The Examiner
Cases
Sharmane Ltd & Ors -v- Companies Acts
[2009] IEHC 377
Finlay Geoghegan J.
16. The primary duty of an examiner is, of course, to examine the affairs of the company and then pursuant to s. 18 (1)(a) “as soon as practicable after he is appointed, formulate proposals for a compromise or scheme of arrangement in relation to the company concerned”. That duty is owed to each company to which he is appointed as examiner. In these examinerships, the Examiner sought directions from the Court as to how he should discharge those duties and proposed that there be a separate scheme of arrangement for each company under the protection of the Court. By order of 13th January, 2009, the Court approved that proposal. The Examiner also proposed that each scheme of arrangement be inter-dependent on the others in that the ultimate approval of each scheme would be conditional on the ultimate approval of all the other schemes. That was necessary, on the facts of this group of companies, as there was a significant number of cross-guarantees and it may not have been possible to procure the survival of one company with an approved scheme of arrangement independently of other related companies.
17. Section 29 must thus be considered in the context of a statutory scheme which envisages the appointment of the same person as examiner to a company pursuant to s. 2(1) and also as examiner to each of one or more related companies pursuant to section 4(1)(a). However, s. 4(4) appears to emphasize that the examiner must discharge to each company separately the duties imposed on him under the Act. Nevertheless, as was submitted on his behalf, much of the work done by him in the course of his appointment as examiner to Sharmane Limited and to each of the related companies may have been simultaneously done for the purpose of formulating schemes of arrangement or otherwise performing his duties in relation to several of the companies. Nevertheless, it is equally obvious that the remuneration now sought by the Examiner and his expenses and, in particular, legal fees incurred, are significantly higher than they would have been if he had been appointed as examiner to only one of the thirteen companies. The effect of an order, as sought by the Examiner, against all the companies jointly and severally, would mean that he is entitled to look to any one of the companies to discharge the entire of his aggregate remuneration and legal expenses for acting as examiner to all thirteen companies. This appears to me to be contrary to the provisions of s. 29(2) and not to be permissible, having regard, in particular, to the priority given to remuneration, costs and expenses of an examiner under section 29(3).
18. First, as appears from the terms of s. 29(2), set out above, the normal rule, unless a Court otherwise orders, is that the remuneration of an examiner is to be paid out of “the revenue of the business of the company to which he has been appointed [emphasis added], or the proceeds of realisation of the assets [of that company]”. It appears to me that in accordance with the plain meaning of the words used by the Oireachtas, unless the Court otherwise orders, it is only the remuneration, costs and expenses of an examiner incurred when acting as examiner to the relevant company which he is entitled to have discharged out of the revenue or assets of that company. It does not appear to me that there is any basis for construing the normal rule in s. 29(2) as permitting an examiner appointed to company A and a related company B to look to the assets or business of either company alone to discharge his aggregate remuneration, costs and expenses incurred while acting as examiner of both companies A and B. This is the effect of the order for joint and several liability sought by the Examiner.
19. This construction is reinforced by the priority given by s. 29(3) to the remuneration, costs and expenses sanctioned by the Court and payable in accordance with section 29(2). As appears, they are to be paid before any other claim, secured or unsecured, under any compromise or scheme of arrangement, or in any receivership or winding-up of the company to which he has been appointed. Sub-section (3B) means that where, following the appointment of an examiner, a company is wound up, the examiner’s remuneration, costs and expenses rank in priority to any payment in a winding-up, including the remuneration of a liquidator.
20. The priority given in s. 29(3) is a potentially significant interference with the property rights of secured creditors. I accept the submission made on behalf of ACC Bank and Ulster Bank that such interference requires the Court to give a strict interpretation to the provisions of s. 29(2) in the sense of construing it as only permitting an examiner to recover from each of the companies (with the priority specified) the remuneration, costs and expenses expressly authorised to be recovered out of the assets of that company under section 29(2). That authorisation does not include remuneration, costs and expenses incurred as examiner of a related company.
21. The remaining issue is whether, even if the normal rule in s.29(2) does not provide for joint and several liability of all the companies to which the Examiner was appointed for his aggregate remuneration, costs and expenses, the opening phrase “[u]nless the Court otherwise orders” in s. 29(2) permits the Court to make such an order. Counsel for the Examiner submitted that the words do give the Court such a jurisdiction and primarily relied upon what he submitted was the normal rule that where a professional does work simultaneously for several persons, that all such persons are jointly and severally liable for the entire remuneration of the professional carrying out the work. He submitted that this was the starting point of any consideration, both for the remuneration of the Examiner in respect of the aggregate work done as examiner to all thirteen companies, and in respect of his legal costs incurred both for advices and applications to the Court as examiner to all thirteen companies in examinership.
22. Counsel for the Examiner did not refer to any authority in support of a normal rule of joint and several liability for which he contended. It does not appear to me that there is any such normal rule. If a professional person carries out work simultaneously for the benefit of several persons, then prima facie it appears to be a matter for agreement between the professional and his clients as to the manner in which the fees incurred will be discharged. This agreement may be express or implied. The situation in relation to legal representation, in the absence of any authority to the contrary, appears to me to be the same.
23. The Examiner has not given any evidence of any express agreement reached between himself and the directors of any of the thirteen companies upon his appointment in relation to the manner in which, or level at which, his fees, as examiner, would be discharged. Insofar as the Examiner retained solicitors and, through them, counsel to act for him in his capacity as examiner to each of the companies, there is no evidence of any agreement reached as to how those fees should be apportioned or discharged. Whilst in many of the applications brought on his behalf during the course of the proceedings counsel and solicitor were acting for the Examiner, they were doing so in his separate and distinct capacity as examiner to each of Sharmane Limited and the related companies. Having regard to my conclusions on the statutory scheme established by the Act, it is not possible to imply an agreement for joint and several liability of each of the companies for the aggregate remuneration or legal costs of the Examiner as examiner to each of the companies.
Evidence has been given of an agreement reached between the Examiner, ‘directors of the Group’ and the investor on the quantum of his remuneration, costs and expenses in February 2009 (and is referred to below). However, there is no evidence of any agreement as to which of the related companies would pay same. They were to be discharged out of monies being introduced to the Group by the investor.
24. Construed in the context of the scheme of the Act, it does not appear to me that the opening phrase of s. 29(2) – “[u]nless the court otherwise orders” – permits the Court to make an order of the type sought now by the Examiner. Rather, its purpose is to give the Court jurisdiction to make an order that the remuneration, costs and expenses of an examiner are not to be paid out of the assets of the company to which he is appointed or that he is not entitled to be indemnified in respect thereof out of the revenue of the business of the company. Such an order will, of course, only be made in exceptional circumstances and normally where there is wrongdoing by an examiner. The decision of Costello J. in Re. Wogan’s (Drogheda) Limited (unreported, High Court, 9th February, 1993) is one such example. No such circumstances arise in these proceedings. The Examiner is entitled pursuant to s. 29 to approval of such amount as may be determined by the court for his reasonable remuneration, costs and expenses in respect of the work done as examiner to each of the companies and it will then follow, as the Court will not be otherwise ordering, that he will be entitled to recover those fees out of the assets of each of the relevant companies in accordance with s. 29(2) in accordance with the priorities granted in sub-sections (3) and (3B).
25. While s. 29 requires the Examiner to identify separately the remuneration, costs and expenses claimed in respect of his appointment as examiner to Sharmane Limited and each of the related companies, this provision must also be applied in a common sense and workable way, where the same person is appointed as examiner to several related companies as in these proceedings. There are many different ways in which a a fair estimate may be made of how costs should be attributed to different companies where work was simultaneously done as examiner of several companies. The Examiner and his solicitors and counsel have prepared proposed apportionments of the total remuneration and legal fees sought to be sanctioned amongst the related companies. Those apportionments are not contested by ACC Bank or Ulster Bank. I am satisfied to accept the relative apportionments proposed by the Examiner, his solicitors and counsel. I now turn to the quantum of remuneration, costs and expenses of the Examiner sought to be sanctioned by the Court.
Quantum of remuneration, costs and expenses
26. The Examiner’s application for approval of the quantum of his remuneration and legal costs and the opposition thereto was done on the basis of aggregate figures. I propose dealing with them on this basis. However, in accordance with the first part of my decision, the amount approved will have to be apportioned.
27. The Examiner seeks approval for his own remuneration at €456,057.50 (plus outlay in respect of print and postage at €3,408) plus VAT. This is stated to be €554,109.86 (inclusive of VAT).
28. The Examiner also seeks an order measuring his legal costs in the sum of €518,016.76 (inclusive of VAT). This is made up of the solicitor’s professional fee of €285,000 with outlays, including senior counsel’s professional fees at €86,100 and junior counsel’s professional fees at €54,500 (all exclusive of VAT), and other small general outlays (plus VAT) amounting to €912.76.
29. The main objection taken by the banks, as secured creditors, to the level of both the Examiner’s remuneration and his legal professional fees, is on the basis of what had been agreed between the Examiner and the directors of the companies within the Group and the investor, in or around 23rd February, 2009, at the time of the formulation of the proposals for the schemes of arrangement. This agreement is explained by the Examiner in his first supplemental affidavit in this application sworn on 7th May, 2009, at paragraph 7 in the following terms:
“For the purpose of completeness I should say that the directors of the Group were advised of the ongoing costs of the Examinership throughout the period of protection. At the time of signing the agreement with the investor, in or around the 23rd February, 2009, I had indicated to the directors of the Group and the investor that my costs, remuneration and legal fees at that stage would be €580,000 exclusive of VAT. At the time this estimate was given, the further work required to complete these Examinerships was not foreseen and ultimately my firm and my legal advisors spent much more time on these Examinerships than we had originally anticipated.”
30. In a subsequent written statement of the Examiner to the Court, he further explains that the figure of €580,000 comprised €300,000 in respect of his remuneration and €280,000 in respect of his legal fees. Excluding VAT on the relevant fees, the Examiner is now seeking, in respect of his own remuneration, €159,465.50 more than he had agreed to accept on 23rd February, 2009. In respect of his legal fees, again excluding VAT, he is now seeking €146,416.37 more than he agreed to accept on 23rd February, 2009. In addition, he is seeking a sum of €22,500 plus VAT in respect of his legal costs of this application.
31. The Examiner explains the difference in two ways. First, he states that he agreed to accept, as part of the schemes of arrangement, in effect, a discounted fee for remuneration and legal costs which would entail the non-recovery by him and his lawyers of certain of the time spent working on these examinerships. He says this was in the context of a desire to achieve a positive result and to preserve jobs and maximise dividend to creditors. He also states that the figures were agreed on the basis that the money would be available immediately at the conclusion of the examinership, which has not now happened.
32. Secondly, while the fees agreed were to be the total fees, including what was then a subsequent application for confirmation of the schemes of arrangement, the Examiner states that a very significant amount of extra work was carried out over than that envisaged at the time of the agreement, as additional issues arose and new objections were made to the proposals for the schemes of arrangement and extensive queries raised. In the course of the hearing, I asked that the Examiner and his lawyers estimate the approximate percentage of the increases due to the discounted element and desire to achieve a positive result and that relative to the significant extra work which had not been envisaged. I was informed that each estimated that approximately 50% of the increased cost was attributable to each.
33. It is not in dispute that the Court must determine reasonable remuneration and legal expenses. Counsel for the banks submit that the starting point for the Court’s consideration of what constitutes reasonable remuneration and the measurement of the Examiner’s reasonable legal expenses should be the amount which the Examiner agreed to accept with the directors and the investor in February 2009, at the time of the formulation of the proposed schemes of arrangement. They submit that insofar as the Examiner claims that there was subsequently significant extra work then not envisaged, that the Examiner should not be entitled to recover same as in part, at least, it was caused by a lack of clarity on certain aspects of the proposed schemes of arrangement. Particular reference was made to the position of Ulster Bank and counsel for the Examiner disputed any responsibility of the Examiner for the issues which arose with Ulster Bank and referred to the lateness of Ulster Bank making its position clear.
34. In respect of these latter objections, I have had the benefit of dealing with all the relevant applications at the time of the proposed schemes of arrangement. Whilst these examinerships were undoubtedly complex, I have concluded that there is some merit in the submission made by counsel for the banks in relation to issues which arose on the schemes of arrangement. There were, in my view, aspects of the schemes of arrangement as formulated which lacked clarity and certainty and which contributed to the issues arising with Ulster Bank and certain of the landlords.
35. It is common case that the remuneration sanctioned by the Court pursuant to s. 29(1) must be reasonable remuneration in the sense that it must be reasonable both for the Examiner and for the companies to which he was appointed. The remuneration sought to be sanctioned is exclusively based upon the time spent by the Examiner and his colleagues working on the examinerships, each being costed out at the hourly rate applicable to them in the firm of Hughes Blake Chartered Accountants. Those hourly rates, I assume, in accordance with normal practice, include a profit element for the accountants.
36. There are no statutory criteria according to which the Court should determine what constitutes reasonable remuneration for the purpose of section 29. It does not appear to me that this can be determined by reference only to the total charge-out costs computed from the hours spent and relevant hourly rates for the Examiner and those working with him. This may, of course, comprise one element to be taken into account in determining what reasonable remuneration is. However, in my view, it should not be the only element, and in determining what is reasonable remuneration the Court must also have regard to the nature of the work carried out, the complexity of the work and the importance or value of the work to the client. These would be common elements taken into account by professionals charging or seeking to agree fees with clients.
