990) provides:
“Except in so far as this Act expressly permits, it shall not be lawful for a company limited by shares or a company limited by guarantee and having a share capital to reduce its share capital in any way.”
The Companies (Amendment) Act, 1990 contains no express provision enabling a company to whom an examiner is appointed under that Act to reduce its share capital as part of a scheme of arrangement.
The absence of such express provision is to be contrasted with certain other provisions of the Companies (Amendment) Act, 1990 which expressly permit a company to which an examiner is appointed to do matters which it would not otherwise be authorised to do. One such provision is s. 20, which enables a company repudiate a contract under certain conditions with the approval of the Court. Also, s. 24(7) (set out below) expressly provides for the taking effect of alterations in the memorandum and articles of association of a company specified in the proposals “notwithstanding any other provisions of the Companies Acts”. No analogous provision exists in relation to alterations in the share capital of a company proposed as part of a scheme of arrangement. .
Accordingly, if a company wishes as part of a scheme of arrangement, to reduce its share capital, then it must do so in accordance with s. 72(1) of the Act of 1963, pursuant to a provision of the Companies Act which expressly so permits. Section 72(2)(b) of the Act of 1963 is one such provision which might apply to a company in a financial situation which required the appointment of an examiner. This was not sought to be operated in the scheme of arrangement herein.
On the facts herein, the provision in the scheme of arrangement that the Company cancel its issued shares on the Effective Date, in effect, requires the Company to do something which appears to be unlawful having regard to s. 72(1) of the Act of 1963.
Section 24(5) of the Act provides that where the Court confirms proposals for a scheme of arrangement, such proposals are binding inter alia on all the members affected by the proposal and also on the company. If the Court were to confirm proposals containing a provision that the Company cancel its issued shares (and thereby reduce its share capital), it would be purporting to impose an obligation on the Company to do something which is unlawful having regard to s. 72(1). The Court cannot make an order which has such an effect. Even if the proposals for the scheme of arrangement were drafted in such a way that the obligation to cancel the shares was not expressly imposed on the Company, it does not appear to me that the Court has jurisdiction under s. 24(8) of the Act to make an order that issued shares credited as fully paid up in the capital of a company limited by shares be cancelled. If it did so, the Court would be assuming a jurisdiction to order that a step be taken, i.e. the shares be cancelled, which the Company itself has no power to do and is expressly prohibited by s. 72(1). Notwithstanding the apparently wide discretion given to the Court under s. 24(8), it does not appear to me to include the doing of an act which, if done by the Company, would be unlawful. Further, any such order of the Court would have to direct that some person or body cancel the shares. The obvious person to do this is the Company, which, again, comes back to the situation of the Court imposing on the Company an obligation to do something which is unlawful pursuant to s. 72(1) of the Act of 1963.
Happily, on the facts of this scheme of arrangement, the issued share capital was very small, i.e. €126.9738. The intention of the scheme of arrangement was that, subsequent to the Effective Date, the Investor would hold 75% of the issued share capital and Mr. McEnaney, 25%. It was possible to achieve this by modifying the scheme of arrangement so as to delete all references to cancellation of the existing 100 ordinary shares and to provide for the issue to the Investor of 300 ordinary shares at par, credited and fully paid up, in consideration of €380.92.
A similar issue arose in December, 2007, in the matter of Euro Iompu Teoranta (in examination) [2007] 372 COS In that instance, the examiner had proposed the cancellation of redeemable preference shares. For the same reasons as expressed herein, I reached a conclusion that I could not confirm the scheme of arrangement as originally proposed. In that instance, the examiner was able to modify the proposals so as to provide for the redemption of the issued redeemable preference shares for a total consideration of €20 out of the proceeds of a fresh issue of shares. The purpose of the cancellation in the scheme of arrangement, in that instance, was to remove the holder of the redeemable preference shares as a member of the company. The redemption provided for in the modified proposals achieved this. The redemption proposed was in accordance with Part XI of the Companies Act, 1990 and the shares could have been cancelled if required, pursuant to s. 208 of the Companies Act, 1990.
The confirmation of the scheme of arrangement by the Court does not, of itself, effect any change in the shareholding of the Company. As already stated, confirmation of the scheme of arrangement makes binding, inter alia, on the members and the company. The requisite resolutions of the company and/or the board of directors still have to be passed to issue and allot the new shares to the Investor.
The second issue which arose related to the amendment of the articles of association of the Company. Paragraph 5.1 of the scheme of arrangement, insofar as relevant, originally provided:
“The Articles of Association of the company shall be deemed, with effect from the Effective Date, to be amended to the extent necessary to allow these proposals to be implemented. Without prejudice to the generality of the foregoing, the period during which the directors are empowered to allot shares contained in article 2 of the Company’s Articles of Association shall be extended to the extent necessary to enable the shares to be allotted to the Investor.”
The intention was that the articles of association of the Company would then be amended pursuant to s. 24(7) of the Act. This provides:
“Any alterations in, additions to or deletions from the memorandum and articles of the company which are specified in the proposals shall, after confirmation of the proposals by the court and notwithstanding any other provisions of the Companies Acts, take effect from a date fixed by the court.”
It is to be noted that, if s. 24(7) is to apply, such alterations must be “specified in the proposals”. The original proposals of the Examiner did not specify the intended alterations to the articles of association. The modified proposals confirmed by the Court on 14th February, 2008, expressly specified the amendments to be made in articles 1 and 2 of the articles of association.
The requirement in s. 24(7) that the proposed amendments be specified is consistent with the need for certainty at any time as to the relevant provisions of the memorandum and articles of association of a company. If the Company had amended its articles by special resolution, the resolution would have had to be filed in the Companies Registration Office. Hence, on 14th February, I made an order pursuant to s. 24(8) of the Act that the articles of association, amended as specified in the modified proposals, be filed in the Companies Registration Office within 21 days.”
Re Mc Inerney Homes Ltd & Ors
[2010] IEHC 340
Clarke J.
“4. Prospect of Survival
4.1 While it is true to say that each case in which the question of a reasonable prospect of survival arises in the context of an application to appoint an examiner turns on its own facts, there are certain general features which tend to crop up in most cases. By definition, as a result of s. 2(1) of the Companies Amendment Act 1990 (“the 1990 Act”), a company entering examinership has to be insolvent. The first port of call has, therefore, to be to identify why the company is in financial trouble in the first place. There will normally be two consequences of whatever has led to the company’s troubles. First, whatever losses are attributable to that cause remain a blot on the company’s balance sheet and will need to be addressed in some form or other if the company is to survive. Second, unless the cause is largely a one off event or series of connected events with no continuing affect other than the losses attributable to them (such as, for example, a failed diversification or take over), then it will be necessary for the company to adopt measures to ensure that those causes are addressed and that its day to day trading into the future can realistically be projected as being likely to operate on a profitable basis.
4.2 Both of those questions arise in the context of McInerney. Its problems have left a huge gap in its balance sheet. Any prospect of survival requires a solution to that problem whether in the form of a reduction in its liabilities (principally to its bankers) or a significant injection of capital in the form of an investment or, more realistically, having regard to the scale of the problem, both of the above. In essence, therefore, a solution must be found to the very large hole in McInerney’s balance sheet by a reduction in its debt to its banks and an investment if it is to have any realistic prospect of survival.
4.3 In addition, the problem of whether McInerney will be in a position to be able to trade profitably into the future needs to be addressed. It is not, therefore, just a case that McInerney has suffered a one off loss and has now returned to profitable trading on a day to day basis. Rather, it is clear that McInerney continues to suffer from a very significant reduction in the number of units which it can sell. There has, therefore, to be a realistic basis for believing that that problem can be solved in order that McInerney can have a realistic prospect of survival.
4.4 It, therefore, seemed to me that there were two issues that needed to be addressed under this heading. The first was as to whether there was a realistic prospect of being able to solve the companies’ capital problem by a reduction in its bank debt and an investment. For the reasons which I have already addressed in the context of the negotiations which took place between the existing Banking Syndicate and Oaktree, those two elements of the equation are necessarily closely interlinked. Second, in addition, it is necessary that there be a realistic basis for believing that the business of McInerney, should it emerge from examinership, would be able, on a day to day basis, to trade profitably into the future. I propose setting out my reasons for concluding that McInerney had established a realistic prospect of survival under both of those headings in the sequence which I have set them out.
4.5 So far as McInerney’s capital shortfall is concerned, the situation is complicated by the position adopted by the Banking Syndicate. The stated position of that Banking Syndicate, through counsel, at the hearing before me, was that the syndicate had taken the view that it no longer wished to be a lender to McInerney. It was not, however, absolutely clear to me as to the basis on which that indication was given. As a matter of fact, on the evidence, it would appear that negotiations continued between IBI on behalf of the Banking Syndicate and McInerney and Oaktree, after the Banking Syndicate indicated in early August that it was calling in its loans insofar as it could and, indeed, after an interim examiner was appointed. While there was some dispute between the parties as to whether those negotiations were without prejudice, it seemed to me that, for the purposes of the application with which I was concerned, it was sufficient that I have regard to the fact of those negotiations rather than the detailed position adopted by the parties in same. The final position adopted on affidavit on behalf of the Banking Syndicate seemed to me to suggest that it was the view of the Banking Syndicate that the gap between the parties still remained very large, notwithstanding what seemed to be an improved offer by Oaktree made less than a week before the hearing before me. That offer appears to have been improved in the sense that Oaktree indicated a willingness to accept a lower reduction in McInerney’s debt to the Banking Syndicate than had previously been its stated position.
4.6 Leaving aside, for the moment, the precise terms of any possible arrangement, it seems that, at a general level, what was being discussed was the possibility that Oaktree would make an investment of the order of €40,000,000 into the McInerney Group as a whole divided, as I have pointed out, as and between the UK division and the Irish division. On the other side, in the event of an agreement, the Banking Syndicate would accept that its total liabilities would be reduced by writing off some portion of those liabilities. Provided the amount and terms of an Oaktree investment coupled with the amount and terms of continuing banking facilities could be agreed by both parties, then there would be no reason, in principle, why a satisfactory arrangement might not be made. It was to that end that negotiations were being conducted.
4.7 However, it is clear that, in order for any such arrangement to be satisfactory to the Banking Syndicate, the syndicate would have to be persuaded that the amount that it was likely to recover through such a restructuring would be at least as much as the amount that it might recover through a receivership.”
Re: SIAC Construction Ltd
[2014] IESC 25
Supreme Court Fennelly J.
“Conclusions
59. This appeal has come before the Court in highly exceptional circumstances. Kelly J had virtually completed the process of approval of the Scheme of Arrangement before the last-minute appearance of a solicitor then extremely recently instructed for the appellant. No notice or other paper, document, letter or even written submission of any kind was placed before the High Court. Kelly J permitted the appellant the exceptional indulgence of being heard. In so far as he did so, it is clear that he heard argument in support of an application that the Scheme be modified to take account of the claim of the appellant that the Scheme treated it in an unfairly prejudicial manner. The claim of unfair prejudice related to two aspects of the scheme. They were: firstly, the exclusion by clause 9(1)(c) of claims for penalty, interest or damages; secondly, the exclusion by Clause 12.3 of subrogation claims.
