High Court Refuses Petition for Examinership Not Brought in Good Faith

Background

In JJ Red Holdings Limited & Companies Act 2014 [2016] IEHC 524, High Court, Baker J, 15 September 2016, the petitioning Company sought to confirm the appointment of an Examiner which was opposed by the Company's landlord.  The Company operated a hotel, which it occupied on foot of a lease from the predecessors in title to the landlord. The Company's employees supported the petition, as did the trade creditors, while Revenue was neutral on the issue.  The up-to-date balance sheet showed creditors of €836k, in addition to €1.1m rent owed to the landlord.  It was not disputed that the Company was insolvent.  The petitioner argued that it had a strong core business, now in profit and this was supported by the reports of the independent expert.

The landlord had served a forfeiture notice in October 2015 and the Company commenced legal proceedings resisting forfeiture. The proceedings were settled in July 2016 and the terms of settlement were incorporated into a High Court order.  The agreement contained a payment schedule for the Company and detailed provisions for enforcement by the landlord.

The petition was presented on 18 August 2016.

High Court

The landlord opposed the petition, claiming that the examinership process was "designed to frustrate and evade" the settlement agreement. It argued that the petition was a collateral attack on a concluded agreement and court order, and that the effect of the examinership would be a write-down of the agreement and a reduction of the liabilities of the Company.

The independent report prepared pursuant to Section 511 of the Companies Act 2014 stated that the Company had a reasonable prospect of survival as a going concern, subject to certain essential conditions including an immediate renegotiation of the settlement arrangement with the landlord, the securing of additional finance to meet the cash flow requirements of the Company and the acceptance by the creditors of an appropriate scheme of arrangement.  The independent report stated that the interests of the creditors as a whole, and the members, were best served by avoiding a winding up.

Decision

The Court noted that it was quite clear that the Company could not meet its obligations under the settlement agreement without a loan or cash injection from some source as well as an achievable arrangement to reschedule the time frame for payment of the settlement monies, if not a write-down on quantum.

The Company pointed to potential investors, however the Court noted that even if the investment were to materialise, the monies involved were not sufficient to meet the cash flow demands and the payments under the terms of settlement.

The Court held that the Company met the threshold test for the appointment of an Examiner under the Act, in that it had a reasonable prospect of survival, but conditional upon the Company being in a position to renegotiate and fund the payment to the landlords.

The Court noted that it was the intention of the Company to discharge the full amount due to the landlord, albeit with some rescheduling. However, it also noted that it was for the Examiner to determine a fair and reasonable means by which the liabilities of the company could be met so that it could survive as a going concern and while the Company might hope and intend that the landlord be paid in full, the Examiner, as an independent person, charged with the interests of the creditors as a whole, was not bound by such an assumption or even agreement.

In exercising its discretion in deciding whether to confirm the appointment of the Examiner, the Court considered that if the petition had the effect of re-opening an issue between parties which had already been determined, then it might be an abuse of process to permit that to happen.

The Court was of the view that, if the sole purpose of the petition was to protect the Company from being required to perform obligations freely entered into only three weeks before the petition was presented, then the motive for the presentation of the petition could be seen as the Company seeking to avoid those obligations and less focused on the protection of the enterprise than on a desire to reschedule or renegotiate that agreement. In this context, examining the "motive" in presenting the petition did not involve a consideration of the subjective intention or conscious purpose of the petition, but could involve looking at the probable outcome of the petition and the collateral effect it might have.

Here, the collateral effect of the examinership would be to allow the Company to avoid a recently negotiated and complex settlement of proceedings, which would fail to respect the principle of finality of litigation, or the solemnity of the entering into a compromise and having its terms ruled by a court.

The Court did note that the permanent employees were unlikely to lose their jobs even if an Examiner were not appointed. The landlord indicated that they intended to continue the employment of all permanent employees and were prepared to give an undertaking to the court in this regard.

As the true purpose of the petition in the present case was to avoid the terms of the settlement and an attempt to buy time, the petition was not presented in good faith and the Court exercised its discretion to dismiss the petition.

For further information please contact Paula Mullooly or your usual contact in A&L Goodbody.

Date Published: 11 October 2016