McInerney Companies Lose Examinership Appeal

The McInerney Homes case was undoubtedly the most high profile and vigorously contested examinership case of 2011. It is the only such case to have resulted in five judgments of the High Court and an appeal before a five judge Supreme Court. Ultimately, the courts refused to confirm the scheme of arrangement proposed by the examiner.

 

Examinership has a statutory time limit of 70 days, extendable to 100. These time limits were broken and a new record was set in the McInerney Homes case, which lasted for 331 days, with the Supreme Court ultimately upholding the High Court’s refusal to confirm the scheme of arrangement proposed by the examiner.

High Court
In August 2010, McInerney Homes Limited and a number of related companies entered examinership. The proposals for a scheme of arrangement provided that a US investor, Oaktree, would invest €32 million in the companies, and the secured debt of €114 million owed to a banking syndicate would be written down to €25 million and discharged on implementation of the scheme. The proposals were opposed by the banking syndicate on the basis that it could recover more of its debt (possibly up to €75 million) through a long term receivership workout plan. The proposals were put before the High Court in December 2010, and in January 2011 the Court ruled that it could not confirm the scheme.

The High Court held that the treatment of the secured loans proposed by the scheme was unfairly prejudicial to the banking syndicate. Mr Justice Clarke accepted the syndicate’s evidence that it could achieve a more favourable outcome by a controlled long term receivership. The High Court did, however, clarify that, in an appropriate case, it can approve a scheme of arrangement that provides for the write down of the debts of secured creditors, provided the scheme is not unfairly prejudicial to those secured creditors. This aspect of the judgment was not appealed to the Supreme Court.

Reconsideration by the High Court
The companies asked the Court to revisit the matter when new information emerged which indicated that the loans of two members of the syndicate, Bank of Ireland and Anglo Irish Bank, were likely to be transferred to NAMA. The companies argued that in this event it would not be possible for the syndicate to carry out its long term receivership plan.

Following a further hearing, the Court decided that in circumstances where their loans were to be transferred to NAMA, Bank of Ireland and Anglo Irish Bank were no longer prejudiced by the examiner’s scheme. However, as the scheme was still unfairly prejudicial to KBC, which is not part of NAMA, the rationale for the original judgment stood. The Court again refused to confirm the scheme.

Supreme Court Appeal
The companies appealed the High Court’s decision to the Supreme Court, but the appeal was dismissed by a 3-2 majority. The Supreme Court confirmed that the onus of proving that a scheme is not unfairly prejudicial to any interested party rests on the examiner and agreed with the High Court finding that the onus had not been discharged in this case.

Mr Justice O’Donnell observed that secured creditors are entitled to enforce their security in a way which maximises their return. He stated that to force secured creditors to accept a particular offer (in this instance €25 million) and to forego the opportunity of seeking to secure a higher return is in itself to treat them in an unfairly prejudicial fashion. He added that although there may be circumstances in which a creditor may be asked to accept less than it would obtain on a liquidation or receivership, such circumstances usually require “weighty justification”.

It would seem, therefore, that a scheme which proposes to compromise a secured creditor’s claim for a sum less than that which the creditor could realise on a liquidation or receivership is unlikely to succeed. Accordingly, issues of valuation are likely to be central to the success of any scheme which imposes a “payment out” on a secured creditor.

Contributed by Niamh Cacciato and Michael Quinn.

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