37. It is difficult for the Court to determine what is reasonable remuneration for an examiner as it does not have full details of all the work done. It should have regard to any agreement which has been reached between the relevant persons who are better placed to assess same. For the purposes of s. 29, this would include any agreement reached by an examiner at the time of his appointment with the directors of the companies to which he is to be appointed, or the petitioner. There is no evidence of any such agreement on the facts of this application. There is, however, evidence of agreement reached when the greater part of the work had been done and proposals for schemes of arrangement prepared. It appears to me that the Court should have regard to that agreement. Whilst the Examiner has indicated that the agreement reached represented a discounted figure, having regard to the time spent, there is no suggestion that this was not an amount then regarded by the Examiner as reasonable remuneration for the total work then envisaged to be done to the completion of these examinerships.
38. Accordingly, I have concluded on the facts of this application, that the starting point for the Court’s consideration as to what is reasonable remuneration should be the amount which the Examiner agreed to accept on 23rd February, 2009, as remuneration for the aggregate work done in these examinerships. However, I accept the evidence of the Examiner that in agreeing to this fee he did so in a context where it was agreed that he would be paid the full amount within a short period of time. The issue of apportionment had not arisen at that stage and, in the context of a schemes of arrangement and the intended survival of all the companies, it was envisaged that his full fees would be paid out of monies introduced by the investor. It is a matter of commonsense that persons will often accept a discounted fee on condition that it is to be paid in a short period of time. However, in so far as the Examiner may have discounted his remuneration to assist in the approval of the schemes of arrangement and survival of the companies it does not appear that there could be any basis for increasing the amount of his remuneration as the schemes have not been approved.
39. I also accept that there may have been some unanticipated work in respect of which it would be reasonable for the Examiner to recover extra remuneration over that agreed. However, for the reasons already stated, I do not accept that this would be to the full extent claimed by the Examiner.
40. In respect of his legal fees, the Examiner could have sought an order that he be entitled to such legal fees as might be determined on taxation. His solicitors have produced a letter from a cost accountant which supports the recovery of the full fees claimed as being fees which would be potentially recoverable on taxation. However the Examiner has not sought an order that his legal costs be taxed, but rather, has requested the Court to measure same. Whilst the cost accountant may be of the view that the total amount claimed would be recoverable on taxation, again, on the facts of this application, the evidence is that the Examiner, agreed to accept discounted legal expenses in February 2009. For reasons similar to those already stated, where the Court is asked to measure the legal expenses, it appears to me that this agreement must be the starting point for any consideration of the legal expenses which I would now allow as reasonable legal expenses for the Examiner.
41. Taking all of the above into account, I have concluded that I should allow, in respect of the Examiner’s aggregate remuneration, solicitors’ professional fees and counsels’ fees, the amounts agreed in February 2009, increased by 25% plus VAT. These amounts are €375,000 plus VAT as the Examiner’s aggregate remuneration and €350,000 plus VAT in respect of aggregate legal professional fees. I have determined the 25% increase by reason of the fact that the fees agreed in February 2009 represented discounted fees for immediate payment and also some allowable additional work over that originally envisaged. In addition, the Examiner is entitled to his postage and outlays in the sum of €3,408.00 and the solicitors to their incidental outlays (inclusive of VAT) of €912.76 both as claimed.
42. The remaining issue is the costs of this application. An examiner is obliged to have his costs approved pursuant to s. 29 where there is no agreement with the relevant persons. Prima facie he should be entitled to his reasonable legal costs of this application. Counsel for the banks oppose the Examiner’s costs of the application as claimed on the basis that the primary issue was that of joint and several liability of the companies on which issue the Examiner was not successful. In addition, counsel for Ulster Bank Limited seeks an order against the Examiner for its costs.
43. I do not propose making any order in favour of Ulster Bank Limited against the Examiner, notwithstanding that he was not successful on the issue of joint and several liability. It appears to me the Examiner was obliged to bring the application under s. 29 and Ulster Bank Limited has, in its own commercial interest, sought, albeit successfully, to oppose the joint and several liability of the companies and has succeeded in some reduction in the Examiner’s fees.
44. There is however some merit in the submission that the Examiner should not be entitled to his full costs of the s. 29 application. I propose allowing a contribution to his costs of the s. 29 application measured at 60% of the professional fees claimed plus VAT. This amounts to €13,500 plus VAT.
45. The above aggregate remuneration, costs and expenses sanctioned by the Court must now be apportioned between the companies in the same relative proportions as the fees claimed, taking into account any appropriate apportionment in respect of the companies placed in liquidation on the 23rd February, 2009. The Examiner and his solicitors should carry out the apportionment and submit the final figures for each company for approval by Order of the Court. I will hear Counsel on the timing of this.”
Re Marino Ltd & Others
[2010] IEHC 394
Clarke J.
“2. Missford
2.1 In a review of the case law in Missford, Kelly J. quoted the observations of Hamilton C.J. in Re Coombe Importers Limited (Unreported, Supreme Court, Hamilton C.J., 22nd June, 1995), where the following was stated:-
“There is no doubt that the court has jurisdiction to review and disallow the remuneration,costs and expenses of the Examiner and in view of the priority given to such remuneration, costs and expenses there is an obligation on the court to be vigilant in scrutinising an examiner’s application for sanction of payment.”
It should be pointed out that one of the issues which arose in Missford was as to whether some of the work in respect of which costs were being sought by the examiner in that case, was work which was properly required of an examiner in the context of the examinership concerned. There is no equivalent issue in this case. I indicated at the initial hearing of the application that I was satisfied that the amount of work being claimed for by Mr. Wallace was reasonable, having regard to the course of the examinership. As is normal practice, the examinership remained with one judge for almost its entire course (that judge being me), with only a number of minor matters being dealt with by another judge due to my unavailability on one occasion. I was, therefore, fully familiar with the course of the examinership and have no doubt but that the volume of work specified in the Examiner’s bill in this case is fully justified. In addition, counsel on behalf of the receiver did not seek to suggest that the volume of work being charged for was in any way inappropriate.
2.2 While the issues in Missford, therefore, turned not only on the rate of remuneration but also on the amount of work to which that rate should be applied, the issues in this case concentrated solely on the rate of remuneration. While agreeing fully with the comments of Kelly J. concerning the need for the court to apply scrutiny to the question of the volume of work being charged for when determining the appropriate costs of an examiner, I am satisfied that no such issues arise on the facts of this case.
2.3 Like Kelly J., I also agree with the views expressed by Finlay Geoghegan J. in Re Sharmane Limited [2009] IEHC 377, where she said:-
“There are no statutory criteria according to which the Court should determine what constitutes reasonable remuneration for the purpose of section 29. It does not appear to me that this can be determined by reference only to the total charge-out costs computed from the hours spent and relevant hourly rate for the Examiner and those working with him. This may, of course, comprise one element to be taken into account in determining what reasonable remunerationis. However, in my view, it should not be the only element, and in determining what is reasonable remuneration the Court must also have regard to the nature of the work carried out, the complexity of the work and the importance or value of the work to the client. These would be common elements taken into account by professionals charging or seeking to agree fees with clients.”
2.4 The examiner’s costs in Missford were based, as is common practice and the case in this application, on an hourly rate, differentiated having regard to the seniority of personnel involved. As noted by Kelly J. at p. 10, the examiner in Missford charged an hourly rate of €425.00. Other staff had respective charge out rates ranging downwards from €210.00 to €100.00 per hour.
2.5 The principal conclusions of Kelly J. commenced by noting that the charge out rate at partner level of the examiner in that case of €425.00 had remained unchanged since January, 2007. Having searched for a comparator, Kelly J. noted that fees payable in respect of publicly funded criminal work in the legal profession had been subjected to reductions of, at least, 16% since 2007. Kelly J., therefore, imposed such a reduction across the board leading to a rate of €357.00 in respect of the examiner, with rates ranging down from €176.40 to €84.00 for other staff.
2.6 In addition to Missford, I raised with counsel for Mr. Wallace another practical example of costs of an examiner which had, as it happens, come before me in the period between the initial application for the approval of costs in this case and the final hearing. The case in question involved the examinership of B.A. Engineering. In that case the examiner and a member of the examiner’s firm of accountants, at partner level, operated a charge out level of €300.00 with one manager level member of the same firm being charged out at €125.00. It is in the context of the rates approved in Missford and B.A. Engineering, that I must approach the hourly rates sought in this case. The rates sought for persons at partner level are €560.00, while rates for other members of the firm range downwards from €405.00 for an Associate Director to €100.00 for a Trainee Accountant.
2.7 Against that general background and in the light of submissions made by counsel on behalf of Mr. Wallace, I should turn first to the general principles applicable.
3. General Principles
3.1 As pointed out by Kelly J. in Missford and Finlay Geoghegan J. in Sharmane, the statutory scheme does not give any guidance as to the criteria to be taken into account in assessing fees of an examiner. However, as pointed out by Hamilton C.J. in Coombe Importers, the court has an obligation to be vigilant in scrutinising any application for costs. The reason identified by Hamilton C.J. for the obligation on the court to be particularly vigilant in such scrutiny stems from the fact that the fees of an examiner are given an exceptional level of priority as to payment under the provisions of s. 29(3) of the 1990 Act. That subsection provides that the remuneration, costs and expenses of an examiner, which have been sanctioned by order of the court, are to be paid “before any other claim, secured or unsecured”, and whether arising under a scheme of arrangement or in the event of a failed examinership in any receivership or winding up of the relevant company.
3.2 A number of points need to be addressed. First, it should be noted that the question of the level of examiner’s fees is only likely, in practice, to be a matter for the court in cases of a failed examinership. Where the examinership succeeds, with a scheme of arrangement being approved by the court, then it is inevitable that the arrangements for which provision has to be made, in the context of that scheme of arrangement, must include the costs of the examiner. In order for a viable scheme to be put in place, it is necessary that there be sufficient funds to meet whatever liabilities of the company are to be paid on foot of the scheme and to provide the relevant company with sufficient funds to enable it to have a viable prospect of survival post examinership. Clearly the equation which presents itself at such a time involves there being sufficient funds to pay whatever has to be paid to the examiner as part of such an arrangement. Indeed, it was quite properly noted by counsel on behalf of Mr. Wallace (on Mr. Wallace’s instructions) that it was not unusual, in practice, for negotiations to take place, as a potentially viable scheme of arrangement began to emerge, during which the relevant examiner might be required to negotiate a reduced level of costs to enable the sums to add up. Indeed, such a practice is one with which most lawyers will be familiar in the context of the settlement of litigation, where it is a not infrequent occurrence that a defendant wishes to fix its total liability (including any liability for costs) at the time of settlement. In such circumstances either a global amount inclusive of costs or two separate sums for damages and costs are often negotiated. In either case, it is not uncommon for lawyers to have to make some reduction in what might otherwise be their fees in order to facilitate a settlement.
3.3 Indeed, based on the fact that it was accepted on behalf of Mr. Wallace that such arrangements were not unusual, it was intimated on his behalf that a reduction of 10% in the overall level of fees sought on an hourly basis might not be unreasonable to reflect the fact that arrangements of that type would not be uncommon as part of the finalisation of a scheme of arrangement in the case of a successful examinership.
3.4 There are, however, other consequences of the statutory regime. In the case of failed examinership it is almost inevitable that the company will either be placed into liquidation or go into receivership (or, indeed, both). The company concerned is, by definition, insolvent or else it could not have been admitted into examinership in the first place. In those circumstances, it is the creditors of the company who, in practice, have to bear the costs of the examinership. While the precise creditors on whom such a burden may fall may vary from case to case depending on just how insolvent the relevant company is, it remains the case that it is one or more class of creditors who will ultimately end up having to forego payment because of the super priority given to the examiner’s costs. It was, indeed, for that reason that the receiver was the obvious legitimus contradictor in this case.
3.5 However, it also follows that there are some similarities between party and party costs of litigation and the costs of examiners in the case of a failed examinership. Like all analogies it should not be pushed too far. However, the reason for exercising scrutiny is broadly the same. In litigation the successful party is entitled to have its costs paid on a party and party basis by the loser. It follows that the amounts which it may be reasonable to impose on that losing party need to be scrutinised. On the one hand parties should be entitled to incur reasonable expense in bringing successful cases to court and should not be unduly penalised by not allowing proper recovery of those costs in the event that they should succeed and have costs awarded to them. On the other hand, there must always be significant scrutiny in cases where one person is being expected to pay sums incurred by someone else. Like considerations apply in an examinership. While the examiner is appointed by the court, it will almost inevitably be the case that the examiner will be nominated by whoever petitions the court (almost always the company or its principals). In the case of a failed examinership, it is, as was argued by counsel for the receiver, the creditors who will end up paying for costs incurred at the instigation of the company or its principals.
3.6 It is next necessary to deal with some specific points made by counsel on behalf of Mr. Wallace as a commentary on the judgment of Kelly J. in Missford. Kelly J. made the point that customers generally of an insolvency practitioner who acts as an examiner cannot be expected to subsidise pro bono work done by that examiner or other work done at a reduced rate for, for example, professional bodies, no matter how praiseworthy undertaking such work may be. While not questioning that proposition, counsel made the point that insolvency practitioners generally do suffer risk as to payment.
3.7 It certainly is the case that there are liquidations where the insolvency practitioner appointed as liquidator, either is not paid at all, or can only obtain a significantly reduced payment because of the lack of funds coming into the company concerned. Like most areas of professional life there is some risk that an insolvency practitioner will, in the course of a year, undertake work for which he or she will not be paid or will be paid, in practice, at a rate far below what might be described as “the going rate”. There can be little doubt that, as with any form of commercial enterprise, such practitioners are likely to “price in” the fact that they may, on average, not recover everything that they might theoretically be entitled to, when deciding their general rates. That is not a cross subsidy. Rather it is a general condition of the market place in which such practitioners have to operate. In substance, it is no different from a supermarket having to take into account the fact that it will suffer some wastage, in calculating the mark up which it needs to charge in order to make a profit at the end of the day.