60. The appeal must be strictly limited to those aspects of the decision of the High Court. The scope of the appeal, therefore, and this judgment is limited to a consideration of whether, in the respects alleged, the scheme is unfairly prejudicial to the appellant.
61. Section 22(1)(d) of the Companies (Amendment) Act, 1990 requires that “the proposals provide equal treatment for each claim or interest of a particular class”.
62. Section 24 provides as follows:
(4) The court shall not confirm any proposals –
(c) unless the court is satisfied that –
i) the proposals are fair and equitable in relation to any class of member or creditors that has not accepted the proposals and whose interest or claims would be impaired by implementation; and
ii) the proposals are not unfairly prejudicial to the interests of any interested party.
63. Reflecting that provision, s. 25 permits a member or creditor at a hearing under s. 24 to object to confirmation of proposals on the ground that “the proposals unfairly prejudice the interests of the objector.”
64. The appellant’s claim was, in the light of a counterclaim that it wished to bring against the Company in Poland, it considered itself to be a creditor of the Company in respect of a damages claim and a subrogated claim in respect of payments said to have been made by the Appellant to various sub-contractors engaged on the A4 Contract.
65. The notion of “unfair prejudice” in the Act requires to be considered from at least two points of view. Firstly, there is the question of whether the objector is unfairly treated by comparison with how he would be likely to fare in a liquidation. Secondly, a court will have regard to his treatment vis-à-vis other creditors.
66. There can be no question, on the facts of the present case, of the appellant being the victim of unfairly prejudice by reference to the outcome of a liquidation. It must, for this purpose, be regarded as being an unsecured creditor. Assuming the appellant to be a creditor, the position is simple. It would, like all other unsecured creditors, recover nothing in a liquidation. Clarke J in Re Traffic Group Ltd [2008] 3 IR 253 considered the possibility that, on a winding up, there might be more funds, on the facts of that case, available to meet the entitlements of the Revenue as preferential creditor. At page 264 of the report he said:
“It is clear from cases such as Re Antigen Holdings Ltd. [2001] 4 I.R. 600, that a court can approve of a scheme, in all the circumstances, even where a creditor may be likely to do worse under the scheme than the same creditor might on a winding up. However it would, of course, be the case that if there were an extreme and disproportionate disparity between the position of a creditor on a winding up and under the scheme proposed compared with the position of other creditors under both alternatives, same might be a factor to be properly taken into account in ruling against confirmation of the scheme.
67. I am not sure that the disparity need be either extreme or disproportionate. If the proposals were clearly less favourable to an objector than the alternative of a winding up, a court might well come to the conclusion that they were unfairly prejudicial. What is clear, however, is that nothing of the sort arises here. The appellant would not, as an unsecured unagreed creditor, receive anything on a liquidation. Nor, of course, would any other such creditor.
68. The case for the appellant is quite narrowly focused on two provisions of the Scheme, namely Clause 9(1)(c) which excludes it from making a claim for penalties, interest or damages and Clause 12.3 insofar as, it is claimed, it precludes it from participating, to the extent of 5%, for its subrogated claims.
69. There are two aspects to the notion of unfairly prejudice. The underlying assumption is that the person in question is, to begin with, prejudiced, that is to say that his interests as a creditor (or, where relevant, a member) are adversely affected or impaired by the proposals. It is the inevitable consequence of the insolvency to a company is that every creditor will, in that sense, suffer prejudice no matter what proposals are put forward. But prejudice is not enough to trigger the court’s obligation to refuse to confirm the proposals. It must in addition be unfair. Unfairness, in turn comprises two essential aspects, the general notion of injustice and the more specific one of unequal treatment.
70. The Act, however, does not seek to define or to preordain what is to be considered to be “unfairly prejudicial” in any particular case. I would adopt the approach outlined by O’Donnell J in his judgment in Re McInerney Home Ltd [2011] IESC 31:
“It is very unlikely that a comprehensive definition of the circumstances of when a proposal would be unfair could be attempted, or indeed would be wise. The fact that any proposed scheme must receive the approval of the Court means that there will be a hearing. The Act of 1990 appears to invite a Court to exercise its general sense of whether, in the round, any particular proposal is unfair or unfairly prejudicial to any interested party, subject to the significant qualification that the test is posed in the negative: the Court cannot confirm the scheme unless it is satisfied that the proposals are not unfairly prejudicial to any interested party.”
71. I would also approve the following helpful passage in Corporate Insolvency and Rescue, by Irene Lynch-Fannon and Gerard Nicholas Murphy (2nd Ed. Bloomsbury Professional 2012) at paragraph 13.43:
“While the court can take into account the prejudice an individual may suffer if the scheme is implemented, the prejudice must be unfair; the court will also consider the prejudice that will be caused to other creditors and employees if the scheme is not approved by the court and weigh both considerations in the balance when deciding whether or not to confirm the scheme of arrangement.”
72. The court will need to assess any claim of a creditor to be unfairly prejudiced by proposals from all angles. There will be a wide range of potentially relevant elements in the factual circumstances of the company, some affecting the creditor adversely and some favourably. As can be seen from the cases, a court will take note of the fact that some creditors, while losing heavily in the write-down of their debts, are likely to benefit if the company is able to resume trading. A party may claim to be prejudiced by the loss of an advantage, right or benefit. On the other hand, it may be relevant to note that the same party is in a position to retain a right or benefit which is not available to other creditors.
73. Whether a set of proposals is unfairly prejudicial to any particular interested party will involve a comparison of the treatment of that party with any similarly situated interested party. The court will also take account of any aspects of either party’s individual position which places it at either an advantage or disadvantage. The court will take account of the totality of the circumstances. The interests of each creditor will depend on its setting.
74. A good illustration of a judge considering and weighing in the balance the different individual aspects of creditors’ claims is to be found in the judgment of McCracken J in Re Antigen Holdings Ltd. [2001] 4 I.R. 600. He was concerned, respectively, with the right of the banks as creditors to recover normal rates of interest weighed against the length of time it would take to discharge their debts within the capacity of the company to pay wighed against the benefits to trade creditors if the company was to be rescued. Here is how he approached the matter at page 603:
“I then have to consider whether the banks have been unfairly prejudiced. It is beyond doubt that if the company has to go into liquidation, then the banks will receive considerably less than they would under the scheme and this is a consideration to be taken into account. But it is not the only one. It has to be said that no creditors are getting paid interest. The banks’ debt of course is by far the largest proportion of the debts owed to the creditors and they undoubtedly are not being treated in the same way as the ordinary creditors. They are being paid off over a longer period and there is some validity in their point that interest to a bank is the equivalent to the profit made by an ordinary trade creditor on selling his goods and the trade creditors are in fact getting paid that profit. However the question is: is this unfair?
The purpose of the scheme is to ensure the viability of the company. This can only be done if there is a reasonable time span in which to discharge the debt and if there is an amount being paid which is within the capacity of the company to pay. Now the vast bulk of remaining creditors are trade creditors who are presumably going to continue trading with the company. I do not think it is unfair they should get some priority because they are going to keep the company going.
I should also say while the court has power to make modifications, which is what is being sought by the banks, the court cannot re-write the scheme. In my view if the banks were to be paid interest, or the alternative they suggest, repaid all their capital immediately, I think there would clearly have to have been new meetings of the creditors to consider this and of course this would carry with it the possibility that the creditors would not accept it and would not accept what would be effectively a new scheme and that would be most undesirable. It is also undesirable in the present case to postpone the final decision because this is a company which effectively has to some extent to keep trading.”
Cisti Gugan Barra Teorenta
[2008] IEHC 251
Finlay Geoghegan J.
“24. However, as the monies to be invested had not yet been produced for the purpose of implementing my decision to confirm the Proposals, I made an order under s. 24 (8) of the Act, directing the Investor to complete the investment in accordance with the Investment Agreement on 8th July, 2008, and gave liberty to apply to the Examiner and the Company. The reason for which I made this order was not that I doubted the bona fide intention of the Investor, as communicated by the letter from its solicitor, but rather, in the interests of creditors, to give a quick method by which the parties could come back into court if any unforeseen difficulty arose in the completion of the investment on the Effective Date. The implementation of the Scheme of Arrangement confirmed by the court is dependent upon the investment. Therefore, it appeared appropriate that as the monies had not already been made available by the Investor, that the order of confirmation should include an order under s. 24 (8) directing the investment to be made on the agreed date and a mechanism for enforcing that obligation within these proceedings i.e. including liberty to apply for the purpose of enforcing the order. This order was only made after the Investor had been notified that the court was contemplating an order under s. 24 (8) and given an opportunity to appear and be heard.
25. The Scheme was confirmed subject to modifications. Certain of the modifications were relevant only to the facts of this Scheme. There were, however, two modifications of more general application.
26. First, the Examiner had sought to address the conditionality of the investment by including in the Proposals at para. 6.3, the following:
“I will seek an order that, in the event that the First Investment is not made on or before the due date, I will be required to inform the Court immediately. In such a circumstance, pending the further order of the Court, the Company will remain under Court Protection and the Proposals will not become effective.”
At the first hearing, the Examiner, through his counsel, accepted that on a full consideration of the Act, the court has no jurisdiction to make the type of order referred to above and, in particular, no jurisdiction to extend the protection period beyond the date upon which the Scheme of Arrangement comes into effect. This is by reason of s. 26 of the Act which provides:
“(1) Subject to section 5, the protection deemed to be granted to a company under that section shall cease-
(a) on the coming into effect of a compromise or scheme of arrangement under this Act, or
(b) on such earlier date as the court may direct.
(2) Where a company ceases to be under the protection of the court, the appointment of the examiner shall terminate on the date of such cessation.”
27. Section 24 (9) provides that a Scheme of Arrangement comes into effect from a date fixed by the court not later than twenty-one days from the date of its confirmation. Accordingly, the protection conferred on the Company by s. 5 of the Act, automatically ends at latest on the date fixed by the court for the coming into effect of the Scheme of Arrangement. The court cannot extend it beyond that date. Accordingly, one of the modifications was the deletion of para. 6.3 of the Proposals.
28. The second modification to which I wish to refer, is that made in relation to a recommended amendment to the Articles of Association. The Examiner had recommended that the Articles of Association be amended by providing that the existing redeemable preference shares be redeemed for the sum of twenty euros, but had not specified the actual amendment required to the Articles of Association to so provide. Section 24 (7) of the Act provides:
“Any alterations in, additions to or deletions from the memorandum and articles of the company which are specified in the proposals shall, after confirmation of the proposals by the court and notwithstanding any other provisions of the Companies Acts, take effect from a date fixed by the court.”
The above subsection appears to require that the actual text of any amendment to the Articles of Association be specified in the Proposals. The purpose of s. 24 (7) of the Act, in requiring specification of the actual amendment, appears to be certainty. No resolution of the Company is required to effect the amendment which would normally provide the text. A person who needs to know what is the current text of the Memorandum and Articles of the Company should be able, if necessary, to ascertain the wording of any amendment made pursuant to s. 24 (7) of the Act, by consulting the Scheme of Arrangement confirmed by the court. Hence, the actual text of the amendment was included as a modification.
