RECENT DEVELOPMENTS IN CORPORATE INSOLVENCY LAW

RECENT DEVELOPMENTS IN CORPORATE INSOLVENCY LAW PRELIMINARY In the last couple of years there have been various legislative developments, both by way of primary legislation and also by way of secondary legislation, impacting upon company law. Some of these have relevance in the area of corporate insolvency. In addition and within the area of corporate insolvency there is an every evolving and ever growing body of case law of which practitioners need to be aware. LEGISLATIVE DEVELOPMENTS Dealing first of all with legislative developments, there have been two pieces of primary legislation which came into force in January 2011, which impact upon the provisions of the Companies Acts. The Fines Act 2010 Within the corporate insolvency provisions of the Companies Acts, there are various sections which give rise to criminal liability. In some of these sections the penalty is a fine whereas in others the penalty is a fine and/or imprisonment. For example, in Section 293 of the Companies Act 1963 a wide array of acts and omissions on the part of officers of companies during the course of the winding up and during the twelve months prior to the commencement of the winding up give rise to potential criminal liability. These offences include not delivering up all books, records and assets of the company to the liquidator, concealing property of the company, fraudulently disposing of property of the company, making material omissions in the statement of affairs of the company, making false entries in the company s books and records and falsifying, concealing or destroying company records. 1

Likewise, Section 297 of the 1963 Act provides for criminal penalties in relation to fraudulent trading and Section 203 of the Companies Act 1990 provides for the imposition of criminal liability and officers of the company that is being wound up and that is unable to pay its debts in circumstances where there has been a failure on the part of the company to maintain proper books of account within the meaning of Section 202 of that Act. In addition, there is a vast range of circumstances in which liquidators, receivers and examiners may incur criminal liability as, for example, under Section 227 of the 1963 Act where a liquidator fails to publish his appointment in the Companies Registration Office Gazette. Heretofore the penalties for breaches of the statutory provisions had been laid down by the Companies Acts themselves. However, insofar as fines are concerned, the quantum of those fines is, with effect from the 4 th January 2011 1 governed by the provisions of the Fines Act 2010. Under the Fines Act 2010 there are now five classes of fines namely Class A fines, Class B fines, Class C fines, Class D fines and Class E fines. These range from 5,000.00 down to 500.00. Acts coming into force after 4 th January 2011 are to provide for fines according to these new classes. However, in relation to pre-existing legislation, the fines that had heretofore applied are now replaced by fines under one or other of the five classes specified in the 2010 Act. As regards the class of fine applicable to the relevant offence, this depends on:- (a) The date of the original enactment (or the date of the amending enactment which prior to 4 th January 2011 had amended the quantum of the fine); and (b) The quantum of the pre-existing fine itself. The class of fine applicable to these preexisting statutory offences is to be determined by reference to a series of tables contained in the 2010 Act. So, for example, in the case of an offence created under a piece of legislation enacted between 1 st January 1990 and 31 st December 1996, if the quantum of the pre-existing fine was greater than 1 Fines Act 2010 (Commencement) Order 2010, SI No. 662/2010. 2

2,769.00 but not greater than 5,000.00, a Class A fine will apply whereas if the quantum of the fine was greater than 1,731.00 but not greater than 2,769.00 a Class B fine will apply. Likewise in relation to an offence created under a piece of legislation enacted between 1 st January 1980 and 31 st December 1989 if the pre-existing fine was greater than 2,328.00 but not greater than 5,000.00 a Class A fine will apply whereas if the existing fine was greater than 1,455.00 but not greater than 2,328.00 a Class B fine will apply. Sadly, there is no easy way of reckoning the quantum of the fine now applicable to a statutory offence and accordingly practitioners, in advising their clients will need to have before them both the tables in the 2010 Act as well as the relevant earlier legislation pursuant to which the quantum of the fine had previously been determined. Civil Partnership and Certain Rights and Obligations of Cohabitants Act 2010 This is not a piece of legislation which may immediately occur to practitioners as having any relevance to matters of company law including, in particular, corporate insolvency law. Nevertheless, the provisions of this Act make certain amendments to the Companies Acts which have a practical relevance in relation to corporate insolvency. In general, wherein the Companies Acts there has, heretofore, been a reference to a spouse of a person, including, in particular, an officer of the company, the reference is now to that person s spouse or civil partner. So, for example, under Section 301A of the Companies Act 1963 where, at a creditors meeting, a creditor is proposing someone for appointment as liquidator of the company, both that creditor and the chairman of the meeting must disclose any connection with the proposed liquidator. Heretofore, the persons regarded as having such a connection were a parent, spouse, brother, sister or child of or employee or partner 2 of the proposed liquidator. Now the definition has been expanded to include a civil partner of the proposed liquidator. 2 i.e. a partner within the meaning of the Partnership Act 1890 and the Limited Partnerships Act 1907. 3