3.8 While accepting that point, it does not seem to me that it either undermines anything said by Kelly J. in Missford or, indeed, is of particularly great significance in respect of an examinership. It is, of course, possible that an examiner might not be paid for his work. However, having regard to the very high level of priority which is given to the payment of examiner’s costs, it does not seem to me that the payment of examiner’s fees carries with it a particularly high level of risk of non payment. Indeed, as was noted by Kelly J. in Missford, it was the practice of the examiner in that case to charge a lower level of fees when nominated by the RevenueCommissioners to reflect the fact that there was a certainty of recovery.
3.9 It is true to say that Kelly J. placed some reliance on the fact that the examiner in Missford had also been appointed as receiver over that company. That is not the case here, in that Mr. Wallace has no continuing formal role in respect of Capital Bars. I am not, however, convinced of the significance of the distinction for the issue which I have to decide.
3.10 Next counsel queried the appropriateness of the comparator used by Kelly J. involving criminal lawyers. The point was made that payment under the Criminal Legal Aid Scheme or from the Director of Public Prosecutions is guaranteed. That is true so far as it goes. Next it was pointed out that the market for the services of insolvency practitioners is counter cyclical, with there being more work when times are bad. On that basis, it was suggested that the market would not be likely to lead to the same fall off in the fees of insolvency practitioners as might be encountered in other areas. While there may be some overall validity in that point I am, for the reasons which I have sought to analyse, faced with having to strike a balance involving the legitimate interests of creditors who are now being asked to foot the bill, in practice, for a process that they did not instigate. As pointed out by Finlay Geoghegan J. in Sharmane, the exercise of scrutinising the fees of an Examiner is not confined to identifying that the hours charged for were actually worked and were necessary, and that the rates per hour are as per the relevant professionals normal charge out rates. Rather the court is required to take an overall view as to whether the costs being imposed on the creditors are, in all the circumstances of the case, reasonable. While the normal rates charged in the marketplace and the normal rates charged by the individual practitioner are significant factors, those rates are not the only matters to be taken into account. I am not, therefore, satisfied that there is any proper basis for departing from the views of Kelly J. as expressed in Missford.”
payment because of the lack of funds coming into the company concerned. Like most areas of professional life there is some risk that an insolvency practitioner will, in the course of a year, undertake work for which he or she will not be paid or will be paid, in practice, at a rate far below what might be described as “the going rate”. There can be little doubt that, as with any form of commercial enterprise, such practitioners are likely to “price in” the fact that they may, on average, not recover everything that they might theoretically be entitled to, when deciding their general rates. That is not a cross subsidy. Rather it is a general condition of the market place in which such practitioners have to operate. In substance, it is no different from a supermarket having to take into account the fact that it will suffer some wastage, in calculating the mark up which it needs to charge in order to make a profit at the end of the day.
3.8 While accepting that point, it does not seem to me that it either undermines anything said by Kelly J. in Missford or, indeed, is of particularly great significance in respect of an examinership. It is, of course, possible that an examiner might not be paid for his work. However, having regard to the very high level of priority which is given to the payment of examiner’s costs, it does not seem to me that the payment of examiner’s fees carries with it a particularly high level of risk of non payment. Indeed, as was noted by Kelly J. in Missford, it was the practice of the examiner in that case to charge a lower level of fees when nominated by the RevenueCommissioners to reflect the fact that there was a certainty of recovery.
3.9 It is true to say that Kelly J. placed some reliance on the fact that the examiner in Missford had also been appointed as receiver over that company. That is not the case here, in that Mr. Wallace has no continuing formal role in respect of Capital Bars. I am not, however, convinced of the significance of the distinction for the issue which I have to decide.
3.10 Next counsel queried the appropriateness of the comparator used by Kelly J. involving criminal lawyers. The point was made that payment under the Criminal Legal Aid Scheme or from the Director of Public Prosecutions is guaranteed. That is true so far as it goes. Next it was pointed out that the market for the services of insolvency practitioners is counter cyclical, with there being more work when times are bad. On that basis, it was suggested that the market would not be likely to lead to the same fall off in the fees of insolvency practitioners as might be encountered in other areas. While there may be some overall validity in that point I am, for the reasons which I have sought to analyse, faced with having to strike a balance involving the legitimate interests of creditors who are now being asked to foot the bill, in practice, for a process that they did not instigate. As pointed out by Finlay Geoghegan J. in Sharmane, the exercise of scrutinising the fees of an Examiner is not confined to identifying that the hours charged for were actually worked and were necessary, and that the rates per hour are as per the relevant professionals normal charge out rates. Rather the court is required to take an overall view as to whether the costs being imposed on the creditors are, in all the circumstances of the case, reasonable. While the normal rates charged in the marketplace and the normal rates charged by the individual practitioner are significant factors, those rates are not the only matters to be taken into account. I am not, therefore, satisfied that there is any proper basis for departing from the views of Kelly J. as expressed in Missford.
3.11 Counsel did also make a point which, in my view, has some merit. The practice has evolved of the question of examiner’s costs coming to be fixed well after the examinership has been completed. As I have already pointed out it is likely, in the context of a successful examinership, that such costs will be agreed at the stage of the finalisation of the scheme of arrangement, for that scheme will need to make provision for those costs in any event. However, in the case of failed examinerships, the costs are normally only fixed after the event. It was pointed out by counsel that that practice can be somewhat unfair, in that a person is being asked to take on work without any agreement as to their rate of pay. Speaking for myself, I would be more than happy, in the future, to fix the basis on which the remuneration of an examiner is to be determined at a much earlier stage of the process, for example, at the original petition hearing or even, if it should prove practicable, on the occasion of the appointment of an interim examiner. In that context I should, however, emphasise the comments made by Finlay Geoghegan J. in Sharmane to the effect that appropriate costs are not necessarily determined solely by applying an hourly charge at various rates, depending on the seniority of the personnel concerned. As there may well be discussion between the company and/or its principals with a possible examiner prior to appointment I would welcome the disclosure of the results of any such discussions relating to costs at an early stage.
3.12 It is clear that there are very significant variations in the hourly rates which are apparently charged by examiners or partner level colleagues who work with the examiner concerned. The rate of €560.00 per hour sought in this case is, I am satisfied, Mr. Wallace’s normal charge out rate. Even before the reductionsimposed by Kelly J. in Missford, the relevant charge out rate for partner level personnel in that case was €425.00. As I have pointed out, the partner level rate sought and obtained in B.A. Engineering was €300.00 per hour. Counsel for the receiver suggested a reduction of €100 per hour across the board which would lead to a rate of €460 per hour for those at the highest level. Given the obligation to ensure that costs are reasonable to all concerned and against that factual background, it is next necessary to say something about the extent to which it is appropriate for the court to allow different rates in different cases.
Re Michel Mc Loughlin [Pharmacy] Ltd
[2011] IEHC 28
Clarke J.
“5. Conclusions
5.1 In summary, therefore, I was satisfied that it was not within the competence of the court to include within an approved or confirmed scheme of arrangement a clause which purported to give immunity to an examiner. I was further of the view that, even if such a jurisdiction existed, it would not be appropriate to exercise same save in wholly exceptional circumstances which did not appear to me to exist on the facts of this case.
5.2 In addition, I came to the view that postponing the potential Revenue entitlements under s. 438 to the receipt of monies from the directors into the residual debt fund was reasonable but that placing the Revenue at a disadvantage vis-à-vis other unsecured creditors even if sufficient funds were received into that fund was unfairly prejudicial.
5.3 I, therefore, directed that revised schemes of arrangement should be brought forward which deleted the proposed indemnity clauses in the respective schemes and which made appropriate amendments to allow the Revenue to receiver a priority payment out of the residual debt fund up to the 10% which was earmarked in any event for all other unsecured creditors.
5.4 Happily, the parties were able to agree on the appropriate text of the necessary amendments and schemes incorporating those amendments were ultimately confirmed.”
Sharmane Ltd & Ors -v- Companies Acts
[2009] IEHC 377 (30 July 2009)
THE HIGH COURT
2008 514 COS
IN THE MATTER OF SHARMANE LIMITED
AND IN THE MATTER OF THE COMPANIES ACTS 1963-2006
AND IN THE MATTER OF GUERNEVILLE LIMITED
AND IN THE MATTER OF THE COMPANIES ACTS 1963-2006
AND IN THE MATTER OF DREEMDALE LIMITED
AND IN THE MATTER OF THE COMPANIES ACTS 1963-2006
AND IN THE MATTER OF EATONCROFT LIMITED
AND IN THE MATTER OF THE COMPANIES ACTS 1963-2006
AND IN THE MATTER OF REDFONT LIMITED
AND IN THE MATTER OF THE COMPANIES ACTS 1963-2006
AND IN THE MATTER OF CHARDERMONT LIMITED
AND IN THE MATTER OF THE COMPANIES ACTS 1963-2006
AND IN THE MATTER OF PUB POOL LIMITED
AND IN THE MATTER OF THE COMPANIES ACTS 1963-2006
AND IN THE MATTER OF DREW INTERNATIONAL LIMITED
AND IN THE MATTER OF THE COMPANIES ACTS 1963-2006
AND IN THE MATTER OF LINCOLE LIMITED
AND IN THE MATTER OF THE COMPANIES ACTS 1963-2006
AND IN THE MATTER OF ATWELL HOLDINGS LIMITED
AND IN THE MATTER OF THE COMPANIES ACTS 1963-2006
AND IN THE MATTER OF JESTDALE LIMITED
AND IN THE MATTER OF THE COMPANIES ACTS 1963-2006
AND IN THE MATTER OF KIRKVALE LIMITED
AND IN THE MATTER OF THE COMPANIES ACTS 1963-2006
AND IN THE MATTER OF KADARAN LIMITED
AND IN THE MATTER OF THE COMPANIES ACTS 1963-2006
AND IN THE MATTER OF TOPART LIMITED
AND IN THE MATTER OF THE COMPANIES ACTS 1963-2006
AND IN THE MATTER OF FLORDITA (IRELAND) LIMITED
AND IN THE MATTER OF THE COMPANIES ACTS 1963-2006
(AS RELATED COMPANIES WITHIN THE MEANING OF SECTOIN 4(5) OF THE COMPANIES (AMENDMENT) ACT 1990)
(AS RELATED COMPANIES WITHIN THE MEANING OF SECTION 4(5) OF THE COMPANIES (AMENDMENT) ACT 1990)
AND IN THE MATTER OF THE COMPANIES (AMENDMENT) ACT 1990
JUDGMENT of Ms. Justice Finlay Geoghegan delivered on 30th day of July 2009
1. On 4th December, 2008, Mr. Kieran McCarthy (“the Examiner”) was appointed examiner of Sharmane Limited pursuant to s. 2 of the Companies (Amendment) Act 1990 (“the Act”). He was also appointed pursuant to s. 4(1)(a) of the Act, as examiner to each of the companies named in the title other than Guerneville Limited (the petitioner) and Floridita (Ireland) Limited. All those companies are related companies of Sharmane Limited within the meaning of s. 4(5) of the Act. Insofar as I refer to the related companies in this judgment, I am only referring to those related companies to which the Examiner was appointed.
2. On 23rd February, 2009, upon the application of the Examiner, the Court ordered pursuant to s. 26(1)(b) of the Act, that Eatoncroft Limited, Jestdale Limited, Kadaran Limited, and Topart Limited cease to have the protection of the Court and that they be wound up by the Court pursuant to the provisions of the Companies Acts 1963-2006. Mr. Anthony Weldon was appointed official liquidator of those four companies and the Examiner ceased to have any further function in relation thereto.
3. On 6th March, 2009, the Examiner presented his reports to the Court proposing schemes of arrangement in relation to each of the nine remaining companies in examinership. The reports were set down for consideration pursuant to s. 24 of the Act, on 13th March, 2009. Confirmation of the proposals for the schemes of arrangement was opposed by ACC Bank plc. and certain other parties.
4. On 20th March, 2009, in the course of the continued confirmation hearing, the Court was informed that the Examiner was no longer recommending that the Court confirm the schemes of arrangement. Difficulties had arisen with the investor whose investment was essential for the funding of the proposed schemes of arrangement.
5. By order of the High Court made on 20th March, 2009, pursuant to s. 26 of the Act, the protection period ceased for all remaining nine companies. ACC Bank plc. appointed a receiver over those companies or their assets. Ulster Bank Limited also appointed a receiver over certain assets of The Pub Pool Limited. In such circumstances no winding-up orders were made.
6. The Examiner now seeks pursuant to s. 29 of the Act, an order determining his remuneration, costs and expenses as both interim examiner and examiner of all the relevant companies. Certain creditors were put on notice and ACC Bank plc. and Ulster Bank Limited were represented at the hearing and opposed, in part, the orders sought by the Examiner.
7. The primary order sought by the Examiner was an order that all thirteen companies to which he was initially appointed be jointly and severally liable for such amount as may be determined in respect of his aggregate remuneration, costs and expenses as Examiner of the thirteen companies. In submissions this may have been altered to an order that all thirteen companies be jointly and severally liable up to 23rd February, 2009, and that the remaining nine companies be jointly and severally liable thereafter. Nothing turns on this distinction.
