The Court of Appeal recently ruled, in Re KH Kitty Hall Holdings & Ors, that an agreement to restructure and discharge the secured debts of a number of companies by selling certain secured assets was not a bar to the appointment of an examiner to those companies. This was the case despite the fact that the application for the appointment of an examiner was inconsistent with the obligations imposed on the companies under the restructuring agreement and was objected to by the secured creditor.
The Court confirmed the appointment of Mr Neil Hughes of Baker Tilly Hughes Blake as examiner to seven group companies (the “Group“) in the Edward Capital Group. The Group, whose assets include the 5-star G Hotel, the 4-star Hotel Meyrick and the Eye Cinema in Galway, were controlled by Galway businessman Gerry Barrett.
The High Court initially appointed Mr Hughes as interim examiner to the Group in September 2017 following a petition by the Group after Deutsche Bank had appointed a receiver over the assets of five of the companies.
Deutsche Bank, to whom the Group owe more than €680 million, opposed the subsequent application to confirm the appointment of Mr Hughes as examiner. Deutsche Bank claimed that the petition was an abuse of process and an attempt to renege on an agreement entered into by the Group and Deutsche Bank in December 2016 to restructure and discharge the secured debt by selling down the secured assets of the Group (the “Debt Settlement Agreement“).
Ultimately, Mr Justice O’Connor in the High Court refused to confirm the appointment of the examiner to four of the seven companies. These four companies owned and/or operated the G Hotel and the Eye Cinema. He said that the primary motivation behind the application was Mr Barrett’s attempt to retain control of the firms in defiance of the Debt Settlement Agreement, which was not the purpose of the examinership process. He viewed the application as an abuse of process. Instead, Mr Justice O’Connor confirmed Mr Hughes’s appointment as examiner to three of the companies, being the companies owning and/or operating the Meyrick Hotel. In doing so he cited his concern for the hotel’s customers and employees and was satisfied that the three companies each had a prospect of survival as a going concern.
The Group appealed the decision to limit the extent of the examinership whilst Deutsche Bank cross-appealed that the examinership should not be confirmed in respect of any of the companies. The Court of Appeal, in overturning the High Court decision and confirming Mr Hughes’s appointment as examiner to all seven companies, made the following observations:
- The examinership system is premised on the assumption that pre-existing commercial contracts, of whatever kind, will be overridden, varied, negated and dishonoured in the wider public interest of rescuing an otherwise potentially viable company.
- The Court, in exercising its statutory discretion to appoint an examiner, must take into account all relevant facts and circumstances from the evidence before it and balance any prejudice to creditors against the wider public interest in rescuing an otherwise potentially viable company.
- The mere fact that the petition was inconsistent with the terms of the Debt Settlement Agreement could not in and of itself be a factor to justify the Court’s refusal to appoint an examiner.
- A company has a statutory entitlement, pursuant to section 510(1) of the Companies Act 2014 (the “Act“), to present a petition seeking the appointment of an examiner. The Group was exercising a statutory right for the intended purpose of procuring rescue from insolvency. The Court held that there were no prior proceedings which made the presentation of the petition an abuse of the due administration of justice. The ordinary commercial instincts of profit making and loss avoidance could not, in the circumstances of the case, be considered an improper motive in seeking to have an examiner appointed by the Court.
- The Court noted that the Debt Settlement Agreement did not include an express provision seeking to exclude or prevent an examinership application by or on behalf of the Group although it treated an application as a terminating event. The Court held that if the Debt Settlement Agreement purported to exclude or limit the statutory right to apply for examinership it would have to be shown that the Group had full knowledge that they were waiving such a right.
- When considering whether or not to appoint an examiner the Court must determine whether the test in section 509 of the Act has been met and whether there is a reasonable prospect of the survival of the company. The Court confirmed that it was not necessary at the petition stage of the application to show that a company would probably survive.
The decision provides helpful clarity on the interaction of debt restructuring agreements with the examinership process, which as Mr Justice Hogan noted, had surprisingly been at best imperfectly explored in case-law since the introduction of examinership under the Companies (Amendment) Act 1990. The decision demonstrates the importance of fully and explicitly expressing any covenant or undertaking that would restrict a party’s access to the Court and, in particular, a party’s statutory right to apply to the Courts to commence an examinership process and the consequent protection offered by the Court.
At the time of writing the examinership is ongoing.
Contributed by: Rebecca O’Connor