Similarly, under Section 315 of the 1963 Act various persons were disqualified for appointment as a receiver of the company including a spouse of an officer of the company. That prohibition has now been expanded to include a civil partner of an officer of the company. Equally well, under Section 289 of the 1963 Act where a floating charge is created by a company during the twelve months prior to the commencement of the winding up to secure an indebtedness to any officer of the company or to any spouse, child or nominee of an officer, that floating charge will be invalidated to the extent of any payments made within the twelve month period. By virtue of the provisions of the 2010 Act, Section 289 is now extended to capture a floating charge created in favour of a civil partner of an officer of the company. However, perhaps the section whose amendment has the most wide ranging potential effect in the realm of corporate insolvency is Section 26 of the Companies Act 1990, wherein the definition of a connected person is to be found. Under Section 26 the persons deemed to be connected with a director of a company included his spouse. That definition has now been extended to include a director s civil partner. In the context of corporate insolvency, there is a whole range of sections where being a connected person has relevance. For example, under Section 286 of the Companies Act 1963 the relevant period for the setting aside of a transaction as a fraudulent preference is extended from six months to two years prior to the commencement of the winding up in circumstances where the transaction is in favour of a connected person. Moreover, in the case of a transaction involving a connected person there is a presumption that the transaction was a fraudulent preference. Likewise, under Section 316A of the 1963 Act a receiver may not sell by private contract a noncash asset of the requisite value to a person who is or within three years prior to the date of the appointment of the receiver has been an officer of the company or a person connected with such an officer unless he gives at least fourteen days notice of his intention to do so to all creditors of the company who are known to him or who have been intimated to him. By virtue of the alternation in the definition of connected person within the meaning of Section 26 of the 1990 4

Act, a proposed sale by the receiver to a civil partner of an officer or former officer will now be caught. Section 231(1)A of the 1963 Act contains a similar provision in relation to the sale of an noncash asset by a liquidator to an officer or former officer of the company or to a person connected with such an officer. This section is therefore equally applicable to a proposed sale to a civil partner of an officer or former officer. In addition to the foregoing, the extension of the definition of connected person to include a civil partner of a director has a relevance in relation to Section 31 of the Companies Act 1990. Whilst this is not, strictly speaking, an insolvency related provision of the Companies Acts, nevertheless it is a section whose suspected breach often comes up for consideration in the context of liquidations and receiverships. Broadly speaking, the section prohibits a company from making a loan or quasi-loan to or entering into a credit transaction as creditor for a director of the company or of its holding company or a person connected with such a director. By virtue of the expansion of the definition of connected person loans or quasi-loans and credit transactions entered into by a company for the benefit of a civil partner of a director will now be caught. Under Section 38 of the 1990 Act where there has been a breach of Section 31 civil liability in the form of an account of profits and/or damages may be imposed not only on the directors who authorised the offending transaction but also on the beneficiary of the transaction. Thus, a civil partner of a director in whose favour the company he has entered into a loan, quasi-loan or credit transaction, may now be exposed to civil liability. Moreover, in the context of a winding up, Section 39 of the 1990 Act provides for the imposition of personal liability on the person for whose benefit the arrangement was made in circumstances where the transaction has contributed materially to the company s inability to pay its debts or has substantially impeded the orderly winding up of the company. This section, given the amendment to the definition of connected person, now extends also to civil partners of directors. 5

Rules of the Superior Courts (Winding Up of Companies and Examinership) 2012 Finally, in the context of legislative developments in the area of corporate insolvency, I wish to make some reference to amendments to Order 74 and Order 75A which deal with the rules of Court applicable to liquidations and examinerships respectively. Amendments have been to the Rules in relation to liquidations and examinerships pursuant to the rules of the Superior Courts (Winding Up of Companies and Examinership) 2012. 3 These rules came into force on the 11 th April 2012. Liquidations As regards liquidations, the 2012 rules substitute a new Order 74. In large part, the new Order 74 remains as before. However, some changes have been introduced in order to reflect the operation of the provisions of the Insolvency Regulation. 4 In some respects the new rules represent no more than a formal embodiment of what has in fact become practice since the coming into force of the Insolvency Regulation. Importantly, Rule 7 now provides for a new form of winding up petition which must contain certain information for the purpose of satisfying the Court that it has jurisdiction to entertain the petition. In particular, Rule 7(2) states that every petition must contain:- (a) Either: (i) statements that the Insolvency Regulation applies to the proceedings and that the company s centre of main interest (determined in accordance with the Insolvency Regulation) is situated in the State and the facts and grounds supporting each statement; or 3 SI No. 121 of 2012. 4 Council Regulation (EC) No. 1346/2000 of 29 th May 2000 on Insolvency Proceedings (OJL 160/1 of 30 th June 2000). 6