8. Both ACC Bank and Ulster Bank opposed any order on a basis of joint and several liability. They submitted, as a matter of principle, that the Court had no jurisdiction pursuant to s. 29 of the Act, to make an order that Sharmane Limited and either twelve or eight related companies be jointly and severally liable for the aggregate remuneration, costs and expenses incurred by the Examiner whilst appointed as examiner to Sharmane Limited and each of the related companies. They also opposed the quantum sought to be determined by the Examiner in respect of his own remuneration and his legal costs on the basis set out below.
9. At the end of the hearing, I had formed a clear view on the point of principle in dispute between the parties and gave my decision, indicating that I would give my reasons for my decision in a written judgment. The first part of this judgment sets out those reasons.
10. I concluded that s. 29 of the Act does not give the Court jurisdiction to make an order that all companies be jointly and severally liable for the aggregate remuneration costs and expenses as sought by the Examiner. My reasons for so concluding derive principally from the wording of s. 29 considered in the context of the entire Act.
11. Section 29 provides:
“(1) The court may from time to time make such orders as it thinks proper for payment of the remuneration and costs of, and reasonable expenses properly incurred by, an examiner.
(2) Unless the court otherwise orders, the remuneration, costs and expenses of an examiner shall be paid and the examiner shall be entitled to be indemnified in respect thereof out of the revenue of the business of the company to which he has been appointed, or the proceeds of realisation of the assets (including investments).
(3) The remuneration, costs and expenses of an examiner which have been sanctioned by order of the court (other than the expenses referred to in subsection (3A)) shall be paid in full and shall be paid before any other claim, secured or unsecured, under any compromise or scheme of arrangement or in any receivership or winding-up of the company to which he has been appointed.
(3A) Liabilities incurred by the company to which an examiner has been appointed that, by virtue of section 10(1), are treated as expenses properly incurred by the examiner shall be paid in full and shall be paid before any other claim (including a claim secured by a floating charge), but after any claim secured by a mortgage, charge, lien or other encumbrance of a fixed nature or a pledge, under any compromise or scheme of arrangement or in any receivership or winding-up of the company to which he has been appointed.
(3B) In subsections (3) and (3A) references to a claim shall be deemed to include references to any payment in a winding-up of the company in respect of costs, charges and expenses of that winding-up (including the remuneration of any liquidator).
(4) The functions of an examiner may be performed by him with the assistance of persons appointed or employed by him for that purpose provided that an examiner shall, insofar as is reasonably possible, make use of the services of the staff and facilities of the company to which he has been appointed to assist him in the performance of his functions.
(5) In considering any matter relating to the costs, expenses and remuneration of an examiner the court shall have particular regard to the proviso to subsection (4).”
12. The order for joint and several liability sought by the Examiner would have to be consistent with s. 29 and, in particular, sub-section (2) thereof.
13. Section 29 has to be considered in the context of the statutory scheme for the appointment of a person as examiner to a company and to related companies of that company. Section 2 provides for the appointment of a person as an examiner to a company “for the purpose of examining the state of the company’s affairs and performing such duties in relation to the company as may be imposed by or under this Act”. It is to be noted that the purpose for which a person is appointed an examiner to a company pursuant to s. 2(1) is confined to examining the state of that company’s affairs and performing duties in relation to that company under the Act. There is no reference to functions in relation to related companies.
14. Section 4 of the Act, insofar as relevant, provides:
“(1) Subject to subsection (2), where the court appoints an examiner to a company, it may, at the same or any time thereafter, make an order-
(a) appointing the examiner to be examiner for the purposes of this Act to a related company, or
(b) conferring on the examiner, in relation to such company, all or any of the powers or duties conferred on him in relation to the first-mentioned company.
(2) In deciding whether to make an order under subsection (1), the court shall have regard to whether the making of the order would be likely to facilitate the survival of the company, or of the related company, or both, and the whole or any part of its or their undertaking, as a going concern and shall not, in any case, make such an order unless it is satisfied that there is a reasonable prospect of the survival of the related company, and the whole or any part of its undertaking, as a going concern.
(3) A related company to which an examiner is appointed shall be deemed to be under the protection of the court for the period beginning on the date of the making of an order under this section and continuing for the period during which the company to which it is related is under such protection.
(4) Where an examiner stands appointed to two or more related companies, he shall have the same powers and duties in relation to each company, taken separately, unless the court otherwise directs.”
15. The appointments herein of the Examiner as examiner to each of the related companies were made pursuant to section 4(1)(a). This obtained for those companies the protection of the Court pursuant to sub-section 3. No order was made by the Court to alter the provision in sub-section (4) that he have “the same powers and duties in relation to each company, taken separately”.
16. The primary duty of an examiner is, of course, to examine the affairs of the company and then pursuant to s. 18 (1)(a) “as soon as practicable after he is appointed, formulate proposals for a compromise or scheme of arrangement in relation to the company concerned”. That duty is owed to each company to which he is appointed as examiner. In these examinerships, the Examiner sought directions from the Court as to how he should discharge those duties and proposed that there be a separate scheme of arrangement for each company under the protection of the Court. By order of 13th January, 2009, the Court approved that proposal. The Examiner also proposed that each scheme of arrangement be inter-dependent on the others in that the ultimate approval of each scheme would be conditional on the ultimate approval of all the other schemes. That was necessary, on the facts of this group of companies, as there was a significant number of cross-guarantees and it may not have been possible to procure the survival of one company with an approved scheme of arrangement independently of other related companies.
17. Section 29 must thus be considered in the context of a statutory scheme which envisages the appointment of the same person as examiner to a company pursuant to s. 2(1) and also as examiner to each of one or more related companies pursuant to section 4(1)(a). However, s. 4(4) appears to emphasize that the examiner must discharge to each company separately the duties imposed on him under the Act. Nevertheless, as was submitted on his behalf, much of the work done by him in the course of his appointment as examiner to Sharmane Limited and to each of the related companies may have been simultaneously done for the purpose of formulating schemes of arrangement or otherwise performing his duties in relation to several of the companies. Nevertheless, it is equally obvious that the remuneration now sought by the Examiner and his expenses and, in particular, legal fees incurred, are significantly higher than they would have been if he had been appointed as examiner to only one of the thirteen companies. The effect of an order, as sought by the Examiner, against all the companies jointly and severally, would mean that he is entitled to look to any one of the companies to discharge the entire of his aggregate remuneration and legal expenses for acting as examiner to all thirteen companies. This appears to me to be contrary to the provisions of s. 29(2) and not to be permissible, having regard, in particular, to the priority given to remuneration, costs and expenses of an examiner under section 29(3).
18. First, as appears from the terms of s. 29(2), set out above, the normal rule, unless a Court otherwise orders, is that the remuneration of an examiner is to be paid out of “the revenue of the business of the company to which he has been appointed [emphasis added], or the proceeds of realisation of the assets [of that company]”. It appears to me that in accordance with the plain meaning of the words used by the Oireachtas, unless the Court otherwise orders, it is only the remuneration, costs and expenses of an examiner incurred when acting as examiner to the relevant company which he is entitled to have discharged out of the revenue or assets of that company. It does not appear to me that there is any basis for construing the normal rule in s. 29(2) as permitting an examiner appointed to company A and a related company B to look to the assets or business of either company alone to discharge his aggregate remuneration, costs and expenses incurred while acting as examiner of both companies A and B. This is the effect of the order for joint and several liability sought by the Examiner.
19. This construction is reinforced by the priority given by s. 29(3) to the remuneration, costs and expenses sanctioned by the Court and payable in accordance with section 29(2). As appears, they are to be paid before any other claim, secured or unsecured, under any compromise or scheme of arrangement, or in any receivership or winding-up of the company to which he has been appointed. Sub-section (3B) means that where, following the appointment of an examiner, a company is wound up, the examiner’s remuneration, costs and expenses rank in priority to any payment in a winding-up, including the remuneration of a liquidator.
20. The priority given in s. 29(3) is a potentially significant interference with the property rights of secured creditors. I accept the submission made on behalf of ACC Bank and Ulster Bank that such interference requires the Court to give a strict interpretation to the provisions of s. 29(2) in the sense of construing it as only permitting an examiner to recover from each of the companies (with the priority specified) the remuneration, costs and expenses expressly authorised to be recovered out of the assets of that company under section 29(2). That authorisation does not include remuneration, costs and expenses incurred as examiner of a related company.
21. The remaining issue is whether, even if the normal rule in s.29(2) does not provide for joint and several liability of all the companies to which the Examiner was appointed for his aggregate remuneration, costs and expenses, the opening phrase “[u]nless the Court otherwise orders” in s. 29(2) permits the Court to make such an order. Counsel for the Examiner submitted that the words do give the Court such a jurisdiction and primarily relied upon what he submitted was the normal rule that where a professional does work simultaneously for several persons, that all such persons are jointly and severally liable for the entire remuneration of the professional carrying out the work. He submitted that this was the starting point of any consideration, both for the remuneration of the Examiner in respect of the aggregate work done as examiner to all thirteen companies, and in respect of his legal costs incurred both for advices and applications to the Court as examiner to all thirteen companies in examinership.
22. Counsel for the Examiner did not refer to any authority in support of a normal rule of joint and several liability for which he contended. It does not appear to me that there is any such normal rule. If a professional person carries out work simultaneously for the benefit of several persons, then prima facie it appears to be a matter for agreement between the professional and his clients as to the manner in which the fees incurred will be discharged. This agreement may be express or implied. The situation in relation to legal representation, in the absence of any authority to the contrary, appears to me to be the same.
23. The Examiner has not given any evidence of any express agreement reached between himself and the directors of any of the thirteen companies upon his appointment in relation to the manner in which, or level at which, his fees, as examiner, would be discharged. Insofar as the Examiner retained solicitors and, through them, counsel to act for him in his capacity as examiner to each of the companies, there is no evidence of any agreement reached as to how those fees should be apportioned or discharged. Whilst in many of the applications brought on his behalf during the course of the proceedings counsel and solicitor were acting for the Examiner, they were doing so in his separate and distinct capacity as examiner to each of Sharmane Limited and the related companies. Having regard to my conclusions on the statutory scheme established by the Act, it is not possible to imply an agreement for joint and several liability of each of the companies for the aggregate remuneration or legal costs of the Examiner as examiner to each of the companies.
Evidence has been given of an agreement reached between the Examiner, ‘directors of the Group’ and the investor on the quantum of his remuneration, costs and expenses in February 2009 (and is referred to below). However, there is no evidence of any agreement as to which of the related companies would pay same. They were to be discharged out of monies being introduced to the Group by the investor.
24. Construed in the context of the scheme of the Act, it does not appear to me that the opening phrase of s. 29(2) – “[u]nless the court otherwise orders” – permits the Court to make an order of the type sought now by the Examiner. Rather, its purpose is to give the Court jurisdiction to make an order that the remuneration, costs and expenses of an examiner are not to be paid out of the assets of the company to which he is appointed or that he is not entitled to be indemnified in respect thereof out of the revenue of the business of the company. Such an order will, of course, only be made in exceptional circumstances and normally where there is wrongdoing by an examiner. The decision of Costello J. in Re. Wogan’s (Drogheda) Limited (unreported, High Court, 9th February, 1993) is one such example. No such circumstances arise in these proceedings. The Examiner is entitled pursuant to s. 29 to approval of such amount as may be determined by the court for his reasonable remuneration, costs and expenses in respect of the work done as examiner to each of the companies and it will then follow, as the Court will not be otherwise ordering, that he will be entitled to recover those fees out of the assets of each of the relevant companies in accordance with s. 29(2) in accordance with the priorities granted in sub-sections (3) and (3B).
25. While s. 29 requires the Examiner to identify separately the remuneration, costs and expenses claimed in respect of his appointment as examiner to Sharmane Limited and each of the related companies, this provision must also be applied in a common sense and workable way, where the same person is appointed as examiner to several related companies as in these proceedings. There are many different ways in which a a fair estimate may be made of how costs should be attributed to different companies where work was simultaneously done as examiner of several companies. The Examiner and his solicitors and counsel have prepared proposed apportionments of the total remuneration and legal fees sought to be sanctioned amongst the related companies. Those apportionments are not contested by ACC Bank or Ulster Bank. I am satisfied to accept the relative apportionments proposed by the Examiner, his solicitors and counsel. I now turn to the quantum of remuneration, costs and expenses of the Examiner sought to be sanctioned by the Court.
Quantum of remuneration, costs and expenses
26. The Examiner’s application for approval of the quantum of his remuneration and legal costs and the opposition thereto was done on the basis of aggregate figures. I propose dealing with them on this basis. However, in accordance with the first part of my decision, the amount approved will have to be apportioned.
27. The Examiner seeks approval for his own remuneration at €456,057.50 (plus outlay in respect of print and postage at €3,408) plus VAT. This is stated to be €554,109.86 (inclusive of VAT).
28. The Examiner also seeks an order measuring his legal costs in the sum of €518,016.76 (inclusive of VAT). This is made up of the solicitor’s professional fee of €285,000 with outlays, including senior counsel’s professional fees at €86,100 and junior counsel’s professional fees at €54,500 (all exclusive of VAT), and other small general outlays (plus VAT) amounting to €912.76.
