Time to Assess the Alternative to an Examinership – In re McSweeney Dispensers 1 Ltd & Ors 621 COS

In December 2011, Mr Justice Clarke confirmed the appointment of an examiner to the McSweeney Group of pharmacies. AIB opposed the appointment, arguing that it would recover more of its debt through a “trading receivership” of the Group.

Background
The McSweeney Pharmacy Group was established in 1987. In 2007 it sold a number of its pharmacies and part of the sale price was used to discharge its existing AIB bank debt. New facilities were then entered into whereby the Group provided security to AIB. The value of this security subsequently decreased due to the fall in property prices and the Group fell into breach of its loan to value covenants. Negotiations to restructure the debt were unsuccessful and a petition for the appointment of an examiner to the Group was filed by the parent company in October 2011.

Opposition by AIB – Trading Receiver
AIB opposed the appointment of an examiner and proposed as an alternative the appointment of a “trading receiver”. It argued that in terms of enterprise and jobs, there was no great difference between a successful examinership on the one hand and a trading receivership on the other. It also relied on a statement of Mr Justice O’Donnell in the McInerney Homes case to the effect that a debenture holder who has security over an entire undertaking retains the flexibility to decide how to get the maximum repayment on its loan and that, in circumstances where the liabilities of the secured creditors are to be written down, this should be taken into account in assessing unfair prejudice.
 
In deciding to appoint an examiner, Mr Justice Clarke said that it was unlikely that a bank would favour a trading receivership where it did not consider that the Group had a reasonable prospect of survival. He therefore found that it was reasonable to infer that AIB viewed the business as being likely to have some reasonable prospect of survival.

He pointed out that the difference between a trading receivership and a restructured company after confirmation of a scheme is that in the former the secured creditor remains able to make decisions based solely on its own interest and to the exclusion of other creditors. In this regard, he stated that it was appropriate to place some weight on the opinion of a further significant creditor of the Group, United Drug plc, which had indicated that its chances of recovery of the monies owing to it were better under examinership than the sort of trading receivership AIB sought to put in place.

AIB also contended that the main shareholder’s intention was to use the examinership process to significantly write down the Group’s secured debt and to avoid making a significant capital contribution himself. It argued that the purpose of examinership is not to absolve shareholders from the consequences of a failed venture. While Mr Justice Clarke agreed with this submission in principle, he noted that the legislation is equally designed to prevent the interest of any single creditor being advanced above those of the creditors as a whole or those of other interested parties.

He added that at this stage of the examinership process (the appointment stage) he was only concerned with the Group’s “reasonable prospects of survival”. In circumstances where the scheme of arrangement had not yet been prepared and there were many alternatives still available, the judge stated that AIB’s opposition, which focused on the existing shareholders retaining control, should not be given any great weight. He held that the proper time to assess the alternative of a trading receivership is when the detail of the scheme is available. On this basis, he proceeded to appoint an examiner to see whether a scheme could be formulated which would be beneficial to the other creditors, while at the same time not unfairly prejudicial to AIB as secured creditor.

Non-Disclosure of Key Facts – In re Mr Binman IEHC 401

In November 2011, Ms Justice Finlay Geoghegan rejected a petition to appoint an examiner to the Mr Binman Group on the ground that she was not satisfied that there was a reasonable prospect of survival of the Group, or the whole or any part of its undertaking, as a going concern. The petition to appoint an examiner was opposed by Bank of Scotland which was owed €53 million by the Group.

The opinion of the independent accountant that the Group was capable of surviving as a going concern was expressed to be subject to nine conditions. In his report, he confirmed that no matters had come to his attention to suggest that the conditions were not capable of being satisfied.

However, the judge was critical of the fact that (i) certain information relating to the retention of VAT and PAYE/PRSI payments had not been disclosed to the Court; and (ii) the independent accountant had not been advised of the existence of Planning Act enforcement proceedings against the Group.

Amounts Due to Revenue Commissioners
The Revenue Commissioners filed an affidavit advising the Court that the Group had withheld almost €1 million in tax in 2010. This had not been addressed in the independent accountant’s report which stated that the Group had managed to absorb the negative impacts in the market place by relying on its own working capital and reserves and by restructuring its operations. However, Ms Justice Finlay Geoghegan came to the “inescapable conclusion” that the Group was only able to continue trading in 2010 by wrongfully retaining payments collected by it on behalf of the Revenue Commissioners.

As the independent accountant did not give evidence, it was not clear whether he had been aware of the wrongful retention of taxes. As a result, Ms Justice Finlay Geoghegan found that the ability of the Court to rely on his opinion had been undermined.

Non-Disclosure of Planning Enforcement Proceedings
The Group also failed to disclose to the independent accountant and to the Court the existence of proceedings pending against it under the Planning and Development Acts. The Group sought to explain this non-disclosure by asserting that it considered the proceedings to be unsustainable and that it had brought an application to have them struck out. However, the judge noted that as the independent accountant had not been advised of the existence of the proceedings, he had no opportunity to assess their commercial impact on the views expressed by him regarding the prospects of the survival of the company. In such circumstances, she found that it should be assumed that had he been so aware, he would have made his opinion subject to the further condition that no order would be made against the Group in such proceedings which would interfere with its ability to continue using the site in question for its business.

No Immunity of Suit for Examiners – In re Michael McLoughlin Pharmacy Ltd & Anor IEHC 28

In this case, an objection was raised to a clause in the proposed scheme of arrangement which purported to provide a certain degree of immunity from suit in favour of the examiner. The clause exempted the examiner from any personal liability in relation to the proposals, his actions as examiner and the conduct of the examinership (save in the case of wilful default, gross negligence or fraud on the part of the examiner or his staff). The clause further provided that the examiner be indemnified out of the assets of the company in respect of any personal liability assumed by him, such indemnity to rank in priority to the payment of all debts due to the creditors of the company.

Bank of Scotland objected to this immunity provision as a matter of principle and noted that such exclusion clauses had begun to “creep into” schemes of arrangement.

Mr Justice Clarke concluded that it was not within the competency of the Court to include within an approved scheme a clause which purported to give immunity to an examiner. He noted that a scheme of arrangement is a scheme involving the company, its members and its creditors under which a set of arrangements is put in place to allow for the survival of the company. The legislation neither expressly nor impliedly contemplates a scheme involving measures between an examiner and persons who might have a claim against the examiner arising out of the performance of his duties.

The judge also noted that an examiner has the right to apply to court to determine any question arising in the course of his office or in the exercise of his duties. In circumstances where the examiner exercises his right of access to the court, it is difficult to see how he could be liable for implementing the court’s directions.

Further, he added that a jurisdiction to include such a clause would create an anomaly between examiners of successful examinerships and those of failed examinerships where the court refused to confirm the scheme. In the former case the court would have a jurisdiction to allow, by the inclusion of a suitable clause in the scheme of arrangement, the examiner to become immune from certain categories of liability, whereas in the latter case the examiner would be exposed to whatever types of claims might legitimately be brought.

The Court ultimately approved the scheme after deletion of the immunity provision.

Contributed by Niamh Cacciato and Michael Quinn.