(ii) (iii) statements that the Insolvency Regulation applies to the proceedings and that the company s centre of main interest is situated in another specified Member State and the facts and grounds supporting each statement, or a statement that the Insolvency Regulation does not apply to the proceedings, and the facts and grounds supporting that statement, and in such case, shall contain a statement of the reasons why the petitioner is entitled to apply for the winding up of the company, or (b) Where the Insolvency Regulation applies to the proceedings, a statement that, to the petitioner s knowledge, no insolvency proceedings have been opened in respect of the company in any Member State or Member States (other than the State) or that such insolvency proceedings have been opened in any other Member State, and if so, whether the proceedings which have been opened are main proceedings, secondary proceedings or territorial proceedings. The last or in Rule 7(2) would appear to an error. The appropriate word should have been and since the provisions of Rule 7(2)(a)(i) and (ii) and Rule 7(2)(b) all clearly relate to a situation where the Insolvency Regulation applies. Under Article 3(2) of the Insolvency Regulation, secondary or territorial proceedings can only be opened in the State if the Company has an establishment within the State. In this regard, Rule 7(3) now stipulates that if the petitioner believes that the company s centre of main interest is situated in another Member State, the petition must identify the place within the State where the petitioner believes that the company has its establishment and the affidavit verifying the petition must set out the facts supporting that belief. Moreover, if territorial proceedings are to be opened prior to main proceedings, Article 3(4) of the Insolvency Regulation stipulates that this may only occur:- (a) where main proceedings cannot be opened because of conditions laid down by the law of the Member State of the country in which the company has its centre of main interest; or 7

(b) where the opening of secondary proceedings is requested by a creditor who is domiciled, habitual residence or registered office is in the Member State in which the company has establishment or where the claim arises from the operation of that establishment. In this regard, Rule 7(4) stipulates that the petition must identify which of the conditions referred to in Article 3(4) is being relied upon in circumstances where secondary proceedings are sought to be opened in the State in advance of main proceedings abroad. Moreover, the facts supporting this belief must be recited in the verifying affidavit. In addition, where insolvency proceedings have already been opened in another Member State (whether they be main proceedings or secondary proceedings) the affidavit verifying the Irish winding up petition must exhibit a certified copy of the original decision of the tribunal appointing the foreign liquidator together with a certified translation (if the foreign decision is not in English). Under Rule 11(2) where main proceedings have already been opened in another Member State and the registered office of the company is not situated in the State, the petitioner is required to serve a copy of the petition on the liquidator in the main proceedings. If application is made for the appointment of a provisional liquidator, the Court if acceding to the application, is now required to include a form of jurisdictional recital within the body of the Order itself. Particularly, Rule 14(2) states that the Order must either state that it is satisfied that the provisions of the Insolvency Regulation do not apply or alternatively, where it applies, that:- (a) the petitioner has adduced evidence that the centre of main interest of the company is situated in Ireland and that no insolvency proceedings have been opened in any other Member State and that the proceedings are therefore main proceedings; or 8

(b) that the petitioner has adduced evidence that insolvency proceedings have been opened in another Member State and that the Company has an establishment in Ireland and that the Irish proceedings are therefore secondary proceedings; or (c) that the petitioner has adduced evidence that the centre of main interest of the company is situated in another Member State but that the company has establishment in Ireland and that the proceedings are therefore territorial proceedings within the meaning of Article 3(4) (i.e. proceedings that have been opened in respect of an establishment in circumstance where main proceedings have not yet been opened in the Member State where the company has it centre of main interest). The requirement for what is in effect a jurisdictional endorsement on the winding up petition is something that already applies in relation to pleadings governed by the Lugana Convention and/or the Brussels I Regulation. In Re Eurofood IFSC Limited 5 Kelly J. expressed the view that such an endorsement would be desirable in respect of insolvency proceedings as well and indeed, in its own ruling in that case 6 the European Court of Justice emphasised that before purporting to open main insolvency proceedings, the Court of the relevant Member State should satisfy itself that it does indeed have jurisdiction. The Court commented as follows:- It is inherent in that principle of mutual trust that the Court of the Member State hearing an application for the opening of main insolvency proceedings checked that it has jurisdiction having regard to Article 3(1) of the Regulation, i.e. examine whether the central debtor s main interest is situated in that Member State. In that regard it should be emphasised that such an examination must take place in such a way as to comply with the essential procedural guarantees required for a fair legal process. If a liquidator is appointed by the Irish High Court and either main proceedings or secondary proceedings have already been opened in another Member State, Rule 1(4) now requires the Irish liquidator, upon being appointed, to immediately send a copy of every petition, notice, report, 5 [2004] 4 IR 370. 6 Re Eurofood IFSC Limited [2006] 3 WLR 309. 9