29. The main objection taken by the banks, as secured creditors, to the level of both the Examiner’s remuneration and his legal professional fees, is on the basis of what had been agreed between the Examiner and the directors of the companies within the Group and the investor, in or around 23rd February, 2009, at the time of the formulation of the proposals for the schemes of arrangement. This agreement is explained by the Examiner in his first supplemental affidavit in this application sworn on 7th May, 2009, at paragraph 7 in the following terms:
“For the purpose of completeness I should say that the directors of the Group were advised of the ongoing costs of the Examinership throughout the period of protection. At the time of signing the agreement with the investor, in or around the 23rd February, 2009, I had indicated to the directors of the Group and the investor that my costs, remuneration and legal fees at that stage would be €580,000 exclusive of VAT. At the time this estimate was given, the further work required to complete these Examinerships was not foreseen and ultimately my firm and my legal advisors spent much more time on these Examinerships than we had originally anticipated.”
30. In a subsequent written statement of the Examiner to the Court, he further explains that the figure of €580,000 comprised €300,000 in respect of his remuneration and €280,000 in respect of his legal fees. Excluding VAT on the relevant fees, the Examiner is now seeking, in respect of his own remuneration, €159,465.50 more than he had agreed to accept on 23rd February, 2009. In respect of his legal fees, again excluding VAT, he is now seeking €146,416.37 more than he agreed to accept on 23rd February, 2009. In addition, he is seeking a sum of €22,500 plus VAT in respect of his legal costs of this application.
31. The Examiner explains the difference in two ways. First, he states that he agreed to accept, as part of the schemes of arrangement, in effect, a discounted fee for remuneration and legal costs which would entail the non-recovery by him and his lawyers of certain of the time spent working on these examinerships. He says this was in the context of a desire to achieve a positive result and to preserve jobs and maximise dividend to creditors. He also states that the figures were agreed on the basis that the money would be available immediately at the conclusion of the examinership, which has not now happened.
32. Secondly, while the fees agreed were to be the total fees, including what was then a subsequent application for confirmation of the schemes of arrangement, the Examiner states that a very significant amount of extra work was carried out over than that envisaged at the time of the agreement, as additional issues arose and new objections were made to the proposals for the schemes of arrangement and extensive queries raised. In the course of the hearing, I asked that the Examiner and his lawyers estimate the approximate percentage of the increases due to the discounted element and desire to achieve a positive result and that relative to the significant extra work which had not been envisaged. I was informed that each estimated that approximately 50% of the increased cost was attributable to each.
33. It is not in dispute that the Court must determine reasonable remuneration and legal expenses. Counsel for the banks submit that the starting point for the Court’s consideration of what constitutes reasonable remuneration and the measurement of the Examiner’s reasonable legal expenses should be the amount which the Examiner agreed to accept with the directors and the investor in February 2009, at the time of the formulation of the proposed schemes of arrangement. They submit that insofar as the Examiner claims that there was subsequently significant extra work then not envisaged, that the Examiner should not be entitled to recover same as in part, at least, it was caused by a lack of clarity on certain aspects of the proposed schemes of arrangement. Particular reference was made to the position of Ulster Bank and counsel for the Examiner disputed any responsibility of the Examiner for the issues which arose with Ulster Bank and referred to the lateness of Ulster Bank making its position clear.
34. In respect of these latter objections, I have had the benefit of dealing with all the relevant applications at the time of the proposed schemes of arrangement. Whilst these examinerships were undoubtedly complex, I have concluded that there is some merit in the submission made by counsel for the banks in relation to issues which arose on the schemes of arrangement. There were, in my view, aspects of the schemes of arrangement as formulated which lacked clarity and certainty and which contributed to the issues arising with Ulster Bank and certain of the landlords.
35. It is common case that the remuneration sanctioned by the Court pursuant to s. 29(1) must be reasonable remuneration in the sense that it must be reasonable both for the Examiner and for the companies to which he was appointed. The remuneration sought to be sanctioned is exclusively based upon the time spent by the Examiner and his colleagues working on the examinerships, each being costed out at the hourly rate applicable to them in the firm of Hughes Blake Chartered Accountants. Those hourly rates, I assume, in accordance with normal practice, include a profit element for the accountants.
36. There are no statutory criteria according to which the Court should determine what constitutes reasonable remuneration for the purpose of section 29. It does not appear to me that this can be determined by reference only to the total charge-out costs computed from the hours spent and relevant hourly rates for the Examiner and those working with him. This may, of course, comprise one element to be taken into account in determining what reasonable remuneration is. However, in my view, it should not be the only element, and in determining what is reasonable remuneration the Court must also have regard to the nature of the work carried out, the complexity of the work and the importance or value of the work to the client. These would be common elements taken into account by professionals charging or seeking to agree fees with clients.
37. It is difficult for the Court to determine what is reasonable remuneration for an examiner as it does not have full details of all the work done. It should have regard to any agreement which has been reached between the relevant persons who are better placed to assess same. For the purposes of s. 29, this would include any agreement reached by an examiner at the time of his appointment with the directors of the companies to which he is to be appointed, or the petitioner. There is no evidence of any such agreement on the facts of this application. There is, however, evidence of agreement reached when the greater part of the work had been done and proposals for schemes of arrangement prepared. It appears to me that the Court should have regard to that agreement. Whilst the Examiner has indicated that the agreement reached represented a discounted figure, having regard to the time spent, there is no suggestion that this was not an amount then regarded by the Examiner as reasonable remuneration for the total work then envisaged to be done to the completion of these examinerships.
38. Accordingly, I have concluded on the facts of this application, that the starting point for the Court’s consideration as to what is reasonable remuneration should be the amount which the Examiner agreed to accept on 23rd February, 2009, as remuneration for the aggregate work done in these examinerships. However, I accept the evidence of the Examiner that in agreeing to this fee he did so in a context where it was agreed that he would be paid the full amount within a short period of time. The issue of apportionment had not arisen at that stage and, in the context of a schemes of arrangement and the intended survival of all the companies, it was envisaged that his full fees would be paid out of monies introduced by the investor. It is a matter of commonsense that persons will often accept a discounted fee on condition that it is to be paid in a short period of time. However, in so far as the Examiner may have discounted his remuneration to assist in the approval of the schemes of arrangement and survival of the companies it does not appear that there could be any basis for increasing the amount of his remuneration as the schemes have not been approved.
39. I also accept that there may have been some unanticipated work in respect of which it would be reasonable for the Examiner to recover extra remuneration over that agreed. However, for the reasons already stated, I do not accept that this would be to the full extent claimed by the Examiner.
40. In respect of his legal fees, the Examiner could have sought an order that he be entitled to such legal fees as might be determined on taxation. His solicitors have produced a letter from a cost accountant which supports the recovery of the full fees claimed as being fees which would be potentially recoverable on taxation. However the Examiner has not sought an order that his legal costs be taxed, but rather, has requested the Court to measure same. Whilst the cost accountant may be of the view that the total amount claimed would be recoverable on taxation, again, on the facts of this application, the evidence is that the Examiner, agreed to accept discounted legal expenses in February 2009. For reasons similar to those already stated, where the Court is asked to measure the legal expenses, it appears to me that this agreement must be the starting point for any consideration of the legal expenses which I would now allow as reasonable legal expenses for the Examiner.
41. Taking all of the above into account, I have concluded that I should allow, in respect of the Examiner’s aggregate remuneration, solicitors’ professional fees and counsels’ fees, the amounts agreed in February 2009, increased by 25% plus VAT. These amounts are €375,000 plus VAT as the Examiner’s aggregate remuneration and €350,000 plus VAT in respect of aggregate legal professional fees. I have determined the 25% increase by reason of the fact that the fees agreed in February 2009 represented discounted fees for immediate payment and also some allowable additional work over that originally envisaged. In addition, the Examiner is entitled to his postage and outlays in the sum of €3,408.00 and the solicitors to their incidental outlays (inclusive of VAT) of €912.76 both as claimed.
42. The remaining issue is the costs of this application. An examiner is obliged to have his costs approved pursuant to s. 29 where there is no agreement with the relevant persons. Prima facie he should be entitled to his reasonable legal costs of this application. Counsel for the banks oppose the Examiner’s costs of the application as claimed on the basis that the primary issue was that of joint and several liability of the companies on which issue the Examiner was not successful. In addition, counsel for Ulster Bank Limited seeks an order against the Examiner for its costs.
43. I do not propose making any order in favour of Ulster Bank Limited against the Examiner, notwithstanding that he was not successful on the issue of joint and several liability. It appears to me the Examiner was obliged to bring the application under s. 29 and Ulster Bank Limited has, in its own commercial interest, sought, albeit successfully, to oppose the joint and several liability of the companies and has succeeded in some reduction in the Examiner’s fees.
44. There is however some merit in the submission that the Examiner should not be entitled to his full costs of the s. 29 application. I propose allowing a contribution to his costs of the s. 29 application measured at 60% of the professional fees claimed plus VAT. This amounts to €13,500 plus VAT.
45. The above aggregate remuneration, costs and expenses sanctioned by the Court must now be apportioned between the companies in the same relative proportions as the fees claimed, taking into account any appropriate apportionment in respect of the companies placed in liquidation on the 23rd February, 2009. The Examiner and his solicitors should carry out the apportionment and submit the final figures for each company for approval by Order of the Court. I will hear Counsel on the timing of this.
Marino Ltd & Ors -v- Companies Acts
[2010] IEHC 394
IN THE MATTER OF MARINO LIMITED
AND IN THE MATTER OF THE COMPANIES ACTS 1963 – 2009
AND IN THE MATTER OF PERFECT PIES LIMITED
AND IN THE MATTER OF THE COMPANIES ACTS, 1963 – 2009
AND IN THE MATTER OF VIKRAM LIMITED
AND IN THE MATTER OF THE COMPANIES ACTS 1932 – 2009
AND IN THE MATTER OF MOUNT STREET PUB LIMITED
AND IN THE MATTER OF THE COMPANIES ACTS 1963 – 2009
(AS RELATED COMPANIES WITHIN THE MEANING OF SECTION 4(5) OF THE COMPANIES (AMENDMENT) ACT 1990)
JUDGMENT of Mr. Justice Clarke delivered the 29th July, 2010
1. Introduction
1.1 The Companies named in the title of these proceedings form part of the Capital Bars Group of Companies (“Capital Bars”). Kieran Wallace of KPMG was appointed as an interim Examiner of Capital Bars on the 18th September, 2009. Subsequently, on the 6th October, 2009, Mr. Wallace was confirmed as Examiner of Capital Bars.
1.2 The examinership continued, with various extensions of time being granted, right down to the wire. However, for reasons which are not relevant to the issue which I now have to decide, the examinership process in respect of Capital Bars ultimately failed.
1.3 On that basis, the appointment of Mr. Wallace as Examiner was terminated and the protection of Capital Bars under the Companies (Amendment) Act 1990 (“the 1990 Act”) ended. Thereafter, Mr. Wallace applied, under s. 29 of the 1990 Act, to the court for an order for the payment of his remuneration and costs together with his reasonable expenses. By the time that application came to be heard, a receiver had been appointed to Capital Bars. The receiver suggested, through counsel, that the rate of fees being charged by Mr. Wallace was too high and suggested a reduction to which I will refer in due course. The fees sought were based on a number of different hourly rates depending on the seniority of the personnel involved.
1.4 At or around that time, Kelly J. had reserved judgment in a similar application in Re Missford Limited T/A Residents Members Club and the Companies Acts. I, therefore, indicated to the parties that I wished to consider the judgment which Kelly J. was due to deliver in that case, but that I would afford the parties a further opportunity to be heard in the light of that judgment. I am of the view, which I expressed at the time, that there is an obligation on the courts to ensure reasonable consistency in the approach adopted to applications for the payment of examiners costs. It was for that reason that I wished to have the opportunity to consider the views then to be expressed by Kelly J. in Missford.
1.5 Thereafter, judgment was delivered on the 17th June by Kelly J., (Missford Limited T/A Residents Members Club & the Companies Acts [2010] IEHC 240). I subsequently afforded the parties an opportunity to make further submissions on the matter. This judgment is directed towards the conclusions which I have reached. I should turn first to the decision in Missford.
2. Missford
2.1 In a review of the case law in Missford, Kelly J. quoted the observations of Hamilton C.J. in Re Coombe Importers Limited (Unreported, Supreme Court, Hamilton C.J., 22nd June, 1995), where the following was stated:-
“There is no doubt that the court has jurisdiction to review and disallow the remuneration, costs and expenses of the Examiner and in view of the priority given to such remuneration, costs and expenses there is an obligation on the court to be vigilant in scrutinising an examiner’s application for sanction of payment.”
It should be pointed out that one of the issues which arose in Missford was as to whether some of the work in respect of which costs were being sought by the examiner in that case, was work which was properly required of an examiner in the context of the examinership concerned. There is no equivalent issue in this case. I indicated at the initial hearing of the application that I was satisfied that the amount of work being claimed for by Mr. Wallace was reasonable, having regard to the course of the examinership. As is normal practice, the examinership remained with one judge for almost its entire course (that judge being me), with only a number of minor matters being dealt with by another judge due to my unavailability on one occasion. I was, therefore, fully familiar with the course of the examinership and have no doubt but that the volume of work specified in the Examiner’s bill in this case is fully justified. In addition, counsel on behalf of the receiver did not seek to suggest that the volume of work being charged for was in any way inappropriate.
2.2 While the issues in Missford, therefore, turned not only on the rate of remuneration but also on the amount of work to which that rate should be applied, the issues in this case concentrated solely on the rate of remuneration. While agreeing fully with the comments of Kelly J. concerning the need for the court to apply scrutiny to the question of the volume of work being charged for when determining the appropriate costs of an examiner, I am satisfied that no such issues arise on the facts of this case.
