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Examinership – Repudiation and Disclaimer of Leases

December 18, 2009

A company in examinership may, subject to the approval of the High Court, repudiate certain contracts. Until recently there was no definitive caselaw as to whether this provision could apply to leases. Nonetheless, it was often relied on by companies in examinership when dealing with their landlords.  Recent judgments have now clarified the application of this rule.

In O’Brien’s Irish Sandwich Bars Limited, the High Court was asked by the well known franchise company, which was then in examinership, to approve the repudiation of over forty leases under which it was the tenant and which were subject to sub-leases to its franchisees.  Its landlords and franchisees opposed the application. Mr Justice Ryan examined the legislation and held that it could not be used to permit the wholesale repudiation of over forty leases. He also expressed concerns regarding the complexity of repudiating such a volume of leases and the difficulties in ascertaining the compensation due to the landlords.

More recently in Linen Supply of Ireland Limited, the company, which is in examinership and is a leading vendor of washroom hygiene products and textile services, applied for approval to repudiate five leases.  Mr Justice McGovern acknowledged that the de facto position was that the courts had permitted repudiation or disclaimer of leases by companies in examinership or by an examiner.  He considered the above judgment of Mr Justice Ryan, but ultimately concluded that the legislation does not permit the Court to make an order approving the repudiation of a lease, unless the landlord has consented in writing. 

In a quick turnaround, this judgment was appealed to the Supreme Court which delivered its judgment on 10 December 2009. It decided that a company in examinership could seek court approval to repudiate a lease and that the relevant section was not limited to contracts other than leases. The Supreme Court returned the case to the High Court which approved the repudiation of each of the leases this week.

The Supreme Court decision in Linen Supply of Ireland Limited has clarified the effect of the decision in O’Brien’s Irish Sandwich Bars Limited and conclusively determined that a company in examinership may, subject to the approval of the High Court, repudiate a lease. If the Supreme Court had decided otherwise, the ability of companies and examiners to deal with the affairs of a company in examinership would have been significantly diminished.