affidavit or other document in the Irish proceedings to the foreign liquidator by email or fax where possible or otherwise by registered post. Throughout Order 74 there are various other consequential amendments to reflect the provisions of the Insolvency Regulation. For example, Rule 91 empowers the liquidator to require the delivery up of the property, books and records of the company. However, that rule has now been modified, in the case of territorial proceedings or secondary proceedings, so as to exclude any entitlement to assets or books and records relating to assets situated outside the State. In addition, under Rule 95, when attempting to ascertain the liabilities of the company, it is no longer sufficient for the liquidator to advertise for creditors in the State. In addition, he must now send notice by prepaid ordinary post to all foreign creditors of whom he is aware. Examinerships Turning now to the position in examinerships, the amendments are more limited than for liquidations and are again all related to the operation of the Insolvency Regulation. The 2012 Rules substitute a new order 75A, Rule 3. Under the new Rule 3(2) the petition must:- (a) Contain either: (i) statements of the Insolvency Regulation applies to the proceedings and that the company s centre of main interest (determined in accordance with the Insolvency Regulation) is situated in the State and the facts and grounds supporting such statement; or (ii) statements that the Insolvency Regulation applies to the proceedings and that the company s centre of main interest is situated in another specified Member State and the facts and grounds supporting each statement; or 10

(iii) a statement that they can apply for Insolvency Regulation does not apply to the proceedings, and the facts and grounds supporting that statement, and in such case, shall contain a statement of the reasons why the debtor is entitled to apply for the appointment of an examiner; (b) contain a statement that, to the petitioner s knowledge, no insolvency proceedings (within the meaning of Article 2 of the Insolvency Regulation) have been opened in respect of the company in any Member State (other than the State), or that such insolvency proceedings have been opened and if so, whether the proceedings which have been opened are main proceedings, territorial proceedings or secondary proceedings. It is to be noted that this jurisdictional indorsement is similar to that for liquidationjs as provided for under the new Order 74 Rule 7(2). It is also notably that the word or does not appear between subparagraphs (a) and (b), thus confirming that the use of that word in Order 74 Rule 7(2) is an error. In circumstances where the petitioner believes that the company s centre of main interest is situated in another Member State, Rule 3A that the petition must:- (a) Identify place within the State where the company has an establishment; and (b) where main proceedings have not been opened in another Member State, the statement as to which of the conditions referred to in Article 3(4) justify opening territorial proceedings in Ireland before any main proceedings have been opened. In addition, the facts and grounds supporting that statement must be recited in the petition. Furthermore, under Rule 6(4) the petitioner must, in the grounding affidavit:- 11

(a) Verify that to his knowledge no insolvency proceedings have been opened in respect of the company in any other Member State or such proceedings have been opened and, if so, whether those proceedings are main proceedings, territorial proceedings or secondary proceedings; and (b) In a case where the petition believes that the company s centre of main interest is situated in another Member State he must set out where he believes that the company has an establishment in Ireland. One potentially troubling provision is the new Rule 3(3) which states that:- Where insolvency proceedings have been opened in any other Member State, the affidavit verifying the petition shall exhibit a certified copy of the original decision appointing the liquidator in the main proceedings or any other certificate of the court having jurisdiction (as referred to in Article 19 of the Insolvency Regulation) and if such decision or certificate is not in one of the official languages of the State, a translation of that decision or certificate into the Irish or the English language certified by a person competent and qualified for the purpose. (Emphasis added) At first sight this sub-rule would seem to suggest that an Irish Court would have jurisdiction to open examinership proceedings as secondary proceedings notwithstanding the appointment of a liquidator in another jurisdiction. However, Section 2(1) of the Companies (Amendment) Act 1990 only permits a petition to be presented for the appointment of an examiner, inter alia, if no resolution subsists for the winding up of the company and no order has been made for the winding up of the company. Nothing in the section states that the reference to a winding up order is only to be construed as a reference to an Irish winding up order. If this sub-rule is therefore suggesting that an examiner can be appointed in secondary proceedings notwithstanding the fact that the company is not already in liquidation in another jurisdiction, a query may well arise as to whether the Rules Committee has acted ultra vires. However, it is to be noted that under the Insolvency Regulation the word liquidator is not 12

confined to liquidators as traditionally so defined and would, for example, in the case of insolvency proceedings in the United Kingdom extend to the supervisor of a voluntary arrangement or an administrator of the company. That being so, if Rule 3(3) is intended to state nothing more than the fact that it is possible to have an Irish examinership by way of secondary proceedings, notwithstanding the existence of foreign proceedings in respect of the company such as a voluntary arrangement or an administration, no legal difficulty would appear to arise. However, if the phrase liquidator is to be construed as extending to liquidators in the strict sense as well, then Rule 3(3) may well be in variance with the provisions of Section 2(1) of the 1990 Act. This is a matter which they ultimately need to be judicially ruled upon. RE McINERNEY HOMES LIMITED Having looked at the changes to the rules of the Superior Courts insofar as they relate to examinerships, I now propose to look at the practical effect of the decisions of the High Court and Supreme Court in Re McInerney Homes Limited insofar as they relate to the hearing of an application by an examiner pursuant to Section 24 of the Companies (Amendment) Act 1990 by approval by the Court of his proposals for a scheme of arrangement. The McInerney Group was a well know group of companies that have been involved in house building for more than 100 years. When a petition was presented to have these companies placed in examinership three of its bankers objected to the appointment of an examiner on the ground that there was no reasonable prospect of survival as a going concern. These objections were rejected by Clarke J. in a judgment delivered on 24 th September 2010. 7 An examiner was duly appointed and he succeeded in putting forward the proposals for a scheme of arrangement which were voted upon by the group s creditors. The banks objected to the scheme of arrangement not on the basis that the group did not have a reasonable prospect of survival but rather on the basis that:- 7 Re McInerney Homes Limited [2010] IEHC 340. 13

