Repudiating Contracts

Overview

The company as distinct from the examiner may, with court approval, repudiate uncompleted contracts to which it is a party where there are proposals for a compromise or scheme of arrangement.  Parties who suffer loss as a result of repudiation become an unsecured creditor for the amount of the loss.  On application, the court may determine the amount concerned which may be treated as a judgment debt.

Leases may be repudiated with leave of court under the provisions in relation to contracts.  Repudiation is likely to be conditional on the confirmation of the scheme. Where the dominant motivation is to assist guarantors or shareholders rather than assist the company’s survival, then the repudiation is unlikely to be sanctioned.

A negative pledge in a contract may be circumvented, subject to service of a notice by the examiner, if, in the opinion of the examiner, its enforcement would prejudice the survival of the company or its undertaking as a going concern.  This may be done for the purpose of allowing borrowing.  He must serve a notice on the debenture holder.


Contracts I

Generally, an examiner may not repudiate a contract entered before the period of protection. Exceptionally, the court may confer the power of a liquidator on the examiner, which includes the power to disclaim contracts. However, in almost all cases, the power to repudiate a contract, rests with the company and not with the examiner.

The court may permit the company to repudiate one or more of the company’s existing uncompleted contracts in the context of a scheme of arrangement. Subject to the approval of the court, the company may repudiate any contract under which some element of performance other than payment remains to be rendered both by the company and the other contracting party.There must be proposals for a compromise or scheme of arrangement in relation to a company. The approval is likely to be conditional on the confirmation of the scheme.


Contracts II

Any person who suffers loss or damage as a result of such repudiation is an unsecured creditor for the amount of such loss or damage. In order to facilitate the formulation, consideration or confirmation of a compromise or scheme of arrangement, the court may hold a hearing and make an order determining the amount of any such loss or damage. The amount so determined shall be due by the company to the creditor as a judgment debt.

Where the examiner is not a party to an application to the court, the company must serve notice of such application on the examiner. The examiner may appear and be heard at the hearing of any such application.

Where the court approves the repudiation of a contract under this power, it may, in giving such approval, make such orders as it thinks fit for the purposes of giving full effect to its approval. This includes orders as to the notices to be given or declaring the rights of any party affected by such affirmation or repudiation.


Leases

Rent incurred after the commencement of the examinership may be treated as an expense incurred by the examiner, thus giving a certain preferential status. Arrears of rent and other accrued obligations may be reduced under the scheme of arrangement.

Future rent may not be reduced under a lease, without the landlord’s consent. A compromise or scheme of arrangement in relation to a company is deemed unfairly prejudicial (and may not be approved), if it contains a provision in relation to lease of real property/ land which restricts a lessor in exercising its normal rights of enforcement, including the right to recover possession, rent, and damages, for future rent or breach of covenant.

A compromise or scheme of arrangement in relation to a company is deemed unfairly prejudicial (and may not be approved), if it contains a provision relating to a lease or hiring agreement in relation to property other than land,  if the value of that property is substantial and the provision restricts future rents or the enforcement of the lease for continuing or future breach.

In deciding, whether the value of the property concerned is substantial, the matters to which the court shall have regard include the length of the unexpired term of the lease or hiring agreement concerned.

The landlord of the property concerned may consent in writing to the inclusion of the above types of provisions in the compromise or scheme of arrangement. Upon repudiation, the landlord may suffer capital loss representing the loss of future rent at the earlier lease level, relative to what can be achieved on a re-letting. The landlord may decide that it is preferable in practical terms, to enter a new lease at market rent, with the existing tenant, than to lose the tenant.


Lease Abrogation I

The rights of the lessor are protected in a similar way to the rights of the mortgagee.  Its future rights cannot be abrogated or “crammed down”. The rights are recognised as proprietary in nature.

The landlord’s right to forfeit the lease remains.  The tenant/ lessee may be evicted for failure to comply with the lease.In many cases, the tenant/lessee may be obliged to surrender the lease and seek alternative accommodation. Alternatively, it may seek to renegotiate a new lease, perhaps at a lower market rent, with the landlord.

The proposals cannot prevent the lessor from exercising his rights to forfeit the lease and recover rent, other sums dues and damages for breach of covenant under the lease.  Proposals for a compromise or scheme of must  not contain any modification nor shall any modification by court result

  • in a reduction in the amount of any rent or other periodical payment reserved under a lease of land that falls to be paid from the date on which the compromise would come into effect or the complete extinguishment of the right of the lessor to any such payments;
  • in respect of a failure to pay an amount of rent or make periodical payment reserved or to comply with covenants, a requirement that the lessor shall not exercise rights to recover the land; effect a forfeiture; recover rent and/or damages or other relief.

Lease Abrogation II

Proposals are deemed unfairly prejudicial if they contain a provision relating to a lease or hiring agreement, the value of the property is substantial, and the effect would be the same as above, i.e.  restrict, reduce the amount of rent recoverable or restrict the ability to recover rent and sums due under the lease. In deciding whether the value of the property is substantial, the court will have regard to matters including the length of the unexpired term of lease or hiring agreement.

The above provisions do not apply if the lessor or owner of the property concerned has consented to the arrangements in the compromise or scheme of arrangements.

The provision does not prevent a court from granting liberty to a company to disclaim a lease under the provisions regards onerous contracts.