2.3 Like Kelly J., I also agree with the views expressed by Finlay Geoghegan J. in Re Sharmane Limited [2009] IEHC 377, where she said:-
“There are no statutory criteria according to which the Court should determine what constitutes reasonable remuneration for the purpose of section 29. It does not appear to me that this can be determined by reference only to the total charge-out costs computed from the hours spent and relevant hourly rate for the Examiner and those working with him. This may, of course, comprise one element to be taken into account in determining what reasonable remuneration is. However, in my view, it should not be the only element, and in determining what is reasonable remuneration the Court must also have regard to the nature of the work carried out, the complexity of the work and the importance or value of the work to the client. These would be common elements taken into account by professionals charging or seeking to agree fees with clients.”
2.4 The examiner’s costs in Missford were based, as is common practice and the case in this application, on an hourly rate, differentiated having regard to the seniority of personnel involved. As noted by Kelly J. at p. 10, the examiner in Missford charged an hourly rate of €425.00. Other staff had respective charge out rates ranging downwards from €210.00 to €100.00 per hour.
2.5 The principal conclusions of Kelly J. commenced by noting that the charge out rate at partner level of the examiner in that case of €425.00 had remained unchanged since January, 2007. Having searched for a comparator, Kelly J. noted that fees payable in respect of publicly funded criminal work in the legal profession had been subjected to reductions of, at least, 16% since 2007. Kelly J., therefore, imposed such a reduction across the board leading to a rate of €357.00 in respect of the examiner, with rates ranging down from €176.40 to €84.00 for other staff.
2.6 In addition to Missford, I raised with counsel for Mr. Wallace another practical example of costs of an examiner which had, as it happens, come before me in the period between the initial application for the approval of costs in this case and the final hearing. The case in question involved the examinership of B.A. Engineering. In that case the examiner and a member of the examiner’s firm of accountants, at partner level, operated a charge out level of €300.00 with one manager level member of the same firm being charged out at €125.00. It is in the context of the rates approved in Missford and B.A. Engineering, that I must approach the hourly rates sought in this case. The rates sought for persons at partner level are €560.00, while rates for other members of the firm range downwards from €405.00 for an Associate Director to €100.00 for a Trainee Accountant.
2.7 Against that general background and in the light of submissions made by counsel on behalf of Mr. Wallace, I should turn first to the general principles applicable.
3. General Principles
3.1 As pointed out by Kelly J. in Missford and Finlay Geoghegan J. in Sharmane, the statutory scheme does not give any guidance as to the criteria to be taken into account in assessing fees of an examiner. However, as pointed out by Hamilton C.J. in Coombe Importers, the court has an obligation to be vigilant in scrutinising any application for costs. The reason identified by Hamilton C.J. for the obligation on the court to be particularly vigilant in such scrutiny stems from the fact that the fees of an examiner are given an exceptional level of priority as to payment under the provisions of s. 29(3) of the 1990 Act. That subsection provides that the remuneration, costs and expenses of an examiner, which have been sanctioned by order of the court, are to be paid “before any other claim, secured or unsecured”, and whether arising under a scheme of arrangement or in the event of a failed examinership in any receivership or winding up of the relevant company.
3.2 A number of points need to be addressed. First, it should be noted that the question of the level of examiner’s fees is only likely, in practice, to be a matter for the court in cases of a failed examinership. Where the examinership succeeds, with a scheme of arrangement being approved by the court, then it is inevitable that the arrangements for which provision has to be made, in the context of that scheme of arrangement, must include the costs of the examiner. In order for a viable scheme to be put in place, it is necessary that there be sufficient funds to meet whatever liabilities of the company are to be paid on foot of the scheme and to provide the relevant company with sufficient funds to enable it to have a viable prospect of survival post examinership. Clearly the equation which presents itself at such a time involves there being sufficient funds to pay whatever has to be paid to the examiner as part of such an arrangement. Indeed, it was quite properly noted by counsel on behalf of Mr. Wallace (on Mr. Wallace’s instructions) that it was not unusual, in practice, for negotiations to take place, as a potentially viable scheme of arrangement began to emerge, during which the relevant examiner might be required to negotiate a reduced level of costs to enable the sums to add up. Indeed, such a practice is one with which most lawyers will be familiar in the context of the settlement of litigation, where it is a not infrequent occurrence that a defendant wishes to fix its total liability (including any liability for costs) at the time of settlement. In such circumstances either a global amount inclusive of costs or two separate sums for damages and costs are often negotiated. In either case, it is not uncommon for lawyers to have to make some reduction in what might otherwise be their fees in order to facilitate a settlement.
3.3 Indeed, based on the fact that it was accepted on behalf of Mr. Wallace that such arrangements were not unusual, it was intimated on his behalf that a reduction of 10% in the overall level of fees sought on an hourly basis might not be unreasonable to reflect the fact that arrangements of that type would not be uncommon as part of the finalisation of a scheme of arrangement in the case of a successful examinership.
3.4 There are, however, other consequences of the statutory regime. In the case of failed examinership it is almost inevitable that the company will either be placed into liquidation or go into receivership (or, indeed, both). The company concerned is, by definition, insolvent or else it could not have been admitted into examinership in the first place. In those circumstances, it is the creditors of the company who, in practice, have to bear the costs of the examinership. While the precise creditors on whom such a burden may fall may vary from case to case depending on just how insolvent the relevant company is, it remains the case that it is one or more class of creditors who will ultimately end up having to forego payment because of the super priority given to the examiner’s costs. It was, indeed, for that reason that the receiver was the obvious legitimus contradictor in this case.
3.5 However, it also follows that there are some similarities between party and party costs of litigation and the costs of examiners in the case of a failed examinership. Like all analogies it should not be pushed too far. However, the reason for exercising scrutiny is broadly the same. In litigation the successful party is entitled to have its costs paid on a party and party basis by the loser. It follows that the amounts which it may be reasonable to impose on that losing party need to be scrutinised. On the one hand parties should be entitled to incur reasonable expense in bringing successful cases to court and should not be unduly penalised by not allowing proper recovery of those costs in the event that they should succeed and have costs awarded to them. On the other hand, there must always be significant scrutiny in cases where one person is being expected to pay sums incurred by someone else. Like considerations apply in an examinership. While the examiner is appointed by the court, it will almost inevitably be the case that the examiner will be nominated by whoever petitions the court (almost always the company or its principals). In the case of a failed examinership, it is, as was argued by counsel for the receiver, the creditors who will end up paying for costs incurred at the instigation of the company or its principals.
3.6 It is next necessary to deal with some specific points made by counsel on behalf of Mr. Wallace as a commentary on the judgment of Kelly J. in Missford. Kelly J. made the point that customers generally of an insolvency practitioner who acts as an examiner cannot be expected to subsidise pro bono work done by that examiner or other work done at a reduced rate for, for example, professional bodies, no matter how praiseworthy undertaking such work may be. While not questioning that proposition, counsel made the point that insolvency practitioners generally do suffer risk as to payment.
3.7 It certainly is the case that there are liquidations where the insolvency practitioner appointed as liquidator, either is not paid at all, or can only obtain a significantly reduced payment because of the lack of funds coming into the company concerned. Like most areas of professional life there is some risk that an insolvency practitioner will, in the course of a year, undertake work for which he or she will not be paid or will be paid, in practice, at a rate far below what might be described as “the going rate”. There can be little doubt that, as with any form of commercial enterprise, such practitioners are likely to “price in” the fact that they may, on average, not recover everything that they might theoretically be entitled to, when deciding their general rates. That is not a cross subsidy. Rather it is a general condition of the market place in which such practitioners have to operate. In substance, it is no different from a supermarket having to take into account the fact that it will suffer some wastage, in calculating the mark up which it needs to charge in order to make a profit at the end of the day.
3.8 While accepting that point, it does not seem to me that it either undermines anything said by Kelly J. in Missford or, indeed, is of particularly great significance in respect of an examinership. It is, of course, possible that an examiner might not be paid for his work. However, having regard to the very high level of priority which is given to the payment of examiner’s costs, it does not seem to me that the payment of examiner’s fees carries with it a particularly high level of risk of non payment. Indeed, as was noted by Kelly J. in Missford, it was the practice of the examiner in that case to charge a lower level of fees when nominated by the Revenue Commissioners to reflect the fact that there was a certainty of recovery.
3.9 It is true to say that Kelly J. placed some reliance on the fact that the examiner in Missford had also been appointed as receiver over that company. That is not the case here, in that Mr. Wallace has no continuing formal role in respect of Capital Bars. I am not, however, convinced of the significance of the distinction for the issue which I have to decide.
3.10 Next counsel queried the appropriateness of the comparator used by Kelly J. involving criminal lawyers. The point was made that payment under the Criminal Legal Aid Scheme or from the Director of Public Prosecutions is guaranteed. That is true so far as it goes. Next it was pointed out that the market for the services of insolvency practitioners is counter cyclical, with there being more work when times are bad. On that basis, it was suggested that the market would not be likely to lead to the same fall off in the fees of insolvency practitioners as might be encountered in other areas. While there may be some overall validity in that point I am, for the reasons which I have sought to analyse, faced with having to strike a balance involving the legitimate interests of creditors who are now being asked to foot the bill, in practice, for a process that they did not instigate. As pointed out by Finlay Geoghegan J. in Sharmane, the exercise of scrutinising the fees of an Examiner is not confined to identifying that the hours charged for were actually worked and were necessary, and that the rates per hour are as per the relevant professionals normal charge out rates. Rather the court is required to take an overall view as to whether the costs being imposed on the creditors are, in all the circumstances of the case, reasonable. While the normal rates charged in the marketplace and the normal rates charged by the individual practitioner are significant factors, those rates are not the only matters to be taken into account. I am not, therefore, satisfied that there is any proper basis for departing from the views of Kelly J. as expressed in Missford.
3.11 Counsel did also make a point which, in my view, has some merit. The practice has evolved of the question of examiner’s costs coming to be fixed well after the examinership has been completed. As I have already pointed out it is likely, in the context of a successful examinership, that such costs will be agreed at the stage of the finalisation of the scheme of arrangement, for that scheme will need to make provision for those costs in any event. However, in the case of failed examinerships, the costs are normally only fixed after the event. It was pointed out by counsel that that practice can be somewhat unfair, in that a person is being asked to take on work without any agreement as to their rate of pay. Speaking for myself, I would be more than happy, in the future, to fix the basis on which the remuneration of an examiner is to be determined at a much earlier stage of the process, for example, at the original petition hearing or even, if it should prove practicable, on the occasion of the appointment of an interim examiner. In that context I should, however, emphasise the comments made by Finlay Geoghegan J. in Sharmane to the effect that appropriate costs are not necessarily determined solely by applying an hourly charge at various rates, depending on the seniority of the personnel concerned. As there may well be discussion between the company and/or its principals with a possible examiner prior to appointment I would welcome the disclosure of the results of any such discussions relating to costs at an early stage.
3.12 It is clear that there are very significant variations in the hourly rates which are apparently charged by examiners or partner level colleagues who work with the examiner concerned. The rate of €560.00 per hour sought in this case is, I am satisfied, Mr. Wallace’s normal charge out rate. Even before the reductions imposed by Kelly J. in Missford, the relevant charge out rate for partner level personnel in that case was €425.00. As I have pointed out, the partner level rate sought and obtained in B.A. Engineering was €300.00 per hour. Counsel for the receiver suggested a reduction of €100 per hour across the board which would lead to a rate of €460 per hour for those at the highest level. Given the obligation to ensure that costs are reasonable to all concerned and against that factual background, it is next necessary to say something about the extent to which it is appropriate for the court to allow different rates in different cases.
4. Should there be a Uniform Rate
4.1 In the course of debate, the point was made by counsel on behalf of Mr. Wallace that there may be valid explanations for variations in the rates charged by different practitioners. Sometimes the payment of an hourly rate is presented as the most transparent way of determining an appropriate level of remuneration for professionals. While such a method of charging has its merits, it is, in my view, possible to exaggerate the extent to which it may provide an entirely transparent way of charging. In that context I am not dealing with questions as to whether the hours claimed were actually worked, for as I have pointed out, there is no question in this case but that the relevant hours were actually worked. However, persons of different experience and expertise may well be able to do the same work in very different periods of time. Doubtless the differential rates charged by different personnel within the same firm, at least in part, reflects that fact. There can be little doubt but that large firms, which may have a significant level of expertise in different areas available within the same firm, may be able to bring efficiencies to bear on the conduct of work which would not be available to a smaller firm. On the other hand, large firms typically have higher overall overheads not otherwise recovered from clients. It does need to be recalled that a charge out rate by a professional in a firm is not the same as that person’s pay. Those overheads of the firm which are not directly charged to clients need to be met out of the fees charged. It is possible that a large firm may not cost more at the end of the day if higher hourly rates might be offset by lower number of hours. However, even that factor is itself variable for not all work is of a type which can be shortened by expertise or experience.
4.2 Having regard to the variety of factors that could legitimately be taken into account, it does not seem to me that it would be appropriate to impose a single fixed hourly rate, nor to insist that the hourly rate method is the only means by which the level of remuneration of examiners should be calculated. On the other hand, while recognising that there may be legitimate factors which may lead to different rates being charged by different firms, it seems to me that, in the context of a process where an examiner is appointed by the court and where the court is under a duty to carefully scrutinise the costs of the examiner because those costs are ultimately going to be paid by someone other than those who are directly or indirectly involved in the appointment of the examiner in the first place, it is not appropriate for a court to countenance a very wide disparity in the rates of remuneration that should be paid to examiners.