(a) The 1990 Act did not confer any jurisdiction on the Court to approve a scheme of arrangement which involved cramming down a secured creditors debt i.e. imposing reduction on the amount to which the secured creditor might be entitled; and (b) In any event the proposals were unfairly prejudicial to the banks in that they would, over time, achieve a better return through a trading receivership. Under Section 24(4)(c) of the Companies (Amendment) Act 1990 it is provided that the Court shall not confirm proposals for a scheme of arrangement:- Unless the Court is satisfied that (i) the proposals are fair and equitable in relation to any class of members or creditors that has not accepted the proposals and whose interests or claims would be impaired by implementation, and (ii) the proposals are not unfairly prejudicial to the interests of any interested party. The confirmation hearing proceeded on affidavit over two days at the end of Michaelmas Term 2010. In relation to the question of whether the examiner s proposals offered a return to the banks which is better than, worse than or the same as might be achieved in a trading receivership, the Court was faced with an array of expert valuation from both sides. Judgment was delivered on 10 th January 2011. 8 In relation to the question of whether a secured creditor can be crammed down whether by taking an immediate payment of less than 100 cent in the euro or alternatively by remaining as creditors, but for a reduced amount, Clarke J. ruled that there was jurisdiction to approve such proposal. He commented as follows:- 8 Re McInerney Homes Limited[2011] IEHC 4. 14

At the end of the day, secured creditors are still creditors. All creditors are required to take pain (and often very significant pain) in cases where a scheme of arrangement under the 1990 Act is approved. There seems to me to be no reason in principle why the terms of the 1990 Act cannot apply equally to secured creditors. It is, of course, the case that in assessing whether a scheme is fair or unfairly prejudicial the Court must have regard to the secured status of such creditors and the fact that the enhanced status places those creditors in an advantageous position in any alternative scenario such as liquidation or receivership. However, that is an issue going to the merits of a particular scheme rather than an issue which goes to the jurisdiction of the Court to approve a scheme which involves the writing down of the debt of a secured creditor. It should also be noted that it is not contemplated that there be, in substance, a removal of the security of the creditor as such. Rather, what is contemplated is a reduction in the amount owed to the secured creditor. The secured creditor remains secured for the reduced sum and can only have the security released on the payment of that reduced sum. In relation to the question of whether the proposals were unfairly prejudicial, this involved the Judge having to compare what was on offer in the proposals with what the banks would be likely to recover through a trade in receivership. There had been no cross-examination of the experts on their affidavits and this, in the Judge s opinion would give rise to a difficulty. He commented as follows:- The first difficulty in assessing the respective arguments of both parties under each of the relevant headings stems from the fact that the evidence of the experts in favour of the competing positions was given on affidavit and no cross-examination occurred. In that context it is apposite to note the views of the Supreme Court in the very recent case of Boliden Tara Mines v- Cosgrove [2010] IE SC 62, in which Hardiman J., writing for the Supreme Court, delivered judgment on the 21 st December last (as it happens, the day on which the hearing in this case concluded). The issues in Boliden were very different from the issues which arise in this case. The case concerned the adequacy of evidence tended 15

in favour of a claim for rectification of a trust deed in respect of a pension fund. However, the evidence in that case in this Court was all tended on affidavit which no cross-examination. In that context, Hardiman J. stated the following:- It cannot be too strongly emphasised that, where evidence is presented on affidavit, a party who wishes to contradict such evidence must serve a notice of intention to cross-examine. In a case tried on affidavit, it is not otherwise possible to choose between two conflicting versions of facts which may have been deposed to. In a case where there is no contradictory evidence an attack on the evidence which is made before the Court must include cross-examination unless the contradicting party is prepared to rely wholly on a submission that the plaintiff has not made out its case, even taking the evidence it had produced at its height. I am faced with a similar difficult. Each side has presented evidence from experts to back up its contention as to the likely recovery by the Banking Syndicate on its receivership model. No cross-examination of the competing experts was sought. I fully appreciate that, within the time confines of the process contemplated under the 1990 Act, it might be difficult to mount a significant hearing where many expert witnesses were subject to cross-examination. It is true that the maximum 100 day period for the continuance of an examinership is specified by reference to the date on which the examiner presents his final report containing, if appropriate, a proposed scheme of arrangement. The Court is entitled to extend the period to enable the Court to consider whether the scheme of arrangement should be approved. In many cases a short extension is allowed to give proper notice to be given of the date of the Court s confirmation hearing. In cases where there is significant opposition a further delay is likely to occur to enable the parties to prepare for a contested hearing and, if necessary, to afford the Court an opportunity to consider the evidence and arguments and rule on same. However, given the clear statutory intent that a company should not be in examinership (with all of the consequences which flow from that) for too long a period, a Court could not likely contemplate a prolonged gap between the presentation at the end of a 100 day 16