Repudiating Leases

The matter of repudiating contracts arose in a number of cases following the post-2008 financial crisis, involving commercial leases, with upward only rent review clauses, under which rent had been set when the market rents were considerably higher. Leases were confirmed by the Supreme Court to be contracts, for the purpose of the legislation on repudiation.

If a company wishes to repudiate its future obligations under the lease, it may apply to the court to repudiate the lease before the scheme is finalised.  The scheme cannot provide for the repudiation of the lease in itself.  As is the case with the repudiation of contracts generally, there must be proposals for a compromise or scheme of arrangement in relation to the company,

The examiner is given notice of the application. He may appear and give evidence.  The other party to the lease/contract must be given notice of the application.

The court may make such orders as it thinks fit, in order to give effect to the approval or other order it makes.  It may declare the rights of the parties.  The court is likely to make the repudiation or variation conditional upon the success of the ultimate scheme of examination arrangement.

The courts have been willing in a number of cases to permit a lease to be repudiated where it was burdensome and jeopardised the survival of the company as a going concern.  The courts have sometimes imposed terms and conditions, including the reinstatement of the premises and removal of fixtures and fitting.


Charged Property I

An examiner may apply to the court to dispose of property subject to a fixed or floating charge or securities subject to retention of title, provided that this would facilitate survival of the company.  The notice must be given to the charge holder.

The fixed charge holder has priority in relation to assets directly or indirectly representing the fixed charge property disposed of.  The order permitting the sale of to the charged assets can be made, only on the basis that net proceeds are to be applied for discharging the money thereby secured. In addition, an amount to be determined by the court to make up any shortfall from the open market value must be paid to the charge holder.

Where, on an application by the examiner, the court is satisfied that  the disposal (with or without other assets) of any property of the company concerned which is subject to a security which, as created, was a floating charge, or  the exercise by the examiner of his or her powers in relation to such property, would be likely to facilitate the survival of the whole or any part of the company as a going concern, the court may by order authorise the examiner to dispose of the property, or exercise his or her powers in relation to it, as the case may be, as if it were not subject to the security.

Where, on an application by the examiner, the court is satisfied that the disposal (with or without other assets) of  any property of the company concerned subject to any fixed security  or  any goods in the possession of the company concerned under a hire-purchase agreement, would be likely to facilitate the survival of the whole or any part of the company as a going concern, the court may by order authorise the examiner to dispose of the property as if it were not subject to the security or to dispose of the goods as if all rights of the owner under the hire-purchase agreement were vested in the company.


Charged Property II

Where the property is disposed of under the above power, the holder of the security shall have the same priority in respect of any property of the company directly or indirectly representing the property disposed of as he or she would have had in respect of the property subject to the security.

The order shall include a condition that

  • the net proceeds of the disposal of the property or goods concerned; and
  • where those proceeds are less than such amount as may be determined by the court to be the net amount which would be realised on a sale of the property or goods concerned in the open market by a willing vendor, such sums as may be required to make good the deficiency,

shall be applied towards discharging the sums secured by the security or payable under the hire-purchase agreement. A hire-purchase agreement for this purpose includes a conditional sale agreement, a retention of title agreement; and an agreement for the bailment of goods which is capable of subsisting for more than 3 months.


References and Sources

Primary References

Companies Act 2014 S. 525, S.537, S.544 (Irish Statute Book)

Companies Act 2014: An Annotation (2015) Conroy

Law of Companies 4th Ed.  (2016)   Ch.23  Courtney

Keane on Company Law 5th Ed. (2016) Ch. 37Hutchinson

Other Irish Sources

Tables of Origins & Destinations Companies Act 2014 (2016) Bloomsbury

Introduction to Irish Company Law    4th Ed. (2015) Callanan

Bloomsbury’s Guide to the Companies Act 2015      Courtney & Ors

Company Law in Ireland 2nd Ed. (2015) Thuillier

Pre-2014 Legislation Editions

Modern Irish Company Law   2nd Ed. (2001) Ellis

Cases & Materials Company Law 2nd Ed. (1998) Forde

Company Law 4th Ed. (2008)  Forde & Kennedy

Corporations & Partnerships in Ireland (2010) Lynch-Fannon & Cuddihy

Companies Acts 1963-2012   (2012)  MacCann & Courtney

Constitutional Rights of Companies   (2007)  O’Neill

Court Applications Under the Companies Act (2013) Samad

Shorter Guides

Company Law – Nutshell 3rd Ed. (2013) McConville

Questions & Answers on Company Law (2008)        McGrath, N & Murphy

Make That Grade Irish Company Law 5th Ed. (2015) Murphy

Company Law BELR Series (2015)   O’Mahony

UK Sources

Companies Act 2006 (UK) (Legilsation.gov.uk)

Statute books Blackstone’s statutes on company law (OUP)

Gower Principles of Modern Company Law 10th Ed. (2016) P. and S. Worthington

Company Law in Context 2nd Ed. (2012) D Kershaw

Company Law (9th Ed.) OUP (2016) J Lowry and A Dignam

Cases and Materials in Company law 11th Ed (2016) Sealy and Worthington

 

UK Practitioners Services

Tolley’s Company Law Handbook

Gore Browne on Companies

Palmer’s Company Law