The scheme of arrangement (Rescue Plan) prepared by the examiner of Mac Interiors Limited (Company) has not been approved by the High Court following strong objections from the Revenue Commissioners (Revenue).
In its challenge, Revenue argued that there had been an error in “class composition” or, in other words, an error in the classification of creditors that voted on the Rescue Plan.
The main issue in dispute was that a group of creditors, referred to as the Retained Project Creditors, was placed in a separate class from the rest of the unsecured creditors for the purposes of voting on the Rescue Plan. Revenue submitted that the creation of the class of Retained Project Creditors breached the established principles on class composition.
Revenue is the biggest unsecured creditor of the Company. A significant part of its debt was warehoused as part of the Covid-19 Debt Warehousing Scheme. When the Debt Warehousing Scheme was extended, a substantial part of the Company’s tax debt lost its preferential status. As a result, Revenue became an unsecured creditor of the Company for over €13m.
Class composition is fundamental in the formulation and confirmation of rescue plans. The Companies Act requires that at least one class of creditors whose interests or claims would be impaired by the scheme of arrangement or rescue plan must have voted in its favour before a court can approve it. In this case, the class of Retained Project Creditors was the only impaired class that voted in favour of the Rescue Plan. The class of Unsecured Creditors, which was dominated by Revenue, voted against it.
Composition of classes – criteria
In the High Court, Quinn J considered whether:
- the composition of classes for an examiner’s scheme of arrangement is governed by the same principles that govern class composition in schemes of arrangement outside examinership; and
- the formation of the class of Retained Project Creditors was valid.
He concluded that the same principles apply to class composition analysis in examinerships. The law requires the classification of creditors to focus on legal rights and interests derived from those rights. Simply put, this means that creditors should predominantly be categorised according to their legal rights. Where their legal rights are the same, diverging interests can be considered. However, only in exceptional circumstances should “non-legal rights-based interests” be relied upon to subdivide a class whose rights are identical.
Those exceptional circumstances must, at least, engage differences which are:
- not extraneous to the business of the meeting (namely, considering and voting on the scheme of arrangement),
- based on verifiable criteria which are not vague, tenuous, or speculative, and
- clearly identified and defined by the examiner in his proposals.
Quinn J noted that the distinction relied upon to form the Retained Project Creditors class was based on the fact that those creditors were likely to have a future relationship with the Company, while the rest of the unsecured creditors were not. He concluded that this distinction did not meet the exceptional circumstances criteria.
Quinn J could not accept “that where the divergence described in this case is no more than different degrees of aspiration among trade creditors – not grounded in or associated in any way with legal rights – it can be relied on as a starting point and, as in this case, as the finishing point to fracture a class whose rights both past and present are otherwise identical”.
Quinn J found that the classes of creditors were erroneously formed, and the statutory meetings which voted in favour of the proposals had not been validly convened and held. On that basis, the court had no jurisdiction to confirm the Rescue Plan. Quinn J subsequently made an order to wind up the Company.
This decision highlights the importance of the correct formation of classes of creditors by examiners, particularly where Revenue is likely to be a significant player in the class of unsecured creditors.
Contributed by Harry Quinn