period of the scheme of arrangement and the Court s decision on whether to confirm the scheme. However, that logistical difficulty does not take away from the problem with which the Court is faced in having to assess the potential prejudiced creditor where there is starkly contrasting expert evidence material to an assessment of that prejudice and where no cross-examination has taken place of the experts concerned. Having made these observations, the Judge then went on to consider the state of the evidence before him. He noted that there was expert evidence on both sides and felt that there was no basis on which he could choose between the experts. In the circumstances therefore, he could do no more than conclude that the Banking Syndicate had established that there was a credible basis for saying that it would do better in a trading receivership and thus he concluded that the examiner had failed to satisfy the Court that the proposals were not unfairly prejudicial. That being so, he refused to confirm the scheme of arrangement. The Judge was due to make his formal order in the matter on the 14 th January 2011 and the matter was put in before him for that date. However, on that date McInerney Group advised him to revisit his judgment on the basis that new evidence had come to light. In particular, it was suggested that because two of the members of the Banking Syndicate were likely to have their loans transferred to NAMA there was no reality to the long term receivership model which had been put forward by the Banking Syndicate. In a judgment delivered on 21 st January 2011 9 Clarke J. ruled that in circumstances where the Order of the Court had not yet been perfected there was indeed a jurisdiction to revisit a question after the delivery of either an oral or written judgment provided that there were strong reasons for so doing. On the facts, the Judge considered that there was a realistic possibility that the potential transfer of the Bank of Ireland and Anglo loans into NAMA might have been material to the Court s consideration and accordingly he agreed to revisit the matter. In this regard however, he was not prepared to revisit the question of whether the long term trading receivership model was or was not better than what was on offer under the examiner s Proposals. Rather, he was only prepared to address the question of whether the prospect of the Bank of Ireland and Anglo loans being transferred into NAMA would have any impact on his earlier finding of unfair prejudice. 9 Re McInerney Homes Limited[2011] IEHC 25. 17

In a judgment delivered on 17 th February 2011 10 on the affidavit of evidence Clarke J. was not satisfied that there was any real basis for concluding that Bank of Ireland and Anglo Irish would do sufficiently better under a NAMA payment for the loans than they would under the examiner s proposals for a scheme of arrangement. Thus, insofar as Bank of Ireland and Anglo were concerned, the Court was satisfied that the proposals were not unfairly prejudicial. However, the Judge concluded that NAMA was likely to view the long term receivership model as being more economically valuable than a short term sale. Thus there was a real likelihood of the long term receivership model happening which would enure for the benefit of the other member of the Banking Syndicate, namely KBC. Thus as far as the Judge was concerned, the proposals remained unfairly prejudicial in respect of KBC and thus he refused to confirm the scheme of arrangement. Having delivered his judgment, Clarke J. put the matter in for further consideration on the 21 st February 2011 with a view to determining the formal orders that ought to be made. On that date the McInerney Group, supported by the examiner, sought to have the matter reopened again on the basis that a higher offer had now come forward from the proposed investor. In an ex tempore ruling 11 Clarke J, in referring to the decision of the Supreme Court in Re Vantive Holdings Limited, 12 held that finality is a matter of fundamental importance in litigation and that it was an abuse of process to wait to put one s best foot forward until after the Court had delivered its judgment. Thus, he refused in the circumstances, to reopen the matter. Thereafter, the matter was appealed to the Supreme Court which delivered its judgments on the 22 nd July 2011. 13 In delivering one of the majority judgments, O Donnell J. made significant observations in relation to the concept of unfair prejudice and the question of where the onus of proof lies at a confirmation hearing. Having quoted the provisions of Section 24, he went on to state as follows:- 10 Re McInerney Homes Limited[2011] IEHC 61. 11 Re McInerney Homes Limited[2011] IEHC 63 12 [2009] IESC 69. 13 McInerney Homes Limited [2011] IESC 31 18