29. For clarity, I also made an order pursuant to s. 24 (8) that the Company file in the Companies Office an amended Articles of Association within twenty-one days. Such filing is required where a company, by resolution, amends its Memorandum or Articles of Association”.
Star Elm Frames Ltd & Companies Acts
[2013] IESC 57 (10 December 2013)
Judgment of Ms. Justice Laffoy delivered on.10th December, 2013
Background
1. Star Elm Frames Limited (the Company) was incorporated on 19th July, 2011. In September 2011 it acquired the assets and goodwill of the business of another company, Star Elm Limited (SEL), which was being wound up, from the liquidator at the price of €130,000, of which the sum of €65,000 remains due and owing to SEL (in liquidation). Since the acquisition was completed, the Company has carried on the business acquired, the manufacture and delivery of casement windows, doors and patio doors, from premises at Raheen Business Park, Raheen, County Limerick, which are held by it on lease. At present the Company has thirty one employees.
2. During its first year of trading, to mid-August 2012, the Company incurred an operating loss of €329,739, which represented 8.28% of turnover. In the following trading year, to mid-August 2013, it incurred an operating loss of €166,276, which represented 4.85% of turnover, which had diminished by 14.03% in that year. However, expenses as a percentage of turnover had also been reduced in that year.
3. On 26th September, 2013, the first date in respect of which the Court has an estimated statement of affairs, the Company had a deficit of €277,638 on a “going concern” basis. The Revenue Commissioners were the Company’s largest creditor. According to the Revenue Commissioners, the Company has a total tax liability of €418,237, comprising €384,374 in respect of VAT for periods November/December 2012, March/April 2013, May/June 2013 and July/August 2013 and €33,863 in respect of PAYE/PRSI for 2013. While there had been engagement between the Company and the Revenue Commissioners prior to October 2013, what appears to have precipitated the Company’s actions which led to these proceedings was the fact that on 1st October, 2013 the Revenue Commissioners placed an attachment on the Company’s bank account, in consequence of which the Company was going to be unable to discharge wages which were due to be paid on 3rd October, 2013.
The petition
4. On 3rd October, 2013 the Company presented a petition to the High Court seeking an order pursuant to s. 2(1) of the Companies (Amendment) Act 1990, as amended (the Act of 1990) appointing an examiner to the Company, On the same day, the Company applied ex parte to the High Court for the appointment of an interim examiner. By order of the High Court (Butler J.) made on 3rd October, 2013, Joseph Walsh (the Interim Examiner) of Hughes Blake, Chartered Accountants, was appointed as interim examiner until after the hearing of the petition on 4th November, 2013. There was before the Court on the hearing of the ex parte application a report dated 2nd October, 2013 of John Tobin, Certified Public Accountant, of J. P. O’Donohoe & Co., which was presented as the report of an independent accountant for the purposes of s. 3(3A) and (3B) of the Act of 1990 (the Independent Accountant’s Report).
5. When the petition came on for hearing before the High Court (Charleton J.) on 4th November, 2013, in addition to the Independent Accountant’s Report, there was before the Court an affidavit of the Interim Examiner, which exhibited a report of the Interim Examiner covering the period from his appointment on 3rd October, 2013 to 4th November, 2013 (the Interim Examiner’s First Report). There was also before the Court an affidavit sworn by Philip Moloney, an officer of the Revenue Commissioners, on 1st November, 2013. It was made clear in that affidavit that, while the Revenue Commissioners were bringing certain concerns they had to the attention of the Court to assist the Court’s adjudication on the petition, they were neutral as to the Company’s application for protection. At the hearing of the petition counsel for the Revenue Commissioners maintained the “guardedly neutral” approach to the application to appoint an examiner.
The decision of the High Court on the petition
6. By order of the High Court (Charleton J.) made on 4th November, 2013 it was ordered that the protection of the Court afforded to the Company be lifted forthwith and that the Interim Examiner be discharged as Interim Examiner of the Company. On 5th November, 2013 the said order was stayed until 8th November, 2013.
7. In an ex tempore judgment Charleton J. set out his reasons for refusing the application. First, the petitioner had failed to satisfy him that the Company was in a position where it had a reasonable prospect of survival as a going concern. Secondly, he was not satisfied that he should exercise the discretion conferred on the Court by the Act of 1990 in favour of the Company, which had collected VAT but had not remitted it to the Revenue Commissioners over a period of a year going back to November 2012, in circumstances where the Company had already defaulted on a “scheme to repay” insisted on by the Revenue Commissioners.
The Appeal
8. The Company served notice of appeal against the decision of the High Court on 6th November, 2013. Subsequently, the Company applied for a stay on the order of the High Court. That relief was granted and the position is that the Court protection and the appointment of the Interim Examiner have remained in place pending the determination of the appeal.
The sources of evidence before the Court on the hearing of the appeal
9. As has happened in the past, for example, in In the Matter of Gallium Limited [2009] 2 ILRM 11, there was new evidence before this Court on the appeal, which, adopting the words of Fennelly J. in his judgment in the Gallium Limited appeal, “had the effect of placing an entirely different complexion on matters as they had appeared before the High Court”. The new evidence consisted of:
(a) an affidavit of David Sage, a director of the Company, sworn on 6th November, 2013;
(b) an affidavit of the Interim Examiner sworn on 8th November, 2013, which exhibited a report of the Interim Examiner covering the period from 5th November, 2013 to 7th November, 2013 (the Interim Examiner’s Second Report);
(c) a further affidavit of the Interim Examiner sworn on 12th November, 2013, which exhibited a further report of the Interim Examiner covering the period from 8th November, 2013 to 12th November, 2013 (the Interim Examiner’s Third Report), to which there was appended a document entitled “Proposals for a Compromise and Scheme of Arrangement between the Company and its Members and Creditors” (the Scheme Proposals), which had been prepared by the Interim Examiner; and
(d) an affidavit sworn by the Interim Examiner on the 26th November, 2013 exhibiting a further report of the Interim Examiner for the period from 13th November, 2013 to 26th November, 2013 (the Interim Examiner’s Fourth Report).
10. There was also before this Court a second affidavit sworn by Mr. Moloney on behalf of the Revenue Commissioners on 12th November, 2013, which raised issues in relation to the viability of the Company having regard to matters asserted in the Independent Accountant’s Report and in the Interim Examiner’s Second Report. It was suggested that clarification of those matters would assist this Court in its consideration of the viability of the Company and its consideration of the prospects of the Company’s survival as a going concern. On receipt by the Revenue Commissioners of the Interim Examiner’s final affidavit sworn on 26th November, 2013, there was an exchange of correspondence between the Revenue solicitor and the solicitors for the Interim Examiner. The Revenue solicitor’s letter dated 26th November, 2013 identified certain issues arising out of the Interim Examiner’s Fourth Report which required further consideration. The response dated 27th November, 2013 was from the Interim Examiner to the Revenue solicitor and it included an appendix setting out an updated cash flow projection for six weeks, the first being the week ending on 29th November, 2013. That correspondence was furnished to the Court on the hearing of the appeal on 27th November, 2013.
Hearing of the Appeal
11. On the hearing of the appeal there were submissions from counsel for the Company, counsel for the Interim Examiner and counsel for the Revenue Commissioners. Counsel for the Revenue Commissioners reiterated that the Revenue Commissioners were not opposing the appointment of an examiner. However, they continued to have significant concerns in relation to the evidence and were continuing to assist this Court in its consideration of the issues. There was no appearance by or on behalf of any creditor of the Company other than the Revenue Commissioners.
The law
12. There was consensus between the parties as to the relevant legal principles to be applied in determining the issues before this Court.
13. Sub-section (1) of s. 2 of the Act of 1990 empowers the Court to appoint an examiner to a company which complies with the requirements set out in paragraphs (a), (b) and (c) of that sub-section, which I am satisfied are complied with by the Company, “for the purposes of examining the state of the company’s affairs and performing such duties in relation to the company as may be imposed by or under” the Act of 1990. Sub-section (2) of s. 2, as amended, provides:
“The court shall not make an order under this section unless it is satisfied that there is a reasonable prospect of the survival of the company and the whole or any part of its undertaking as a going concern.”
Here, the Court is concerned with the survival of the Company.
14. Of particular relevance to the application of those provisions, by reference to the requirements of sub-sections (3A) and (3B) of s. 3 of the Act of 1990 in relation to the report of an independent accountant which must accompany the petition under s. 2 and the contents of the report, to the circumstances of this petition is the approach adopted by the Supreme Court to the application of those provisions in In the Matter of Gallium Limited. Having stated that the onus of proof is on the petitioner, Fennelly J. stated (at para. 46):
“However, the statutory requirement is to show that ‘there is a reasonable prospect of the survival of the company . . .’. A petitioner does not, by getting over that threshold, acquire a right to have an order made. I still think it is fair to say that the section confers a ‘wide discretion’ on the court, or alternatively, that the court should take account of all the circumstances. The establishment of a reasonable prospect of the survival merely triggers the power, which remains discretionary.”
The manner in which the Court exercises its discretion under s. 2 was elaborated on by Fennelly J. in succeeding paragraphs as follows:
“47. The entire purpose of examinership is to make it possible to rescue companies in difficulty. The protection period is there to facilitate examination of the prospects of rescue. However, that protection may prejudice the interests of some creditors. The court will weigh the existence and degree of any such prejudice in the balance. It will have regard to the report of the independent accountant.
48. The Court has to take account of all relevant interests. The independent accountant must consider whether examinership would ‘be more advantageous to the members as a whole and the creditors as a whole than a winding-up of the company . . .’. This does not limit the range of interests to be taken into account by the court under section 2. The interests of employees cannot be excluded. In the case of an insolvent company, it is natural that the creditors will have the greatest interest in the future, if any, of the company. The court will take a balanced approach, as suggested by the reference to the creditors as a whole.”
The evidence
15. The opinion of Mr. Tobin in the Independent Accountant’s Report, based on the projections of the Company’s profit or loss over the twelve months to September 2014 which had been prepared by the directors of the Company and which, in his opinion, appeared to be viable, was that, subject to certain conditions, the Company has a reasonable prospect of survival as a going concern. The conditions he stipulated were:
(a) the securing of investment to fund a Scheme of Arrangement;
(b) the ability of the directors to implement and maintain efficiencies which were planned and were already implemented on an ongoing basis; and
(c) the approval of a Scheme of Arrangement by the members, creditors and the High Court.
In relation to the first condition, when the matter was before the High Court, the prospective investor had been named in the petition, which had been verified by an affidavit sworn by Michael Quaid, the owner of 100% of the issued share capital and a director of the Company, on 2nd October, 2013. In Mr. Moloney’s first affidavit, which was before the High Court, it was averred that the Revenue Commissioners had a judgment against the prospective investor for a sum in excess of €45,000, which remained unsatisfied and that the Revenue Commissioners had serious concerns with regard to the prospective investor’s ability to invest money in the Company. The factual position has changed materially since the matter was in the High Court, because that prospective investor has fallen out of the picture. In the Scheme Proposals alternative investors have been identified and no issue has been raised as to their ability to invest the agreed sum, €120,000.