5. Conclusions
5.1 Having regard to the rate fixed by Kelly J. in Missford, the rate sought and approved in B.A. Engineering, and the rate suggested by the receiver, I find it difficult to accept that, even in the case of the largest of firms with the highest of overheads (with, it must be assumed, corresponding efficiencies leading to a reduction in the amount of hours being charged for), it would be appropriate to allow a rate in excess of €375.00 per hour for those at partnership level.
5.2 On that basis, I propose allowing €375.00 per hour for those at partner level in this case. On the same basis, it seems to me that the rate for Associate Director should be €300.00 per hour, that for Manager €260.00 per hour, that for Senior Accountant €200.00 per hour, and that for Trainee Accountant €80.00. When a calculation as to the precise total amount due on that basis has been made, I will approve the examiner’s costs and expenses in that sum together with the other items of the examiner’s costs which are not in contention in this hearing. I have conducted a rough calculation on that basis and am satisfied that the total that would be determined as a result of that calculation would meet the broad criteria of being reasonable having regard to difficulty, importance and value identified by Finlay Geoghegan J. in Sharmane.
Harley Mechanical Services Ltd & The Companies Act
[2018] IEHC 80 (20 February 2018)
URL: http://www.bailii.org/ie/cases/IEHC/2018/H80.html
Cite as: [2018] IEHC 80
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Judgment
Title:
Harley Mechanical Services Ltd & The Companies Act
Neutral Citation:
[2018] IEHC 80
JUDGMENT of Ms. Justice Baker delivered on the 20th day of February, 2018
1. This judgment concerns the treatment of tax liabilities incurred by a company in the course of the examinership process and what consequence should flow from a breach of an undertaking that current tax returns will be filed and made.
2. By motion issued on 1st December, 2017 application was made on behalf of the liquidator of Harley Mechanical Services Limited (“the Company”) for an order setting aside that part of an order made by me on 5th September, 2015 that the amount of tax due pursuant to the P30 for the Company for July 2017 be deemed to be a cost in the examinership.
3. Following the presentation of a petition on 28th June, 2017 by the Company pursuant to Part 10 of the Companies Act 2014 (“the Act”), Aengus Burns was appointed examiner of the Company on an interim basis. At the hearing of the petition on 11th July, 2017 Mr. Burns was appointed examiner.
4. At the scheduled hearing on 5th September, 2017 and because the examiner was unable to obtain funding to propose a scheme of arrangement, the protection of the court was lifted and an order was made pursuant to s. 535(2) of the Act that the Company be wound up and Mr Burns appointed liquidator. Later that day after 4pm counsel for Revenue appeared and informed me that the Company had failed to file and pay the P30 return for the period 1st July, 2017 to 31st July, 2017 due to be filed and paid by 23rd August, 2017 and in respect to which an undertaking had been given at the hearing of the petition. Revenue applied for an order that the sum due on foot of that return be treated as a priority expense in the examinership and I made an order accordingly, and gave the liquidator liberty to apply. The motion under consideration in the present judgment is the liquidator’s application to set aside that order.
5. The order had the practical effect that the Revenue liabilities were deemed to be expenses in the examinership, and thus given special status, such that the relevant amount will be not available to the liquidator to deal with his costs and expenses of the liquidation and to discharge some of the liabilities to creditors.
6. The order was made ex parte and without the knowledge of counsel or solicitor who appeared on behalf of the examiner. The events on 5th September 2017 have given rise to the exchanges of several affidavits and the liquidator and Revenue argue that the other is to be faulted.
7. When the motion was opened by counsel for the liquidator, he first approached the matter by reference to the jurisdiction of the court to set aside an order made ex parte and the heightened obligation of good faith on a legal practitioner or litigant making an ex parte application. As the matter evolved, it became clear that Revenue did not contest the proposition that the order could be set aside and the matter then proceeded to be determined on its merits.
8. Before I consider the arguments on the merits I will deal with the allegations regarding alleged lack of candour or good faith.
The course of the hearings on 5th September, 2017
9. The transcript of the DAR recording was available for the hearing of the present motion.
10. The Company was wound up and Mr. Burns appointed liquidator in the early afternoon on 5th September, 2017, and at 16:04, as the normal court business was ending, counsel on behalf of Revenue attended and indicated that she had “omitted” to make an application earlier with regard to the treatment of the tax liability. She said she had been unable to contact counsel who appeared on behalf of Mr. Burns, but that the application was being made without any objection from the directors of the Company, or from the largest creditor, both of whom had attended at the earlier hearing. Counsel identified that the filing and payment of the relevant return had not been made, the tax due was circa €107,000, and asked that the unpaid tax be deemed to be an expense or cost in the examinership. In response to my question whether I was competent to make an order of such consequence without hearing Mr. Burns, counsel suggested, and I accepted, that I would make the order and give the liquidator liberty to apply.
11. Both parties argue that the other failed to exercise good faith in the course of the hearing on 5th September, 2017. Mr. Burns argues that Revenue failed to identify to the court that Revenue saw the making of the order as a form of sanction, and that the order made was not one that ought to have been made ex parte. Having reviewed the DAR, I consider that insofar as counsel for Revenue might have encouraged me to make the order, she did so having regard to the fact that the application was made during the Long Vacation, and that it was not anticipated that I would be available to hear the matter until the following week at the earliest. I had seisin of the examinership and it would therefore not have been appropriate for counsel to have sought the order before another judge. Even if the matter had been brought on notice, as a matter of high probability the matter would have been returned to my court at a later date.
12. A number of affidavits were filed for the motion and both sides levy criticism against the other. In the case of the liquidator, his counsel argues that Revenue ought to have instructed counsel early in the day, and before the order was made winding up the Company, that the tax return had not been made and argues that the circumstances that gave rise to counsel’s returning to court later in the day ought not to have occurred. Criticism is also levied against Revenue for making the application ex parte when there was, it was argued, no real urgency in having the matter dealt with on that day.
13. For its part, Revenue levies criticism against Mr. Burns for not noticing that the P30 return had not been made and not returning to the court for directions, including directions for the termination of the examinership process, once he ascertained this position. It was argued that the examiner breached his fundamental duty to report to the court once he knew that the Company had breached its undertaking to pay current taxes as they fell due during the period of examinership.
14. Mr. Burns replies to this criticism by pointing out that he was not in control of the Company or its management as no order had been made pursuant to s. 524(7)(b) of the Act giving him executive powers. The examiner’s role, it is argued, is to liaise with the Company, its management and creditors with a view to formulating a scheme of arrangement to ensure the survival of a company. The examiner must perform that function with independence, transparency and professionalism and without any obligation to any one interested party or group.
15. I do not consider that the examiner failed to act in good faith or displayed a lack of candour. The examiner expressed a belief that up to close of business on 4th September, 2017 he believed the Company could survive as a going concern, and that a cash investment would be made which would have dealt with inter alia ongoing Revenue liabilities.
16. Following the appointment of Mr. Burns as interim examiner of the Company, he prepared a report on 7th July, 2017, in which he dealt, inter alia, with the position of Revenue and at p. 11 thereof, he stated the following: –
“My staff have liaised with the Revenue Commissioners further by telephone and they are in the process of formalising their claim.
I instructed the Company to ensure that there is an adequate provision for payment of all taxes relating to the period of examinership.”
17. Mr. Burns prepared a report dated 4th September, 2017, in which he outlined, inter alia, the position of Revenue: –
“My staff have liaised with Revenue further by both email and telephone with regard to the Company formalising its pre and post-petition claim.
The Company has filed its pre-petition tax return with the exception of the Company’s Corporation Tax return (CT 2017) for 1st January, 2017 to 28th June, 2017….”
18. In his report presented to the court on 5th September 2017, the examiner made it clear that the P30 liability remained unpaid and explained why this had happened, although the examiner mistakenly said that the return had been filed.
19. I do not accept the argument of Revenue that the examiner ought to have attended immediately at court once he became aware some time after 23rd August, 2017, that the Revenue liability had not been met. A number of factors lead me to this conclusion. The court was not in session and the examiner was entitled to assume that Revenue was aware of the tax position and would if it thought necessary make representation to the court in regard to the late returns and payment at the scheduled hearing on 5th September, 2017. I am satisfied also that the examiner did instruct the company to ensure that there was adequate provision for payment of current tax during the period of the examinership and this is clear from his report dated 10th July, 2107.
20. The failure to pay taxes was not signalled in correspondence by Revenue to the examiner. Further, the failure to pay taxes was not a failure of the examiner, but of the Company.
21. I do not accept that the examiner failed to disclose to me that the Company had been in breach of its undertaking at the hearing on 5th September, 2017. The examiner’s report is clear that the Revenue liability had not been met, and I indicated to the parties that I had read and considered the report in advance of the hearing. Revenue was present in court when the order appointing the liquidator was made and made no relevant submission.
22. It is clear also that at the short ex parte hearing counsel had identified to me the import of the order sought and this was expressly noted by me in the course of my ruling. I do not consider that she misled me or failed to identify the nature or seriousness of the application.
23. I therefore reject the arguments that there was a lack of candour by the examiner or Revenue.
24. I turn now to consider the substance of the application.
The undertaking
25. The petition to appoint an examiner was presented by the Company and supported by the verifying affidavit of Tadhg O’Connell, a director of the Company sworn on 27th June, 2017, which contained an undertaking to discharge Revenue liabilities as they fell due during the period of protection. The undertaking is stated in the following terms in the affidavit: –
“I say and believe that if an examiner is appointed to the Company, the Company will honour all of its current tax liabilities as they fall due during the period of protection. On behalf of the Company, I undertake that this will be done.”
26. The order of 10th July, 2017 appointing the examiner contained reference to undertakings to pay current taxes and make return in the normal way, and recites that they were given by counsel for the Company as follows: –
“The court doth note the undertakings given by counsel for the Company in relation to the discharge of its Revenue liabilities and that the outstanding returns of the Company will be made in the normal way during the period of examinership.”
27. The Company has filed its post-petition P30 liabilities for June 2017, and the liability was off set against monies held by Revenue. The July P30 is not filed and the liabilities remain unpaid.
28. It was anticipated by the examiner, and he expressly noted in his final report, that the Company would have discharged the July P30 liability in advance of the scheduled court hearing on 5th September 2017 if terms of a proposed investment had been agreed, and the examiner had anticipated that some of the investment funds would be used to deal with those liabilities.
29. In the event, no terms of investment were agreed
30. The examiner’s evidence is that in the eight weeks of the examinership process he had remained cautiously optimistic that an investment would be negotiated to enable him to form proposals for a scheme of arrangement. That optimism continued up to the scheduled conference call at 2pm on Monday the 4th September, the day before the matter was returnable before the High Court. At 5.15pm on that day however, it became clear that the parties could not resolve certain commercial differences and that the investment would not be forthcoming. In that context the examiner formed the view that the Company did not have a reasonable prospect of survival as a going concern and determined to seek an order lifting the protection of the court and an order that the Company be wound up.
31. The terms of the undertaking were not complied with for these reasons.
The purpose of the undertaking
32. An undertaking in the form given at the hearing of the petition is commonly sought and given by a company before an examiner is appointed.
33. The Revenue Commissioners are always on notice of a petition to appoint an examiner, and Courtney suggests in the fourth edition of The Law of Companies the courts “frequently tend to pay particular attention to the Revenue Commissioners’ position on an application for the appointment of an examiner” (at para. 23.063). Where Revenue is neutral this has been interpreted as being “a sign of hope” for the ailing company, a comment made by O’Flaherty J. in Re Cavan Christies Glass Limited [1998] 3 IR 591 at 594. The practice has evolved that Revenue will take a neutral position when an undertaking is given that for the course of the period of protection Revenue returns will be filed and liabilities met as they fall due. Such an undertaking was given in the present case at the hearing of the petition. The giving of such undertaking is a factor that will be taken into account in the exercise by the court of its discretionary jurisdiction to appoint an examiner, a power to be exercised in the light of the fact of all the circumstances: Missford Limited t/a Residents Members Club [2010] IEHC, In Re Star Elm Frames Limited [2013] IESC 57 and In Re Gallium [2009] 2 ILRM 11.
34. The ability of a company to give an undertaking to continue to meet Revenue liabilities as they fall due is regarded as supporting the argument that the company is capable of surviving as a going concern in whole or in part. It also must be the case that the court would regard it as proper not to permit a company to continue to trade and collect PAYE and PRSI from employees, or VAT on services or goods, if the court could not be satisfied that the monies so collected would be transmitted to Revenue on whose behalf the relevant taxes are collected.
35. Revenue is a preferential creditor in a winding up, and the purpose of the undertaking in the examinership process is to enable a company to trade in a protected environment for a limited period without fear of a winding up petition and to give comfort to Revenue for current taxes. This is consistent with public policy and the interest of the common good in the rescue of viable companies and the saving of jobs for which the examinership legislation was promulgated.
36. The undertaking is not designed to, nor could it, supplant the legal obligations of the Company. The proffering of an undertaking does not have the effect of altering or improving the priority status of Revenue debt, and that status or priority is a matter governed by statute.
To whom and by whom is undertaking given?
37. The undertaking to met Revenue liabilities as they fall due is an undertaking given by a company unless the examiner is given executive powers in the examinership, a factor which did not arise in the present case. While I accept the argument of Revenue that the examiner does bear an onerous responsibility of candour to the court I do not accept that in the present case the examiner could be said to have breached the undertaking which was given by and on behalf of the Company.
38. It is unclear however, to whom the undertaking is given. Counsel for the liquidator argues that the undertaking is given by a company to Revenue. Counsel for Revenue argues that the undertaking is given to the court.