Insofar as it is material to this appeal, the relevant provision can be reduced to this: the Court shall not confirm any proposals unless it is satisfied that the proposals are not unfairly prejudicial to the interest of any interested party. The immediate context of Section 24 does not itself provide any insight into what is, or is not, unfair prejudice. However this section, like any other piece of legislation, requires to be set in the context of the Act as a whole. Examinership was first introduced into Irish law by the provisions of the Act of 1990. The scheme has been refined since then, but the essential architectural and rationale of the procedure remains intact. Prior to the Act of 1990, when a company got into difficulties, the possible options opened were limited and crude. A company which might have had some realistic prospect of survival if agreement could be reached with its creditors was at the mercy of the most obdurate and trigger happy of its creditors. The process of liquidation provided for the orderly running down of the business of the company, but at a significant cost in direct terms in the cost of the liquidation, and also indirectly in the reduced value that was inevitably achieved in respect of the companies assets. It was recognised that these costs created the potential for the process which might be beneficial to all parties. Creditors could be asked to accept a payment of a very significant written down debt which would still be more than they could expect to achieve after a perhaps lengthy and costly liquidation. The company that was thus restructured might be attractive to an investor who could perhaps be encouraged to pay more to become an investor in a company in a company as a going concern than he or she would pay to acquire the assets after liquidation. This might provide monies to pay the creditors the written down amount, and to refloat the restructured company. In theory, therefore, if the problems of the company were not prohibitively severe, the process could provide benefits to all interested parties. The conduct of a successful examinership is not easy. The essential issue in every case is the amount of investment that may be secured for a restructured company and the terms of any possible restructuring. Any investor will value a company by reference to the possible value at which the assets may be acquired in a breakup. There is only a limited amount more that an investor may pay. The business of the examiner may be to locate an 19

investor, or ideally a number of potential investors, and shuttle between the parties and seek to negotiate a deal which provides benefits to all parties. The essential structure of a successful examinership should, however, be one where the good sense of the proposal should be obvious, but where the examiner has a significant additional weapon that the Court can force a reluctant creditor to co-operate and write down his or her debt, if the Court is persuaded that the proposal is fair or, perhaps more accurately, if it is satisfied that the proposal is not unfairly prejudicial. Accordingly, the examinership process is not intended to operate to secure the survival of a company at all costs. Instead the only examinerships which can be approved are those which result in proposals broadly beneficial to all reasonable parties. It is telling that Section 24 in the Act of 1990 provides in very clear terms that the Court cannot approve a scheme of arrangement on unless it is satisfied that it is not unfairly prejudicial to any interested party. However the clarity of the structure of the section is in contrast to the lack of specificity of the concept of unfair prejudice. It might be said that the Act contemplates necessary prejudice to creditors, and only prohibits prejudice which is unfair. However, it may be more correct to conceive if any scheme has been prejudicial since it requires a creditor to accept a lesser amount than is, in theory, his or her legal entitlement. For example in this case the scheme is prejudicial in that it required creditors to accept a written down amount for their debt. But it was said to be unfairly prejudicial because that was less than the banks could obtain on a receivership. The question in any particular case is whether that particular prejudice is unfair. The essential flexibility of the test appears deliberate. It is very likely that a comprehensive definition of the circumstances of when a proposal would be unfair could be attempted, or indeed would be wise. The fact that any proposed scheme must receive the approval of the Court means that there will be a hearing. The Act of 1990 appears to invite a Court to exercise its general sense of whether, in the round, any particular proposal is unfair or unfairly prejudicial to any interested party, subject to the significant qualification that the test is posed in a negative: the Court cannot confirm the scheme unless it is satisfied the proposals are not unfairly prejudicial to any interested party. 20

In this case, the Trial Judge s approach to the question was to view the scheme against the likely return to affected creditors under the likely alternative in the event that there was no examinership, and no successful scheme. I agree that that is a vital test. Furthermore, as the Trial Judge recognised, there may well be circumstances where a creditor may be required to accept less than would be obtained in such circumstances on liquidation or a receivership, but those circumstances would normally require weighty justification. However, as this case illustrates, there may remain considerable difficulty in determining the value which a creditor, and in particular a secured creditor, might otherwise obtain, by reference to which the proposal can be judged. Having thus commented on the concept of unfair prejudice O Donnell J. went on to deal with the question of where the burden of proof lies in a Section 24 hearing. He stated as follows:- Much argument in this appeal centres on the question of the onus of proof and the question of unfair prejudice. This was perhaps inevitable given the findings of the Trial Judge on the criticisms made by the companies of the receivership model. The Trial Judge did not resolve those criticisms and instead considered that all that could be said was that the receivership model s projected returns were credible. Accordingly it seemed to follow, that if the onus had been on the banks to show positively that there would be unfair prejudice, then the finding of mere credibility of the returns would be insufficient, and arguably the objection would fail, and the proposal would be confirmed. In this regard the companies argument relied heavily on the provisions of Section 25 of the Act of 1990. It was pointed out that Section 24(3) is said to be subject to Sections 24 and 25. It was argued that once an objection is made under Section 25, whether it related to irregularity or unfair prejudice, the onus of establishing that matter lay on the objector. If so, then since Section 24 and Section 25 had, it was said, to be read together, this placed the onus on the objector to establish unfair prejudice. This argument was central in this appeal because of the way in which the confirmation hearing had proceeded. The onus of proof is important in every case, but it only becomes decisive when the Court cannot be satisfied one way or another on a particular issue. In 21