16. In the Interim Examiner’s First Report, which was before the High Court, the Interim Examiner, who had then been in place for thirty three days, expressed the view that the conditions set out in the Independent Accountant’s Report are achievable. In his subsequent reports, which were prepared for this Court, the Interim Examiner maintained the belief that the Company has a reasonable prospect of survival based on projected trading, which, in turn, was based on current turnover and reduced cost. In the Interim Examiner’s Third Report his view was expressed in a very forthright manner. He stated that he was firmly of the view that the projections are reasonable and achievable. In the Interim Examiner’s Fourth Report, the belief of the Interim Examiner that the Company has a reasonable prospect of survival was reiterated in similar terms.
17. The attitude of the largest creditors has not changed since the matter was before the High Court. As has been made clear, the largest creditor, the Revenue Commissioners, while having raised issues which have been of considerable assistance to the Court, have made it clear that they are not opposing the petition. The second largest creditor is the Company’s main supplier, Profile 22 Systems (Profile 22), which is based in England. The Interim Examiner had put before the High Court an undated letter from Profile 22 confirming that it had continued to supply the Company since the petition was presented and would continue should the appointment of an examiner be confirmed. Further, it was stated that Profile 22 supports the application for the appointment of an examiner. The Interim Examiner appended to the Interim Examiner’s Fourth Report a letter dated 19th November, 2013 from the landlord of the unit occupied by the Company at Raheen Business Park, which is a creditor of the Company. That letter stated that the landlord supports the application to appoint an examiner. This Court was informed by counsel for the Company that the liquidator of SEL (in liquidation) also supports the appointment of an examiner, although no written communication to that effect has been put before this Court.
18. The most significant difference between the factual picture which was presented to the High Court and the evidence before this Court is that the Interim Examiner has put before this Court the Scheme Proposals. While it is no function of this Court to express a view on the Scheme Proposals, which will be the function of the High Court under s. 24 of the Act of 1990 if the examinership proceeds, the information contained in the Scheme Proposals, which was not before the High Court, is pertinent to the determination of the core issue which this Court has to determine on the appeal – whether it can be satisfied that the Company has a reasonable prospect of survival as a going concern. In broad terms, the Scheme Proposals envisage funds of €150,000 being available to implement the proposals. Those funds are to be made up of –
(a) input in the sum of €120,000 by two outside investors, who have been identified, comprising a long-term loan in the sum of €60,000 to the Company and an investment in shares of the Company in the sum of €60,000, and
(b) Company funds in the amount of €30,000, which have been generated since the Interim Examiner was appointed.
The proposed treatment of the creditors differentiates between various classes of creditors and, in very broad terms, provides as follows:
(i) the so-called “Retention of Title” creditors, which class I assume primarily relates to Profile 22, will have the option of exercising their retention of title rights;
(ii) the so-called “Lien Creditor”, meaning the liquidator of SEL, will be repaid the debt due to SEL (in liquidation) by sixty equal monthly instalments, the first instalment to be paid on 1st January, 2014;
(iii) the Revenue Commissioners’ debt is to be paid in full, 21% of it, which amounts to €87,500, to be paid within thirty days of the Scheme becoming effective and the balance over a period of seven years by three monthly equal instalments, the first instalment payable on 31st March, 2014; and
(iv) the Company’s landlord and the unsecured creditors will be paid 2.5% of their respective debts within thirty days of the Scheme becoming effective.
Apart from meeting the foregoing payments, the funds available will have to meet the costs of the examinership, which have been estimated at €52,000. As regards the owner of 100% of the issued share capital of the Company, Mr. Quaid, counsel for the Company pointed out that his shareholding will be diluted on the allotment of shares to the outside investors.
19. The Revenue Commissioners have reserved their rights as regards the Scheme Proposals and, in particular, the right to make submissions in respect of the proposals if and when the issue of confirmation of such proposals has to be determined by the Court in accordance with s. 24 of the Act of 1990. Counsel for the Revenue Commissioners submitted that this Court should be sceptical as to whether an injection of €120,000 is going to transform the fortunes of the Company and enable it to pay back the Revenue Commissioners and to avoid further arrears of tax accruing in the future. In particular, he highlighted that the costs of the examinership (€52,000) and the first payment to the Revenue Commissioners (€87,500) is coming out of that investment, the conclusion this Court was invited to draw being that there is no clear evidence before this Court now that the Company has a reasonable prospect of survival as a going concern.
20. Counsel for the Revenue Commissioners also questioned the reliability of projections in relation to cash flow and profitability contained in the Independent Accountant’s Report, which was before the High Court, when compared with the actual performance of the Company during the eight weeks of the interim examinership prior to the hearing in this Court and of the projections of the Interim Examiner appended to his letter dated 27th November, 2013 for the following six weeks. There are undoubtedly inconsistencies in that data, which are difficult to reconcile or rationalise. The strongest point made by the Interim Examiner in support of his recent projections is that they were based on a very strong order book and the current debtor’s ledger as at 27th November, 2013.
Conclusions
21. Adopting the approach adopted in In the Matter of Gallium Limited, the first question to be addressed is whether the petitioner has got over the threshold stipulated in s. 2(2) of the Act of 1990 and has satisfied this Court on the evidence adduced both before and since the order of the High Court that the Company has a reasonable prospect of survival as a going concern. Although, having regard to the analysis of the evidence conducted by counsel for the Revenue Commissioners, it must be acknowledged that this is very much a borderline case, the conclusion I have come to is that the Company has got over the threshold. The fact that both the Independent Accountant’s Report and the various reports of the Interim Examiner clearly and unequivocally support it, is the most important factor in reaching that conclusion.
22. On an application to court under s. 2, the court is usually to a very considerable extent reliant on the report of the independent accountant which is required to accompany the petition in accordance with s. 3(3A) and (3B) of the Act of 1990, although it may be supplemented, in a case where an interim examiner has been appointed by the court, by the report furnished by the interim examiner to the court at the hearing of the petition, in determining the crucial question as to whether it is satisfied that the company has a reasonable prospect of survival as a going concern. That being the case, while it is appreciated that the directors of the company will be the primary source of the material on which they form their respective opinions as to the prospect of the company surviving, both the independent accountant and the interim examiner must act independently of the company and of its directors and members in giving their respective opinions to the court. Further, s. 4A of the Act of 1990 imposes a strict duty of “utmost good faith” in the preparation of the presentation of the petition on the petitioner and on the independent accountant. It is particularly important that both the independent accountant and where appropriate the interim examiner are scrupulous in discharging their duty which involves giving the Court the benefit of their independent opinion, setting out the reasons for it and where appropriate indicating any contrary factors. In this case, genuine concerns have been raised and cogent arguments made on behalf of the Revenue Commissioners. I am of the view on balance however that there is not a sufficient basis for rejecting the opinions put before this Court in the Independent Accountant’s Report and in the various reports furnished by the Interim Examiner that the Company has a reasonable prospect of survival, and, accordingly, on balance, I accept that is so.
23. Turning to the “wide discretion” which, the petitioner having got over that threshold, is reposed in the Court, having regard to all of the circumstances, I consider that the discretion should be exercised in favour of continuing the protection of the Court and appointing the Interim Examiner as examiner for the purposes of s. 2(1) of the Act of 1990. On the evidence now before this Court, it is reasonable to conclude that an examinership would be more advantageous to the creditors as a whole than a winding up of the Company, which is the only alternative. It is of particular relevance that no creditor has opposed the appointment of an examiner. Three of the major creditors, Profile 22, the liquidator of SEL (in liquidation) and the Company’s landlord, have signified support for the petition. While the Revenue Commissioners, the largest creditors, apprised the Court of their concerns, it was made clear that they were not opposing the petition. The interests of the Company’s thirty one employees, who would inevitably become unemployed if the application were refused, favour continuing the protection of the Court and appointing the Interim Examiner as examiner. At this point in time the interim examinership has been in place for over two months and a considerable amount of work has been done by the Interim Examiner in examining the affairs of the Company and in formulating the Scheme Proposals. Subject to the observations in the next paragraph, the overall picture at this point in time indicates that the continuance of the protection and the appointment of the Interim Examiner as examiner is the course which is least prejudicial to the interested parties and, in particular, to the creditors as a whole.
24. As has been made clear earlier, although they have been outlined in very general terms, nothing in this judgment is to be construed as an endorsement of the Scheme Proposals which will, if appropriate, be considered at a hearing under s. 24 and where interested parties will have the opportunity of making their views known. On the contrary, it does seem that a very meagre provision is made in the Scheme Proposals for the Company’s unsecured creditors. It is recommended that the proposed provision for the unsecured creditors should be re-assessed by the Interim Examiner on his appointment as examiner.
Re: SIAC Construction Ltd & ors
& Companies (Amendment) Act 1990 (as amended) [2014] IESC 25 JUDGMENT of Mr. Justice Fennelly delivered the 8th day of April, 2014.
1. The appeal has come before this Court in truly remarkable circumstances. The SIAC Group of companies has been in examinership since October 2013. The Examiner made proposals for a Scheme of arrangement. On the 7th February 2014, the High Court heard the Examiner’s application for approval of his proposals, when it announced that it would pronounce its decision on 12th February. On that date Kelly J. announced his decision approving the proposals. On that date also, the appellant made its first appearance indicating that it wished to have modifications made to the proposed Scheme. Although it had provided no evidence, the Court permitted it to be heard on Friday 14th February. On that date, it had still produced no evidence. The matter proceeded on the basis of the evidence which the Examiner had placed before the court. The High Court rejected the appellant’s application. The appellant immediately appealed to this Court. It was permitted, exceptionally, an early hearing of its appeal.
2. However remarkable these circumstances, it is clear that the High Court permitted the appellant to appear and argue its case. This Court has entertained the appeal and has heard the appellant as well as the Examiner, the companies and the investor.
3. The Court, on Tuesday 24th February announced that it was dismissing the appeal. This judgment contains the reasons for that decision.
4. I propose, in the first instance, to outline the history of these examinership proceedings. Next I will describe the appellant’s application. Having referred to the relevant statutory provisions and the authorities on the relevant legal issues, I will apply these to the appellant’s appeal.
5. On 23rd October 2013, SIAC Construction Limited (hereinafter “SCL”) presented a petition to the High Court for an order that the protection of the Court be extended to that company and to a number of related companies. The order was duly made and the Examiner was appointed on an interim basis.
6. The petition was based on the Independent Accountant’s Report (IAR) of 23rd October 2013 prepared by Kieran Wallace, Chartered Accountant, of KPMG.
7. SCL was incorporated in 1913. It is the largest trading company of the Group which comprises some fifty trading and non-trading subsidiaries. SIAC Holdings (Ireland) Ltd (“SHIRE”) is the intermediate holding company for the SIAC Group’s trading business which comprises Civil Engineering and subcontracting works. There are three main interconnected divisions in the group: civil engineering, subcontracting and a property division. SCL is the largest trading company in the group.