39. I consider that on a construction of the recital of the undertaking in the order appointing the examiner, that the undertaking is not to be understood as one given to Revenue, as an undertaking to Revenue is superfluous, does no more than confirm the existing statutory obligation and confers no new power to Revenue to enforce the statutory obligations to file a return and pay the taxes. An undertaking to the court on the other hand has a special meaning, and is to be treated for most purposes as equivalent to the making by the court of an order.
40. The undertaking was in my view given to the court.
What consequence is to flow from the breach of the undertaking?
41. The parties disagree as to the effect of the breach of the undertaking.
42. An undertaking given to the court is solemn and binding, and is frequently accepted in substitution for an order. Brightman J. in Biba Ltd. v. Stratford Investments Ltd. [1972] 3 All. E.R. 1041 described an undertaking as: –
“An undertaking given to the court and embodied in the written order of the court, whereby a party undertook to abstain from doing an act, had the same effect for the purposes of R.S.C., Ord. 45, r. 5 as a judgment or order in joining that act.”
43. An undertaking of an officer of the court carries a special degree of solemnity identified by Laffoy J. in the case of an undertaking given by a solicitor in Bank of Ireland Mortgage Bank v. Coleman [2009] 3 IR 699 where she stressed that the special jurisdiction of the High Court in regard to the enforcement of an undertaking was “compensatory as well as disciplinary in nature”. Finlay Geoghegan J. in Re Camden Street Investments Ltd. [2014] IEHC 86 regarded an examiner as “an officer of the court” to which he owed duties to “act honesty, reasonably, and with the fullest candour to the court in respect of all matters which, on objective criteria, could be material”.
44. Counsel for Revenue argues that the breach of the undertaking to meet Revenue liabilities which fell due entitles the court to make an order that the taxes be paid to Revenue, and the order made ex parte on 5th September, 2017 was no more than giving effect to what would have been done had the Company met its undertaking. It is argued therefore that the order was a proper exercise of its jurisdiction to enforce an undertaking, and that the effect of the order was to put the Company in precisely the position it would have been in had the undertaking been met and Revenue paid. The Company is grossly insolvent and Revenue argues that the basis of the appointment of the examiner and the continuation of court protection demands that the monies due on the relevant P30 return should be paid to Revenue and not retained for the purposes of the liquidation.
45. Counsel also argues that as circumstances had arisen that required the examiner to make application for directions under s. 524(5) the order made was an appropriate sanction to the examiner/liquidator for his failure to return to the court immediately upon becoming aware of the breach of the undertaking by the Company.
46. An analysis of the DAR recording of the very short application made by counsel in the late afternoon of 5th September, 2017 does not shows that the order was sought by way of exception or sanction and it is highly unlikely that any court would have made an order for the purposes of expressing its dissatisfaction or by way of sanction for breach of an undertaking without hearing the party intended to be sanctioned. The matter was presented quite differently, and essentially on the basis that the order was “routine”, although it was anticipated that there might be some objection by the examiner, who had by then been appointed liquidator.
47. No order would have been made by way of sanction on an ex parte basis.
48. I consider that had the breach of the undertaking or the failure of the Company to make the relevant returns been identified before the liquidator was appointed the likely result would have been the immediate removal of court protection from the Company on account of the failure of the Company to meet the precondition for the continuation of protection, but also because the failure to pay would have shown that there was no longer a reasonable prospect that the Company could have survived as a going concern. The sanction for failure would not have been a direction that the Company make and file the return, and insofar as a sanction was warranted it is a sanction to the Company which, it having failed to pay the taxes, it was no longer entitled to protection.
49. The undertaking of its nature does not offer a guarantee of payment or give current Revenue liabilities an enhanced priority, but breach may invoke the inherent jurisdiction of the court to express its displeasure or make a suitable order of enforcement. But an undertaking does not equate to certification, a statutory function reserved to an examiner. I return later to this proposition.
50. There may be cases where on application to a court in the course of the examinership process a court would, or could, give the company in examinership an opportunity to mend its hand and make the return, but it is likely that in most cases a court would express its dissatisfaction arising from the breach of the undertaking by lifting its protection.
51. The nature of the examinership process, and that arising from a breach of a solemn undertaking given to the court, engage discretionary factors and it is imprudent to state any further general proposition.
52. However, in the present case the court protection was lifted and the company would up by order of the court. For reasons I deal with later in this judgment I consider that the application was made too late.
53. But first I will deal with the argument that the impugned order is not one that may be made under that statutory scheme.
Jurisdiction to make the order deeming tax to be an expense in the examinership
54. The liquidator contends that the court had no jurisdiction under Part 10 of the Act or otherwise in its inherent jurisdiction to make the order.
55. Section 529 of the Act makes provision for the treatment of the liabilities of a company in examinership as follows: –
“(1) Any liabilities incurred by the company during the protection period which are specified in subsection (2) shall be treated as expenses properly incurred, for the purpose of section 554, by the examiner.
(2) The liabilities referred to in subsection (1) are those certified in writing by the examiner, at the time they are incurred, to have been incurred in circumstances where, in the opinion of the examiner, the survival of the company as a going concern during the protection period would otherwise be seriously prejudiced.
(3) In this section “protection period” means the period, beginning with the appointment of an examiner, during which the company is under the protection of the court.”
56. Liabilities which are by virtue of s. 529 to be treated as expenses properly incurred by the examiner and certified in writing by the examiner at the time they are incurred, are given preferential status by s. 554(3), (4) and (5) of the Act: –
“(3) The remuneration, costs and expenses of an examiner which have been sanctioned by order of the court (other than the expenses referred to in subsection (4)) shall be paid in full and shall be paid before any other claim, secured or unsecured, under any compromise or scheme of arrangement or in any receivership or winding up of the company to which he or she has been appointed.
(4) Liabilities incurred by the company to which an examiner has been appointed that, by virtue of section 529, are treated as expenses properly incurred by the examiner shall be paid in full and shall be paid before any other claim (including a claim secured by a floating charge), but after any claim secured by a mortgage, charge, lien or other encumbrance of a fixed nature or a pledge, under any compromise or scheme of arrangement or in any receivership or winding up of the company.
(5) In subsections (3) and (4), references to a claim shall be deemed to include references to any payment in a winding up of the company in respect of the costs, charges and expenses of that winding up (including the remuneration of any liquidator).”
57. The effect of the treatment of the liabilities of a company as expenses properly incurred by the examiner and so certified by the examiner is to elevate those liabilities so that they are paid before any other claims in a receivership or winding up, and before the costs, charges and expenses of a winding up including the remuneration of a liquidator. The equivalent provision in the Companies (Amendment) Act of 1990 was s. 10 and was considered y Murphy J. in the Re Edenpark Construction Limited [1994] 3 IR 126, where he described it as giving “extraordinary priority” to liabilities of the company deemed to be expenses for the purposes of the section. As he put it: –
“If sanctioned by the court such remuneration, costs and expenses are payable not merely in priority to other claims against the company concerned but in priority to those creditors who are the legal owners by way of security of the assets to which recourse may be had for the payment of such indebtedness.”
58. Murphy J. explained that the provision might not seem so far reaching were it not for s. 10 of the Act which permitted the certification or deeming of certain liabilities of the company to be expenses of the examinership and accordingly to enjoy the same priority.
Perquisites to the elevation of status
59. The legislation requires that in order for liabilities to be treated as expenses of the examinership under s. 529 a number of procedural requirements are to be met.
(a) The liabilities are to be certified in writing by the examiner, under s. 529(2)
(b) The certification must be done at the time the expenses are incurred. This means that the examiner may not certify pre-petition liabilities: In Re Edenpark Construction Limited and the expenses must be “foreseen as occurring in the period which commenced with the appointment of an examiner and terminated with the cessation of the protection” (p. 134).
(c) The certification is to be made where in the opinion of the examiner the preferential treatment of the liabilities is required if otherwise the survival of the company as a growing concern during the protection period would be seriously prejudiced.
The role of the court
60. The court has a power to review the certification by an examiner of liabilities as expenses and this power is clear from the authorities. In In Re Don Bluth Entertainment Limited, Murphy J. inter alia considered whether the discretion conferred upon an examiner by the then relevant statutory provisions was capable of review by the court. In reliance on the decision of Costello J. in In Re Clare Textiles Limited [1993] 2 IR 213, he considered that the court does have a function to review the exercise by the examiner of the certification function, and that the matter was there decided.
61. As stated by Courtney in his text the opinion of an examiner is not “sacrosanct” (para. 23.102), and the court can question the act of certification. In Re Don Bluth Entertainment Limited Murphy said that the examiner: –
“…it is important that an examiner should exercise great care and professional expertise in issuing certificates under s. 10 aforesaid. I would anticipate that an examiner from whom a certificate is sought would require the directors managing the business of the company to submit to him their proposals in relation to any particular liabilities which they proposed to incur and to satisfy him as to how the services or goods to be obtained would benefit the company, and in particular how they would contribute to the survival of the company ‘during the protection period’.”
Murphy J. refused to certify certain liabilities in the light of concerns expressed by persons who had opposed the petition relating to the motive behind the petition.
62. It is clear from the judgment of Murphy J. in In Re Edenpark Construction Limited that the court may scrutinise the bases on which the examiner certifies.
63. But the court has no express jurisdiction under Part 10 of the Act to deem liabilities as having the status of certified expenses and in my view there exists no standalone power to deem certain liabilities to be expenses in the examinership and entitled therefore to special statutory priority.
64. The conclusion is supported by the fact that the court is operating within a scheme which is wholly statutory in nature, but also by reference to s. 521 of the Act which give the court power to authorise the discharge or satisfaction of a pre-petition liability if the conditions in s. 521(2) are met: –
“The court may, on application being made to it in that behalf by the examiner or any interested party, authorise the discharge or satisfaction, in whole or in part, by the company concerned of a liability referred to in subsection (1) if it is satisfied that a failure to discharge or satisfy, in whole or in part, that liability would considerably reduce the prospects of the company or the whole or any part of its undertaking surviving as a going concern.”
65. The criteria that must be met for the exercise of that jurisdiction are identified and before making such order a court must be satisfied that the failure to discharge or satisfy such debt would considerably reduce the prospects of survival. The threshold is high.
66. The fact that the court has express jurisdiction to authorise the discharges of certain pre-petition liabilities in support of the examinership process, and in constrained circumstances, would suggest to me that no inherent jurisdiction exists outside the statutory scheme by which a court may deem certain liabilities to be the costs in the examinership.
67. The express power to certify or designate certain liabilities as expenses is vested in the examiner whose discretion is open to review by the court. The examiner is best placed to identify which liabilities satisfy the statutory requirements, and could be certified to ensure the continuation of the process.
68. Even without such consideration the fact that no statutory provision exists to regulate or guide the court in making a determination that certain liabilities are to be treated as expenses, would suggest that the statutory scheme does not admit of such power.
69. The court may make directions under s. 532(9) on application for directions within the statutory framework and for the purposes of the resolution of any questions arising therein but this does not create a free standing jurisdiction to make an order akin to certification and with the same effect.
70. I consider that the matter that arises in the present case must be dealt with wholly within the confines of the statutory scheme, and that counsel for Mr. Burns is correct that there is no jurisdiction in the court to make an order that has the effect of changing the normal priorities. This can be done by the certification by the examiner, and subject to review by the court.
71. I consider therefore that the court has no inherent jurisdiction outside the statutory scheme to deem Revenue liabilities to be an expense in the examinership. The inherent jurisdiction that the court undoubtedly has to police its own orders and to enforce the performance of undertakings is not one by which the court can, without more, displace the priorities in a liquidation
Was the application made too late?
72. Another factor that must bear on my consideration is that the Company was wound up by order of the court some time in the earlier afternoon of 5th September, 2017, and almost two hours later the application was made by counsel for Revenue relating to the taxes. Even were the order to be one which could have been validly made in the exercise of my jurisdiction to police the undertaking, the application came too late. The examiner no longer had a function which would have enabled him to certify the Revenue expenses under s. 529, as the examinership process had come to an end. By the time the order was sought in the late afternoon the Company was already in liquidation, and no order that the court could make could displace the priorities which by then had crystallised.
73. I also accept the argument of Revenue that the failure of the company to pay the taxes as they fell due in accordance with the obligation contained in the undertaking could have been treated as a matter that seriously prejudiced the likelihood that the company would survive as a going concern, and that the liability was one capable of being certified under s. 529 by the examiner. But the liability was not certified, and I am not satisfied at this juncture that I have any statutory jurisdiction to make an order that the liability be treated as an expense on the examinership.
74. However, I do not accept the argument made by Revenue that the power in the court to make orders relating to the payment of the remuneration and cost of the examiner under s. 554 of the Act provides such jurisdiction. As a matter of fact, in the present case the effect of the order made ex parte was that monies would have been paid to Revenue, and would not fall into the liquidation, with the loss of money to discharge the fees of the liquidator or other relevant creditor. While that end result might appear to be desirable in the interests of Revenue, the power of the court to make orders regarding the remuneration costs and expenses of an examiner ought not to be used to achieve a result not contemplated by another section in the Act, and the inherent jurisdiction is not to be called in aid when express statutory powers are available to meet the same mischief. No application was made under s.554.
75. The powers of the court are those determined by statute and I am not satisfied that the order made ex parte in the late afternoon on 5th September, 2017 was made within jurisdiction.
76. Therefore, I propose making an order setting aside that part of the order made on 5th September, 2017 by which the amount of tax due on the P30 for the Company for July 2017 be deemed to be a cost or expense in the examinership.