those circumstances the party bearing the onus must fail. Therefore, I am not sure that this is an entirely useful analysis to apply in the context of an examinership issue. The issue is not only an adversarial one: the Court is conducting a process in the public interest and will, for example, have regard to the interest of parties such as employees who may not be represented before it. It should be noted however that the argument advanced by the companies, if correct, would give rise to some anomalies. If a creditor lacked the means to formally object, then on the companies argument, the examiner would still have to bear the burden of satisfying the Court that the proposal was not unfairly prejudicial to such a creditor. On the other hand if the creditor felt so strongly that he or she did formerly object, but lacked the resource to do so effectively, then the logic of the companies arguments would be that the onus would nevertheless have shifted to him or her and the Court should proceed to approve the scheme on the basis that the objector had failed to discharge the onus of proof of unfairness. In my view, the words of the Act of 1990 are clear, and are fatal to the companies argument. Whatever approach is taken to Section 25, and whether or not the issue is considered in terms of the onus of proof, the wording of Section 24 remains operative. The Court is specifically prohibited from approving a scheme unless it is satisfied that it is not unfairly prejudicial to any creditor. If the end point of the argument between a company, the examiner and a creditor is that the Court cannot say that it is satisfied that the proposal is not unfairly prejudicial to any interested party, then it cannot approve the scheme, whether or not that party has objected or appeared at the hearing. In practical terms it follows that the person who seeks to have a scheme approved will seek to persuade the Court that the scheme is not unfairly prejudicial, and in that sense can be said to bear the burden of proof. However in my view, analysing the issue in these terms at best adds nothing to the clear words of Section 24 and may on occasion be misleading. In any event I must reject the companies argument that the onus of proof of unfair prejudice lies on the banks. (Emphasis added) 22

On the evidence, the majority of the Court found that the examiner had not established to the Court s satisfaction that the scheme was not unfairly prejudicial to the banks and accordingly the appeal failed. In passing, it is worth noting that whilst O Donnell J. agreed with the Trial Judge that the matter should not have been reopened for a second time on the basis of a higher offer from the proposed investor, he declined to categorise the revised offer as an abuse of process and instead confined himself to stating that there should have been no reopening of the matter because of the need for finality in litigation. What is of significance in relation to the decisions in Re McInerney Homes Limited is that the High Court and the Supreme Court have now very firmly established that in a Section 24 confirmation hearing the onus of proof lies firmly on the examiner to satisfy the Court that his proposals are fair and equitable and are not unfairly prejudicial to any interested party. This is an onus which must be established irrespective of whether or not any interested parties are objecting to the confirmation of the scheme. Typically, this will involve the examiner in not just presenting a report to the Court setting out the contents of the scheme of arrangement and summarising the outcome of each of the class meetings. Instead, the examiner, if he is to do his job properly, will have to demonstrate to the Court by way of affidavit evidence that the amount on offer pursuant to the terms of the scheme of arrangement is, for each creditor, equal to or greater than that which the creditor would receive in an alternative procedure such as liquidation or receivership. Furthermore, if the amount that is on offer pursuant to the terms of the scheme of arrangement is less than would be achieved in a liquidator or receivership, the examiner will need to put forward clear and cogent evidence as to why, nevertheless, the proposals ought not to be considered unfairly prejudicial as regards that particular creditor. Also, significantly, if a creditor does object and if that objecting creditor adduces expert valuation evidence on affidavit, then, having regard to the onus of proof that lies on him, the 23

examiner will not be in a position whereby he can safely run the Section 24 application simply on the basis of the affidavit evidence. At the very least, he will need to serve notice to crossexamine the objector s expert witnesses (which will almost inevitably lead to the objector seeking to have the examiner s expert witnesses cross-examined) or alternatively he may have to seek a full plenary hearing. Either way, in contested examinerships from now on, it seems likely that Section 24 hearings will become much more protracted affairs running over several days and adding significantly to the costs of the examinership process. CRYSTALLISATION OF FLOATING CHARGES The final case law in relation to corporate insolvency developments which I wish to refer is that of Re JD Brien Limited 14 and Re JD Brien Limited (No.2) 15 These cases concerned the effectiveness of notices of crystallisation for the purpose of enabling the holder of a floating charge to leapfrog preferential creditors in the event of a winding up or receivership. Under Section 98(1) of the Companies Act 1963 it is provided that:- Where either a receiver is appointed on behalf of the holders of any debentures of a company secured by a floating charge, or possession is taken by or on behalf of those debenture holders or any property comprised in or subject to the charge, then, if the company is not at the time in the course of being wound up, the debts which in every winding up are, under the provisions of Part VI relating to preferential payments to be paid in priority to all other debts, shall be paid out of any assets coming to the hands of the receiver or other person taking possession as aforesaid in priority to any claim for principal or interest in respect of those debentures. Insofar as liquidations are concerned, Section 285(1) to (6) lists the debts that are to have preferential status in a winding up. Subsection (7) goes on to state that:- 14 [2012] 1 ILRM 27. 15 [2012] 1 ILRM 50. 24