8. SIAC has for many years been one of the best known and successful groups of companies in the construction and engineering sector of the Irish economy. Its history goes back for about 100 years. It has performed numerous contracts including road infrastructure, has been involved in the construction and widening of our new network of motorways. It operates primarily in the public sector, constructing roads, bridges, railways and water infrastructure for government agencies, local authorities and other state agencies both in Ireland and overseas. It frequently engages in joint ventures with other enterprises. It is a normal contract requirement that SCL provide a bond for the benefit of the client to cover a percentage of the contract sum.
9. SCL, the principal company, was highly profitable until 2011. It commenced to incur losses in 2012 and projected a substantial loss for the year 2013. At the time of entry into examinership it had 145 full-time employees working both in Ireland and the United Kingdom. Following a decline in construction activity in Ireland, as a result of the general financial crisis, it sought opportunities outside Ireland, most materially, for present purposes, in Poland. It was to a large extent difficulties arising on its Polish project which threatened the survival of SCL and of the SIAC group.
10. The IAR says that, apart from the decline in the Irish construction market, the largest contributing factor to the Group’s financial difficulties was its contract in Poland.
11. SCL, as part of a consortium with PBG S.A. with a Polish contractor, and two of its subsidiaries (HYDROBUDOWA POLSKA S.A. and APRIVIA S.A.), tendered for and was awarded a €365 million contract, the A4 contract, by the appellant, which is the Polish roads authority (GDDKiA), for the A4 road of 35 km of motorway and bridges from Tarnow to Rzeszow. The contracting authority is GDDKiA, the Polish State Treasury, the appellant in the present matter. I describe it as the appellant.
12. The history of the Polish project is central to the present appeal. Almost the only information available to the Court is contained in the IAR, to which, therefore, it is necessary to refer.
13. While work commenced on the A4 project in August 2010, SCL encountered numerous difficulties from the outset. It complains that it should have had a complete workable design from the commencement. This was not the case. The consortium was forced to carry out a complete redesign on part of the largest key structure, which resulted in severe delays. There were numerous other sources of delay. Extensions of time recommended by the client’s engineer, were never formally issued. A separate arrangement to fund cash flow had to be arranged with a bank, Bank Pekao SA.
14. In June 2012, the joint venture partner, which was the primary funder of working capital through Pekao, entered into an insolvency process under the protection of the Polish courts. At this point almost all bridge construction was complete. SCL offered to complete the venture on its own provided that the recommended extensions of time were granted and that all contractual entitlements were paid. The appellant refused to agree to any such terms.
15. On 24th July 2012, SCL served a 14 day notice of termination on the appellant under the contract claiming that the appellant had failed to perform its obligations under the contract provisions. The contractor, it is claimed, was then entitled to have its bond returned and to claim a contractual penalty of 10% of the contract price (including VAT) and payment of outstanding contractual entitlements. SCL’s share of the penalty, €42 million, would, it is claimed have been €21 million. The IAR does not record, but the Court has been informed that the appellant also served a notice of termination on 25th July 2012.
16. According to SCL, as recorded in the IAR, its contractual claims and other entitlements against the appellant amount in gross value to €210 million, of which SCL’s share is €113 million. These contractual claims include a PVC (price variation) claim of €64 million and circa €87 million concerned with operational issues claimed to be based on the appellant’s failure properly and fairly to administer the contract. The merits of these claims have not yet been assessed. It is acknowledged that many of the claims made by SCL are hotly contested. The most that can be said at this stage is that, assuming substantial work has been performed under the contract, it is not unreasonable to expect that substantial payments are due. All this is the common material for dispute under large building or engineering projects.
17. SCL had provided a contract performance bond in the sum of €10.7 million through Allianz Polska SA. The appellant demanded payment from Allianz. SCL disputed its right to do so. At first it obtained an injunction to prevent this, but the Polish courts reversed this and directed Allianz Polska to pay over the bond. SCL were forced to fund this payment via Allianz plc (in Ireland) and another company. To date €5.9 million has been paid and SCL remains liable to fund further payments: €350,000 in 2013, €2.4 million in 2014 and €2.4 million in 2015. These payments have placed severe strain on the finances of SCL.
18. The final issue relating to Poland concerns trade creditors, i.e., the normal claims for monies due for supply of works and services including rights of subcontractors. The appellant is obliged under Polish law to pay certain creditors’ claims up to certain limits. The IAR says that creditors in Poland have been reduced from €36 million to €7.4 million as a result of payments made by the appellant. These payments have become the subject of one of the claims advanced by the appellant before the High Court and on this appeal, where they take the form of subrogation claims. The IAR says nothing about the possibility that the appellant might be able to recover the sums so paid to creditors on the basis of any right of subrogation, although it might be assumed that such provision would exist under most systems of law. The terms of Clause 12.3 and Clause 20.3 of the Scheme relate to subrogation and set-off and will be considered later.
19. The Independent Accountant, in his report expressed the opinion that, subject to the following conditions, the companies and the whole or part of their undertakings had a reasonable prospect of survival as a going concern. The conditions were:
• The Company being granted the protection of the High Court;
• SHIRE being granted the protection of the High Court;
• The other seven (7) related entities being granted the protection of the High Court;
• The acceptance of an appropriate scheme of arrangement by the creditors and members of the Companies and its approval by the High Court;
• An investment of such funds that would support the Companies future working capital requirements and allow for the implementation of a scheme of arrangement with the Companies creditors;
• The restructure of Group debt to a level that is sustainable for both the individual companies and the Group as a whole;
• The continued co-operation of the Company’s key suppliers and sub-contractors during the protection period and beyond;
• The continued co-operation of SCL’s Employers/clients on current and future contracts during the protection period;
• The implementation of the Group Restructuring Plan;
• The continuing availability of bonding and insurance facilities;
• The continued co-operation of the Group’s Lenders and the future availability of funding;
• The write down of creditor liabilities;
• Maintenance of tax clearance certificate for contract tendering and collection of debtor balances.
20. On 6 November 2013, the High Court made an order confirming the Examiner’s appointment.
21. The appointment of the Interim Examiner was published in Irish newspapers and, on Monday 23rd October 2013 and a Polish translation of this notice was published in Poland in GazetaWyborcza and Rzeczpospolita on 29th October 2013 and 31st October 2013 respectively. Confirmation of the Examiner’s appointment was published in Iris Oifigiúil, Irish newspapers as well as Rzeczpospolita on 8th November 2013, 9th November 2013, and 12th November 2013 respectively. These are nationwide daily newspapers circulating in Poland. Both are widely used by state bodies, receivers and liquidators and businesses.
22. During the same period the appellant was party to proceedings in Poland brought in respect of the calling in by the appellants of the performance bond. In the context of these proceedings the appellant was formally on notice of the examinership process by the 21st of November 2013, at the latest – as the examinership was raised at the Court hearing in Rzesow, Poland where the Company and the appellant (GDDKiA) were parties to the matter heard.
23. The appellant did not, at any time, submit any claim to be a creditor of SCL.
24. The Examiner, in due course, prepared a scheme of arrangement for presentation to the creditors and ultimately to the Court.
25. On 17th January 2014, the Examiner circulated notices together with the Scheme Proposals and related documentation relating to the creditors’ meetings to all Polish creditors. The creditors’ meetings were convened for 27th January 2014.
26. Meetings of the members and creditors of the Company and Related companies duly took place.
27. On 24th January 2014 the Examiner reported to the High Court that an investment of €10.5 had been agreed with investors, namely LKG Investments Limited and Finn Lyden. On that date SIAC (Butlers) Ltd was removed from the list of companies under protection; an order was made for its winding up.
28. The Examiner applied to the High Court ex parte on 29th January 2014 for leave to deliver his report pursuant to s. 18 of the Companies (Amendment) Act 1990 and for the fixing of a hearing date for an application to the Court for sanction of his proposals for the SCL and related companies under s. 24 of the Act. The Court duly granted such leave and fixed Friday 7th February 2013 as the date the hearing of the Examiner’s application.
29. Clause 7 of the Scheme is headed: “CLASSES OF CREDITORS AND EFFECT OF PROPOSALS.” Clause 7.1(a) lists 11 classes of Creditors of the Company as at the Fixed Date.” Leaving secured and preferential creditors and other special classes, most relevantly for present purposes, it lists “Unagreed Creditors” and “Contingent Creditors,” both being unsecured creditors. A number of Appendices contained listings of names of Creditors compiled from Company records. Clause 7(1)(d) provides for Unagreed Creditors as follows:
“Any Creditor or party claiming to be a Creditor:
– whose claim is not included in the Appendices; or
– which appears in the Appendices without the addition of the letter “Y”; or
– which disputes the amount of its claim as it appears in the voting form accompanying these Proposals,
shall be deemed to be an “Unagreed Creditor” for the purpose of these Proposals, which term shall be construed consistently with Clause 9.1(c) and shall be dealt with under the terms set out below.”
Clause 7.2 provides for “Determining the Claims of Unagreed Creditors.” It contains detailed provisions for the determination of the claims of Unagreed Creditors by an “Expert,” whose determination is to be “final and binding on both parties.” The Company and the Unagreed Creditor is each liable for 50% of the costs and expenses of the Expert.
30. Two Polish creditors, CEMEX and Karmar, appeared in the High Court to object to Clause 9.1(c) of the proposals, which provides:
“No interest, penalties, damages (save in respect of personal injuries) or costs save those which have been awarded prior to the Fixed Date by a court of competent jurisdiction shall be payable by the Company to any Creditor.”
31. On 7th February 2014, Kelly J heard the s. 24 application. There was substantial argument on behalf of CEMEX and Karmar as to the allegedly unfairly prejudicial effect of the exclusion of damages claims under the proposals on them.
32. Kelly J reserved his judgment to be delivered on 12th February 2014. On that date he delivered his ex tempore judgment. He dealt with the scheme generally and addressed a number of issues and three objections. He commenced by referring to the report of the examiner as follows:
“On 24th January 2014, the examiner reported to the court that an investment of €10.5m had been agreed with a number of investors, all of whom had signed an investment agreement with the companies………………”
33. The following are the principal points of his judgment:
“Having been under the protection of the court since last October, the Examiner has put together a scheme of arrangement which he now asks this court to confirm pursuant to the provisions of s. 24 of the Companies (Amendment) Act 1990.
“The companies are involved in the construction and contracting businesses and have three main areas of activity. They are civil engineering, subcontracting and investments…………………
”The scheme involves the companies being split into two groups. [The learned judge names the individual companies.]
”The proposed scheme will see the investment funds being used to pay the various classes of creditors under the proposals, to pay the examiner’s remuneration and expenses with the balance being used to provide working capital.
“There are minor differences between each scheme by reference to the classes of creditors but in the main, they provide that the payment of a €5m aggregate sum, the secured creditors will be repaid overdraft facilities only in full and on such payment will release their security over the companies’ assets.
“The preferential creditors will receive 10% of the debt due in full and final settlement within 21 days. Contingent preferential creditors will likewise receive 10% of the amount due in full and final settlement within 21 days of their claims ceasing to be contingent. Insofar as agreed creditors are concerned, they will receive 5% of their debt within 21 days. Unagreed, unsecured creditors will receive 5% of their debt within 21 days of the claim being determined as agreed unsecured creditors using the mechanism which is set out in the scheme of arrangement. Intercompany creditors will receive zero. Contingent creditors will receive 5% of their debt and what are described as employment appeal creditors are to receive a specified sum which amounts to 60% – 70% of the debt. Insofar as shareholders and members are concerned, the entire issued share capital will transfer to a nominee of the first investor for a nominal consideration.“
34. The learned judge observed that there was “no doubt that if the scheme [was] not approved, the companies [would] go into liquidation or receivership and that unsecured creditors instead of obtaining 5% of their debt as they [did] under the scheme [would] get a zero return.” It was, as he said, “against that backdrop,” that he examined the objections which had been raised. He expressed himself satisfied that the conditions for his confirmation of the scheme had been met. He continued:
“In addition, it is incumbent on me to be satisfied that there is a reasonable prospect of survival of these companies in the event of my approving the scheme. The opinion expressed by the examiner which is supportive of that notion is fortified by the trading performance to date during examination, the future trading prospects and the post investment balance sheet. His report makes it clear that the various conditions identified by the independent accountant have been met and that if the proposals are confirmed, the surviving companies will be placed on a sound commercial footing so that they will be able to exploit opportunities available to them in the coming years. Indeed, the current and anticipated list of contracts for work in this jurisdiction is impressive. The companies also have the continued support of their bankers.”
35. The learned judge considered three individual objections to the scheme advanced by creditors, one Irish and two Polish, the creditors mentioned above, on the basis of its being allegedly unfairly prejudicial to their interests. He noted that he had been informed by the examiner that the investor was not prepared to make available any additional monies and that the only alternative to the scheme was receivership or liquidation, in which event the unsecured creditors would receive nothing. He found that all creditors in each class were being treated equally, that all would be adversely affected in suffering a huge write-down in their entitlements and that the unsecured creditors would receive no return in the event of receivership or liquidation. In these circumstances he did not find that any of the creditors who had made objections were unfairly prejudiced. He proposed to confirm the scheme.
36. However, on the evening of Tuesday 11th February 2014, the eve of the delivery of the ruling of Kelly J, solicitors for the appellant contacted the solicitors for the Examiner seeking a copy of the Proposals. On the morning of Wednesday 12th February 2014, they e-mailed the Examiner’s Solicitors. No copy of that email has been provided to the Court: the Examiner has informed the Court that the email said that that, in the light of a counterclaim that the appellant wished to bring against the Company in Poland, it considered itself to be a creditor of the Company in respect of a damages claim and a subrogated claim in respect of payments said to have been made by it to various sub-contractors engaged on the A4 Contract. The email asked that the Examiner consider a modification to the Proposals: (a) to permit the Polish State Treasury to pursue its putative counterclaim before the Polish Courts and outside the Expert determination process under clause 7.2 of the Proposals, and (b) to permit the appellant to step into the shoes of creditors paid by it under the A4 Contract notwithstanding clause 12.3 of the Proposals.
37. Kelly J delivered his ruling on the morning of Wednesday 23rd February, indicating that he would confirm the proposals subject to some queries which he had arising from the amended proposals which ad been delivered on 10th February. Those queries were then dealt with.
38. It was then that counsel for the Examiner informed the Court that correspondence had been received late on the previous evening from the appellant. It was intimated to Kelly J that discussions were taking place between the respective solicitors and that it was anticipated that there might be an agreed revision to the scheme. The matter was put back to Friday 14th February. No agreement proved possible. The Examiner asked the learned judge to confirm the scheme. A solicitor for the appellant was permitted to address the court, as Kelly J put it, “as to why there should be a variation to the schemes to accommodate his particular client’s situation.”
39. It should be immediately noted that the appellant had provided no evidence as to the nature of its interest. It did not even write formally explaining its claim. The appellant explains its omissions, in its written submissions addressed to this Court, by saying that, when it was initially advised that SIAC had entered the examination (for which it does not provide a date) it was “preoccupied with putting together [its] counterclaim in the Polish proceedings…” In the High Court, the appellant advanced essentially two points:
1. It was said that Clause 9(1)(c) of the scheme was unfairly prejudicial to the interests of the appellant by excluding any claim for penalties, interest or damages, claims which the appellant would be entitled to make in a liquidation. The appellant accepted that it was an unsecured creditor in respect of any claim it might have. Kelly J ruled that the appellant, insofar as it had a liquidated claim, would be entitled, as an unsecured creditor, to a 5% dividend. Insofar as any claim to damages was concerned, the learned judge pointed out that the reality of the situation was that a limited sum of money was being invested. This would provide a small sum for unsecured creditors. In the event of liquidation, there would be no dividend at all. Every unsecured creditor was being dealt with in the same way. He did not consider that there was anything in the objection made “either by reference to the comparison with what would occur in liquidation or by reference to the provisions of s. 22(1)(d) of the Act.” He declined to modify the scheme.
2. The second point was treated by Kelly J as relating to the provisions as to set-off in the scheme. The learned judge refers to the provisions of Clause 12 of the scheme. It appears from the submissions made on the appeal that the appellant’s complaint relates to its rights, under Polish law, to be subrogated, as against the companies (SCL) to the claims of trade creditors such as sub-contractors who have been paid off by the appellant. It is preferable to address this issue as it arose on the appeal. At any rate, insofar as this aspect of the claim was concerned, Kelly J ruled that the appellant was being treated in the same way as all affected creditors. There was no breach of the provisions of s. 22(1)(d) of the Act. Again, the learned judge declined to modify the scheme.
40. The Examiner has explained to the Court that the position he adopted before the High Court was as follows (referring to the appellant as GDDKiA):
(1) GDDKiA is a substantial debtor of the Company but now claims to be a significant creditor of the Company in an amount which it says may exceed the Company’s claim against it, though this is disputed;
(2) As GDDKiA is not listed in any Appendix to the Scheme and its claim is not accepted, it is an Unagreed Creditor for the purposes of clause 7.1(d) of the Proposals;
(3) Insofar as the claims which GDDKiA has posited are asserted by way of set-off against the existing claims of the Company, the position of GDDKiA is protected by Article 6(1) of Council Regulation EC 1346/2000 (the “Insolvency Regulation”) – viz.
“The opening of insolvency proceedings shall not affect the right of creditors to demand the set-off of their claims against the claims of the debtor, where such set-off is permitted by the law applicable to the insolvent debtor’s claim.” (Consistent with the preservation of the Company’s right of set-ff under Clause 12.3 of the Proposals).
(4) Insofar as GDDKiA seeks to establish a claim for payment against the Company, however, that claim is subject to the provisions of the Proposals applicable to every other Unagreed (and unsecured) creditor. In particular:-
(i) The GDDKiA claims are subject to expert determination under clause 7.2;
(ii) Under Clause 9(1)(c) no interest, penalties, damages (save in respect of personal injuries) or costs (save those which have been awarded prior to the Fixed Date by court of competent jurisdiction) shall be payable by the Company to GDDKiA; and
(iii) Clause 12.3 operates to preclude a subrogated claim for payment or right of indemnity as against the Company in respect of any payment made by GDDKiA, consistent with the preclusion of set-off in respect of a post-insolvency payment claim. Any dispute between the Appellant and the Company as to such a claim falls to be dealt with under Clause 7.2 of the Proposals by way of expert determination.
(5) If, on determination by the expert, in accordance with Clause 7.2, it is found that the GDDKiA is entitled to payment in respect of any part of its claim against the Company (notwithstanding the significant claims made by the Company against GDDKiA) it will rank for dividend under the Proposals in respect of that claim for 5% in the ordinary way.
(6) This treatment of GDDKiA is not unfairly prejudicial. GDDKiA is treated precisely the same way as every other creditor of the Company asserting a claim by way of interest, penalty, damages or cost. On a winding up, a liquidator could choose to pursue GDDKiA for the same claims as now maintained by the Company – in which case the same set-off rules would apply as apply in the examinership. If GDDKiA established a claim over and above the Company’s claim, it would rank as unsecured in the winding up for such payment and would receive a nil return. In fact they do better under the Proposals – their right of set-off is preserved and there is, subject to expert determination, some prospect of a 5% return on any claim established before the expert.
41. The learned judge confirmed the scheme. He fixed an effective date: 5 pm on Monday 17th February.
42. The appellant has now appealed to this Court. The Notice of Appeal claims that the High Court judge was mistaken in rejecting its claim to have been unfairly prejudiced. The Scheme, it is claimed, is unfairly prejudicial insofar as it precludes the appellant from maintaining any claim for damages and/or from making any subrogation claims.
43. It must once more be noted that neither the High Court nor this Court has any evidence before it with regard to the amount or the nature of the appellant’s claim. The nature of the relationship between the appellant and SCL is, at least to some degree, apparent from the IAR. The relevant parts of that report have been summarised earlier.
44. At a general level, it is apparent that the appellant is the contracting authority which awarded the contract for the construction of the 35 km A4 road including bridges to the joint venture in which SCL was a participant. The material in the IAR is evidence of a contractual relationship between the parties for a period of some two years from 2010 to 2012. Substantial work was performed under the contract. SCL has outstanding claims against the appellant, which it has quantified at some €113m. It is obvious that there are very serious unresolved disputes between the parties. Nonetheless, the general picture is one where the appellant appears to be a debtor to SCL for very substantial sums. The appellant has not, at any stage, placed any material before the High Court or this Court to displace the prima facie picture that the appellant is a debtor rather than a creditor. It has not submitted any claim as a creditor.
45. The appellant has, in very general terms, summarised the respective claims and counterclaims as follows in its written submissions in which it is described as the “Polish State Treasury”:
1. In accordance with Polish Law the Polish State Treasury was legally required to discharge and did discharge substantial sums due to SIAC and PBG subcontractors, which amount so far to PLN87,520,437.50 (€20,838,199 approximately). The Polish State Treasury in turn is advised that it is entitled to recover these sums from SIAC and PGB on a subrogated claims basis.
2. In addition, the Polish State Treasury is entitled to damages against SIAC and PGB following service of a termination notice by it on SIAC on July 25th for non performance under the principal contract including ‘slow progress’ and the fact that SIAC had itself served a notice of termination of the contract on the previous day, July 24th 2012.
3. The quantum of the Polish State Treasury damages claim under the contract amounts to PLN207,893,546.28 (Contractual penalty PLN 176,361,140.69 and interest accrued PLN 31,532,405.59) (€49,498,463 approximately) as a result of the consortiums failure to complete the contract. SIAC for its part has commenced proceedings in Poland seeking payment of approximately €30 million, (in response to which the Polish State Treasury has lodged a counterclaim claiming damages and interest. SIAC has also intimated that it intends to bring further claims (as set out in paragraph 1.41 of the IAR) totalling an additional €83 million making in total claims for €113 million. These claims by SIAC, as acknowledged in the IAR, will be ‘vigorously defended’ by the Polish State Treasury and are strongly disputed.
4. In summary therefore the Polish State Treasury claims that SIAC is indebted to it in an aggregate amount of approximately €70 million whereas SIAC has intimated that it has claims against the Polish State Treasury for approximately €113 million. In the event that the Polish State Treasury prevails in its claims against SIAC, as it believes it will, SIAC’s liability to the Polish State Treasury is almost double the amount owed to its secured creditors (€37 million) and some €18 million more than the total amount owing to the unsecured creditors (€53 million). (The amount owing to the Polish State Treasury by SIAC may rise in the event that further claims are made by SIAC’s sub-contractors against it).
46. The appellant accepted in the High Court and appears also to accept in this Court its classification as an unagreed creditor entitled to be paid 5% of its claim. It says that the only claims that it has against SCL are:
1. firstly, by way of what it describes as contractual penalty (liquidated damages) and interest for breach of contract;
2. secondly, arising out of sums paid to subcontractors of SCL.
47. It says that the scheme precludes it from making either of these claims and that it is, thus, unfairly prejudicial. It says that the first heading of claim is precluded by Clause 9(1)(c) of the Scheme, which is as follows:
“No interest, penalties, damages (save in respect of personal injuries) or costs save those which have been awarded prior to the Fixed Date by a court of competent jurisdiction shall be payable by the Company to any Creditor.”
48. It says that the second heading of claim is precluded by Clause 12.3 of the Scheme as follows:
“For the avoidance of doubt, any Creditor, whether contingent or otherwise, who may be called upon to make a payment to any person whatsoever, including but not limited to a payment made to any party on foot of a personal guarantee given by such Creditor or a payment made to any party on foot of a contract of insurance by such Creditor, shall not be entitled, in respect of any such payment, to a subrogated claim or a right of indemnity against the Company and shall be deemed to have waived any and all rights and claims in subrogation against the Company which he may now have, or which may arise at any time.”
49. The result, the appellant says is that, unlike other unsecured creditors, whether agreed, unagreed or contingent, it is shut out from recovering 5% of its debt. It claims that the Examiner has provided no justification for excluding these headings of claim. It was submitted that the appellant is uniquely prejudiced by comparison with other creditors. Those with liquidated claims will, at least, recover 5% of that amount, whereas the appellant, which does not have such a claim, is denied the right to any dividend payment or recovery, while SCL is permitted to maintain its proceedings and its claims against the appellant. In the case of the subrogated claims, in particular, it says that a Polish sub-contractor on the A4 Motorway project could recover 5% of its claim, whereas the appellant which discharged some or all of a sub-contractor’s claim would be precluded from any recovery.
50. It should be noted that the appellant made its late intervention in the High Court in support of an application for modification of the Scheme of Arrangement proposed by the Examiner. The submissions of counsel for the appellant at the hearing of the appeal appeared to go further. Faced with the undisputed opinion of the Examiner that, in a liquidation, there would be no dividend at all for unsecured creditors, including the appellant, he submitted that the Court should find unfairly prejudice even if that were to result in their being no payment for any unsecured creditors, presumably including Polish sub-contractors and suppliers.
51. In legal terms, the appellant claims that it is treated in an unfairly prejudicial manner in terms of ss. 24 and 25 of the Act. The Examiner is required to satisfy the Court that the proposals being put forward are not unfairly prejudicial. In addition, it is submitted that the Scheme is inconsistent with the cornerstone of insolvency law which is that creditors in the same class and position are to be treated equally and without favour. It relies on s. 22(1)(d) of the Act which requires that “the proposals provide equal treatment for each claim or interest of a particular class.”
52. Both the Examiner and the Company object in the strongest terms to the late entry and attempted participation of the appellant in the proceedings. They object, in particular, to the failure of the appellant to place any information before the High Court. The Examiner has disputed both the basis of the subrogation claims and their quantification. It claims, for example, that the appellant paid subcontractors out of money provided to it pursuant to the bond mentioned above. The Examiner claims that the appellant was aware of the examinership process by 21st November 2013 at the latest but submitted no claim.
53. The Examiner submits that the appellant’s submissions are based on a number of misconceptions. In particular, he says that the Scheme does not in terms preclude the Appellant from “maintaining a claim against SIAC for damages and interest and for any subrogated claims.” A damages claim, it is said, may be maintained by the appellant but only by way of set-off against the Company’s claims, though not for payment and that a similar position may apply in respect of a subrogated claim for payment. The Examiner also says that any such claims are unagreed claims subject to the provisions of Clause 7 of the Scheme and subject also the Company’s right to assert set-off under Clause 20.3 of the Proposals. The examiner’s position as to the extent to which the appellant may be entitled to raise a defence of set-off in the Polish courts is considered later in this judgment.
54. The Examiner makes a submission, which he describes as fundamental, namely the failure on the part of the appellant to recognise the very real substantial protection it enjoys by way of set-off against the Company’s very substantial claims against it. He explains that the existence and availability of this right of set-off goes a significant way to explaining the fair treatment of the Appellant. While the appellant is equally impaired with the other creditors in terms of exclusion from payment of the claims it advances, the fact that it is a substantial debtor and that any rights of set-off which it claims to have under Polish law are preserved, means that it at least holds the prospect of obtaining some value from its asserted damages claim. Clearly, the Examiner is here referring to the context of claims against the Appellant in the Polish courts. It should be noted here that the Court has no information about the provisions of Polish law on these issues.
55. He rejects the appellant’s claim that he has failed to provide any rationale for the exclusion of any payment in respect of penalty, interest and damages. In an affidavit sworn on 6th February 2014, the Examiner had deposed as follows:
“14. The majority of Creditor claims received from Polish Creditors attempted to claim for interest and penalties above the core debt. These calculations are complicated and subject to significant amount of subjectivity and are disputed by [the Company]. While there are a number of creditors (circa five creditors) from Poland who formally expressed that disagreement with the provisions of Clause 9.1 of the Scheme that I proposed in respect of [the Company], the large unagreed unsecured creditor list reflects the nature of such claims for interest and penalties. The effect of provision 9.1 is that no interest, penalties or costs over and above creditor’s substantive claim will be payable. The relevant Polish creditors have queried the rationale for amounts appearing against their names in the Scheme differ to those which were lodged with me. The basis for this is as provided for Clause 9.1 – that is to say a disallowance of any penalty claim over and above the basic debt.
15. I say that a certain number of creditors have argued that this stance is unfairly prejudicial to their interests. While perhaps more appropriately a matter for legal submission, I say believe that it is not so in circumstances where the same treatment is applied in the proposals across all of the creditors of [the Company], and where, if the Company was wound up or placed into receivership, the creditors concerned would recover nothing in respect of their claims. Furthermore, there is a finite amount of investment available to the Company and, therefore, any further dividend to these creditors could only be paid at the expense of the other creditors. In the circumstances, while certain creditors will undoubtedly feel aggrieved that I have decided my proposals to disallow such penalty claims, I do not believe that this can properly be characterised as being inequitable in any way or unfairly prejudicial to the interests of such creditors.
16. In addition, I say that the investment is conditional on the Scheme being approved and implemented without material modification and the investors have confirmed to me that they are not agreeable to such a potentially significant change to the amounts to be paid to creditors particularly where the goodwill of many of the creditors who would be adversely affected is of importance to the continued trading of the Company. If the creditors who are claiming in respect of “damages” were in a separate class, given the level of uncertainty in relation to the precise quantum of claims, it would not have been possible to offer a percentage recovery (other than one which was much lower than 5%) but rather a defined amount of money would have had to have been made available to meet their claims with a consequence of potentially long delay in making any payments to support all of the claims had been agreed. In those circumstances, the creditors, in my view, would have fared worse than they will if the scheme proposed by me is approved by this Honourable Court and implemented.”
56. The Examiner refers to other affidavits sworn in the context of the objections by two Polish creditors to this precise point. He makes the two points that, firstly, the only alternative to the Scheme is liquidation, in which event unsecured creditors would get nothing, and, secondly, that the matter must be considered in the light of the fairness of the Scheme as a whole: any potential unfairness of the exclusion, applying across the board of all creditors. He adds that the alternative of including damages claims across all creditors (apart from being in a massive, uncertain and deeply disputed amount) would have unfairly prejudiced the claims and interests of supply and service creditors with a consequent detrimental impact on the prospects for survival of the Company as a going concern. . Such a modification would have made it impossible to offer any certainty of a return to the unsecured trade creditors and certainly not in the form of a guaranteed percentage dividend on their agreed claims. In the Examiner’s view, any such a change to the proposals could not be countenanced “in circumstances where the goodwill of many of the creditors who would be adversely affected is of importance to the continued trading of the Company.” The examiner has insisted that, in any event, the investor would not countenance any modification of the Scheme so as to make provision for these claims as formulated by the appellant.
57. The Companies, in their separate submissions in support of the position of the Examiner, especially argue that the appellant should be limited to the submissions it made to the High Court, namely that it was unfairly prejudiced and that it sought modifications of the Scheme. They argue that the Examiner has sworn uncontroverted affidavits to the effect that there are insufficient investment funds to bring provide for a modified Scheme of Arrangement in which the appellant would receive a 5% dividend. Thus what the appellant seeks is, in fact, impossible. It accepts that, in some circumstances, a comparison with how a creditor raising an objection, would fare on a liquidation may be relevant to determining unfairly prejudice. However, in circumstances where the ultimate effect of a creditor’s action would be to deprive all the other unsecured creditors of a dividend rather than securing any improvement in its own position, the result may be different.
58. Finally, the Court agreed, in the special circumstances of this case, to hear counsel for the investors, LKG Investments Limited and Finn Lyden, although that entity is not one of the parties listed in s. 24(1) of the Act as “persons [who] may appear and be heard at a hearing under subsection (1)…” The Examiner and the Companies supported the intervention of the investor. Counsel for the appellant did not object. The Court considered that it had power to hear the investor and noted that the High Court had permitted the investor to intervene in a number of cases. The Court considered that it was of special importance to ascertain the attitude of the investor to any modification of the Scheme to accommodate the interests of the appellant. In the event, the position was very simple. The investor made it abundantly clear that it would not accept any modification to the Scheme with that end in view. Put bluntly, it was not prepared to complete its investment in circumstances where the Scheme was to be rewritten.
Conclusions
59. This appeal has come before the Court in highly exceptional circumstances. Kelly J had virtually completed the process of approval of the Scheme of Arrangement before the last-minute appearance of a solicitor then extremely recently instructed for the appellant. No notice or other paper, document, letter or even written submission of any kind was placed before the High Court. Kelly J permitted the appellant the exceptional indulgence of being heard. In so far as he did so, it is clear that he heard argument in support of an application that the Scheme be modified to take account of the claim of the appellant that the Scheme treated it in an unfairly prejudicial manner. The claim of unfair prejudice related to two aspects of the scheme. They were: firstly, the exclusion by clause 9(1)(c) of claims for penalty, interest or damages; secondly, the exclusion by Clause 12.3 of subrogation claims.
60. The appeal must be strictly limited to those aspects of the decision of the High Court. The scope of the appeal, therefore, and this judgment is limited to a consideration of whether, in the respects alleged, the scheme is unfairly prejudicial to the appellant.
61. Section 22(1)(d) of the Companies (Amendment) Act, 1990 requires that “the proposals provide equal treatment for each claim or interest of a particular class”.
62. Section 24 provides as follows:
(4) The court shall not confirm any proposals –
(c) unless the court is satisfied that –
i) the proposals are fair and equitable in relation to any class of member or creditors that has not accepted the proposals and whose interest or claims would be impaired by implementation; and
ii) the proposals are not unfairly prejudicial to the interests of any interested party.
63. Reflecting that provision, s. 25 permits a member or creditor at a hearing under s. 24 to object to confirmation of proposals on the ground that “the proposals unfairly prejudice the interests of the objector.”
64. The appellant’s claim was, in the light of a counterclaim that it wished to bring against the Company in Poland, it considered itself to be a creditor of the Company in respect of a damages claim and a subrogated claim in respect of payments said to have been made by the Appellant to various sub-contractors engaged on the A4 Contract.
65. The notion of “unfair prejudice” in the Act requires to be considered from at least two points of view. Firstly, there is the question of whether the objector is unfairly treated by comparison with how he would be likely to fare in a liquidation. Secondly, a court will have regard to his treatment vis-à-vis other creditors.
66. There can be no question, on the facts of the present case, of the appellant being the victim of unfairly prejudice by reference to the outcome of a liquidation. It must, for this purpose, be regarded as being an unsecured creditor. Assuming the appellant to be a creditor, the position is simple. It would, like all other unsecured creditors, recover nothing in a liquidation. Clarke J in Re Traffic Group Ltd [2008] 3 IR 253 considered the possibility that, on a winding up, there might be more funds, on the facts of that case, available to meet the entitlements of the Revenue as preferential creditor. At page 264 of the report he said:
“It is clear from cases such as Re Antigen Holdings Ltd. [2001] 4 I.R. 600, that a court can approve of a scheme, in all the circumstances, even where a creditor may be likely to do worse under the scheme than the same creditor might on a winding up. However it would, of course, be the case that if there were an extreme and disproportionate disparity between the position of a creditor on a winding up and under the scheme proposed compared with the position of other creditors under both alternatives, same might be a factor to be properly taken into account in ruling against confirmation of the scheme.
67. I am not sure that the disparity need be either extreme or disproportionate. If the proposals were clearly less favourable to an objector than the alternative of a winding up, a court might well come to the conclusion that they were unfairly prejudicial. What is clear, however, is that nothing of the sort arises here. The appellant would not, as an unsecured unagreed creditor, receive anything on a liquidation. Nor, of course, would any other such creditor.
68. The case for the appellant is quite narrowly focused on two provisions of the Scheme, namely Clause 9(1)(c) which excludes it from making a claim for penalties, interest or damages and Clause 12.3 insofar as, it is claimed, it precludes it from participating, to the extent of 5%, for its subrogated claims.
69. There are two aspects to the notion of unfairly prejudice. The underlying assumption is that the person in question is, to begin with, prejudiced, that is to say that his interests as a creditor (or, where relevant, a member) are adversely affected or impaired by the proposals. It is the inevitable consequence of the insolvency to a company is that every creditor will, in that sense, suffer prejudice no matter what proposals are put forward. But prejudice is not enough to trigger the court’s obligation to refuse to confirm the proposals. It must in addition be unfair. Unfairness, in turn comprises two essential aspects, the general notion of injustice and the more specific one of unequal treatment.
70. The Act, however, does not seek to define or to preordain what is to be considered to be “unfairly prejudicial” in any particular case. I would adopt the approach outlined by O’Donnell J in his judgment in Re McInerney Home Ltd [2011] IESC 31:
“It is very unlikely that a comprehensive definition of the circumstances of when a proposal would be unfair could be attempted, or indeed would be wise. The fact that any proposed scheme must receive the approval of the Court means that there will be a hearing. The Act of 1990 appears to invite a Court to exercise its general sense of whether, in the round, any particular proposal is unfair or unfairly prejudicial to any interested party, subject to the significant qualification that the test is posed in the negative: the Court cannot confirm the scheme unless it is satisfied that the proposals are not unfairly prejudicial to any interested party.”
71. I would also approve the following helpful passage in Corporate Insolvency and Rescue, by Irene Lynch-Fannon and Gerard Nicholas Murphy (2nd Ed. Bloomsbury Professional 2012) at paragraph 13.43:
“While the court can take into account the prejudice an individual may suffer if the scheme is implemented, the prejudice must be unfair; the court will also consider the prejudice that will be caused to other creditors and employees if the scheme is not approved by the court and weigh both considerations in the balance when deciding whether or not to confirm the scheme of arrangement.”
72. The court will need to assess any claim of a creditor to be unfairly prejudiced by proposals from all angles. There will be a wide range of potentially relevant elements in the factual circumstances of the company, some affecting the creditor adversely and some favourably. As can be seen from the cases, a court will take note of the fact that some creditors, while losing heavily in the write-down of their debts, are likely to benefit if the company is able to resume trading. A party may claim to be prejudiced by the loss of an advantage, right or benefit. On the other hand, it may be relevant to note that the same party is in a position to retain a right or benefit which is not available to other creditors.
73. Whether a set of proposals is unfairly prejudicial to any particular interested party will involve a comparison of the treatment of that party with any similarly situated interested party. The court will also take account of any aspects of either party’s individual position which places it at either an advantage or disadvantage. The court will take account of the totality of the circumstances. The interests of each creditor will depend on its setting.
74. A good illustration of a judge considering and weighing in the balance the different individual aspects of creditors’ claims is to be found in the judgment of McCracken J in Re Antigen Holdings Ltd. [2001] 4 I.R. 600. He was concerned, respectively, with the right of the banks as creditors to recover normal rates of interest weighed against the length of time it would take to discharge their debts within the capacity of the company to pay wighed against the benefits to trade creditors if the company was to be rescued. Here is how he approached the matter at page 603:
“I then have to consider whether the banks have been unfairly prejudiced. It is beyond doubt that if the company has to go into liquidation, then the banks will receive considerably less than they would under the scheme and this is a consideration to be taken into account. But it is not the only one. It has to be said that no creditors are getting paid interest. The banks’ debt of course is by far the largest proportion of the debts owed to the creditors and they undoubtedly are not being treated in the same way as the ordinary creditors. They are being paid off over a longer period and there is some validity in their point that interest to a bank is the equivalent to the profit made by an ordinary trade creditor on selling his goods and the trade creditors are in fact getting paid that profit. However the question is: is this unfair?
The purpose of the scheme is to ensure the viability of the company. This can only be done if there is a reasonable time span in which to discharge the debt and if there is an amount being paid which is within the capacity of the company to pay. Now the vast bulk of remaining creditors are trade creditors who are presumably going to continue trading with the company. I do not think it is unfair they should get some priority because they are going to keep the company going.
I should also say while the court has power to make modifications, which is what is being sought by the banks, the court cannot re-write the scheme. In my view if the banks were to be paid interest, or the alternative they suggest, repaid all their capital immediately, I think there would clearly have to have been new meetings of the creditors to consider this and of course this would carry with it the possibility that the creditors would not accept it and would not accept what would be effectively a new scheme and that would be most undesirable. It is also undesirable in the present case to postpone the final decision because this is a company which effectively has to some extent to keep trading.”
75. I turn then to consider, first separately, and then together, the two objections raised by the appellant.
76. Firstly, under Clause 9(1)(c) no interest, penalties or damages are payable by the Companies. Insofar as the appellant is concerned that means SCL. The appellant says that it has a claim against SCL in Poland for a penalty amounting to 10% of the contract price. It quantifies this claim in its written submissions at €49,498,463. That is the only evidence we have about it. The Examiner accepts that Clause 9(1)(c) prevents the appellant from making a claim for payment of this sum under the Scheme. He says that Clause 9(1)(c) applies equally to every creditor: there is no difference of treatment and no and fairness. He justifies this stands by referring, amongst other things, to the subjective nature of these claims, the expense involved in measuring and assessing them and, ultimately, by the lack of availability of monies to meet them. The appellant counters by claiming that it is in a unique position or, at least, that it is in a different position from other creditors such as trade creditors. They commence by having an underlying liquidated claim, of which they can receive 5%.
77. Secondly, the appellant complains that it is precluded by the terms of Clause 12.3 from recovering its subrogated claims. This is unfair, the appellant says for the following reason in particular. The ordinary trade creditor of SCL in Poland is entitled to recover 5% as an unsecured creditor. The appellant is obliged under Polish law to discharge of debts due to subcontractors of SCL and, it says, it has done so to the extent of some €20m. It is unjust, the argument goes, to preclude the appellant, which steps into the shoes of these subcontractors, from recovering in exactly the same way as the subcontractors themselves. What is more, the subcontractors will be entitled under the Scheme in respect of any excess over what the appellant is obliged to pay.
78. For the purposes of dealing with these objections, I propose to give the benefit of the doubt to the appellant and to take its claims as set out in their written submissions and quoted above at their face value.
79. Looking at the account given in those submissions of the respective claims and counter claims of SCL and the appellant, it is clear that, on any view, SCL has very substantial claims outstanding against the appellant in Poland. It is acknowledged that SCL (SIAC) has already commenced proceedings in Poland for €30 million and it has quantified its total claims at €113 million. These amounts are, of course, speculative at this stage. So also are the appellant’s claims. It would appear, as the Examiner acknowledged in his submissions to the Court that the appellant enjoys the very considerable advantage of being able to raise its own claims by way of counterclaim or set off or whatever equivalent exists in Polish law by way of defence or reduction of SCL’s claims. The Examiner acknowledges that the Scheme does not purport to, even if it could, prevent the appellant from raising by way of defence any of its claims in accordance with Polish law in the courts of Poland.
80. That consideration appears to me to apply to both headings claim. However, special note may need to be taken of the provisions of Clause 12.3. On its face, it appears to provided that each creditor “ shall be deemed to have waived any and all rights and claims in subrogation against a Company which he may now have, of which may arise at any time.” Counsel for the Examiner, in his submissions to this Court, did not claim that this provision could preclude the appellant from raising its subrogation claims by way of defence in the Polish courts. The position, therefore, is that, insofar as the appellant has rights pursuant to the contract or by way of subrogation, which may, insofar as Polish law allows, be set up by way of a defence of set-off, against any claims of SCL in Poland, the Examiner accepts that the scheme does not purport to affect those rights.
81. Looking at the totality of its situation, the position of the appellant is that, on all the evidence before the Court and, having regard even to the terms of the written submissions it has presented, it is a very substantial debtor of SCL in Poland. There is no suggestion from the Examiner that the Appellant will not be entitled, under Polish law, to raise any of its claims by way of set-off, defence or counterclaim in the Polish courts. That position sharply distinguishes it from other creditors, in particular unsecured creditors who are entitled to recover only 5% of their claims. Even assuming there to be an element of unfairness in not permitting the appellant to recover 5% of its claim to recover a penalty or the value of its subrogated claims, and ignoring the fact that all creditors are subjected to the same provisions, any such disadvantage is largely if not totally counter-balanced by its right to raise these claims in full by way of defence, set-off or counterclaim in Poland.
82. For all these reasons, I do not consider that the appellant is unfairly prejudiced. Those are the reasons for the decision of the Court to dismiss its appeal.