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Court protection for companies
A petition made to the Court for the appointment of an examiner may be made by the company’s directors, creditors, prospective creditors or a member holding not less than one tenth of paid up capital. If the Court makes an order to appoint an examiner the examiners duty will be to examine the company’s affairs, the company will have the protection of the Court for seventy days from the date of the petition, the Court may extend this period for an additional thirty days.
It was first recognised in Salomon v Salomon where Lord McNaughten stated:
“Everybody knows that when there is a winding up, debenture-holders generally step in and sweep off everything. And a great scandal that is"
The purpose of protection is to firstly for the company to be “immunised" from creditors and secondly to appoint an examiner to investigate and make proposals for the survival of the company through a scheme of arrangement. In Re. Atlantic Magnetics Ltd McCarthy J. summarised:
“…its purpose is protection – protection of the company and consequently of its shareholders, workforce and creditors. It is clear that parliament intended that the fate of the company and those who depend upon it should not lie solely in the hands of one or more large creditors who can by appointing a receiver pursuant to a debenture effectively terminate its operation and secure as best they may the discharge of the monies due to them to the inevitable disadvantage of those less protected, the Act is to provide a breathing space albeit at the expense of some creditor or creditors."
The honourable Justice Lardner stated that the test to be applied when deciding whether the examiner should be appointed was whether there was ‘some reasonable prospect of survival’. The Supreme Court took a different view: the ‘reasonable prospect of survival’ test was rejected by Finlay CJ, indicated that it was sufficient if there was ‘some prospect of survival’.
The test held by Lardner J. ‘reasonable prospect of survival’ is now in Section 12(b) of the Companies (Amendment)(No.2) Act, 1999:
“and shall not, in any case, make such an order unless it is satisfied that there is a reasonable prospect of the survival of the related company, and the whole or any part of its undertaking, as a going concern"
Re. Atlantic Magnetics Ltd Finlay C.J. stated that there cannot be an onus of proof on a petitioner to establish as a matter of probability that the company is capable of surviving as a going concern. This is no longer the position under the Act of 1990 the wording of sub-s. ‘3(b) be supported by such evidence as the court may require for the purpose of showing that the petitioner has good reason for requiring the appointment of an examiner,’. The (No.2) Act of 1999 has amended and added a number of pre-requisite procedures and evidence that must be provided to the court by the petitioner and requires for a report by an independent accountant. The burden of proof has now been shifted to the petitioner. “The court shall not make an order under this section unless it is satisfied that there is a reasonable prospect of the survival of the company and the whole or any part of its undertaking as a going concern." The petitioner will have to show that:
(a) a company is or is likely to be unable to pay its debts, and
(b) no resolution subsists for the winding-up of the company, and
(c) no order has been made for the winding-up of the company,
In Re. Tuskar Resources plc. Top of Form
McCracken J. stated:
“If the court is to be "satisfied", it must be satisfied on the evidence before it, which is in the first instance the evidence of the petitioner. If that evidence does not satisfy the court, the order cannot be made, and in my view this is tantamount to saying that there is an onus of proof on the petitioner at the initial stage to satisfy the court that there is a reasonable prospect of survival. For this reason, the court has to view the evidence in a different manner to that applicable prior to the Act of 1999."
The selection of an independent accountant has been raised in a number of cases as to who is independent. McCracken J. raised the question:
“I have to say that I have considerable sympathy for the argument, and accept that, on the general basis that justice must be seen to be done, there can be a question mark over how independent an accountant can be if the purpose of his report to the court is to determine whether he personally should or should not be appointed to a position such as examiner."
McCracken J. in attempting to answer the question based it on the cost of appointing an extra accountant referring to Costello J. dictum in Re Wogans (Drogheda) Ltd. stating:
“…the court would be very slow to appoint an accountant previously associated with the company as examiner, as his impartiality could be questioned. However, on the other side it can be argued that there would considerable additional expense involved if two accountants had separately to investigate the prospects of the company,"
McCracken J. was of the opinion that legislator did not seek to prohibit the independent accountant from acting as examiner and that there was no restriction on the court in appointing the accountant, however he did go on to say that it would be undesirable in some cases.
The legislator sought to impose a further requirement under section 13 of the Act of 1999 amending section 4 of the Act of 1990, which is at the Courts discretion:
“4A. The court may decline to hear a petition presented under section 2 or, as the case may be, may decline to continue hearing such a petition if it appears to the court that, in the preparation or presentation of the petition or in the preparation of the report of the independent accountant, the petitioner or independent accountant-
has failed to disclose any information available to him which is material to the exercise by the court of its powers under this Act, or
has in any other way failed to exercise utmost good faith.".
The Court will have to reach the opinion that the parties have all acted Bona Fides. Re. Tuskar Resources plc. Top of Form
The opposing party “Green Sea A/S" urged that the original grounding affidavit was misleading and failed to disclose material matters to the court. McCracken J. went on to say that ‘I have no doubt that, in the light of subsequent evidence, both the grounding affidavit and the independent auditor's report were overly optimistic as to the future of the company…’ and concluded by saying:
“…I do not think that over-optimism is sufficient to show bad faith, and in any event there is clearly a wide discretion in the court under the sub-s., as it uses the word "may" rather than "shall". I do not think that in my discretion I should refuse to hear the petition on this basis."
The onus of proof is on the petitioner to show that there is a reasonable prospect of survival, this leads to providing the court with sufficient evidence from an independent accountant that must show profits and losses of the company over the last year of trading. The Companies (Amendment) (No 2) Act, 1999 made provision for an independent accountant’s report to assist the court in deciding the key question, set out in section 2(2), as to whether the company has “a reasonable prospect of……survival."
That Act introduced two new sub-sections into section 3 that the independent accountant is either the auditor of the company or a person who is qualified to be appointed as an examiner of the company. The report shall comprise of inter alia a statement of affairs of the company with particular regard to the company’s assets and liabilities. That in his opinion the company in making an undertaking would have a reasonable prospect of survival as a going concern and provide a statement of the conditions that he would consider essential to ensure such survival. The formulation and acceptance of a draft proposal for a compromise or a scheme of arrangement would offer a reasonable prospect of survival of the company. That in his opinion based on the facts that the disclosure would warrant further inquiries with a view to proceedings under section 297 or 297A of the principle Act. Details of extra funding required, liabilities incurred and if the work of an examiner would be assisted by a court direction concerning any creditors.
In the lead up to the presentation of a petition for the appointment of an examiner, if the petitioner fails to properly disclose all relevant facts that the court should take into account the court must weigh the evidence adduced in the balance.
In Re Selukwe Ltd determined that it was appropriate to approve the scheme under consideration, notwithstanding a finding that the relevant petitioners had failed to act with the utmost good faith at the time of the presentation of the petition and had, to their knowledge, significantly understated the relevant company’s Revenue debt. Costello J. was of the view that:
“…the position in this case is such that these considerations to which I have referred are outweighed by what I consider to be the main consideration in this case, namely, the fact that there are thirty jobs at stake. I do not think the court should turn down the proposals if there is any prospect of saving those jobs. So notwithstanding the doubts which I have expressed I have decided to confirm the proposal subject to the modifications to which I have referred".
In Re Wogans (Drogheda) Ltd set out that the appointment of an examiner was at the discretion of the court Costello J., pointed out on page 7 of the judgment that creditors whose interests are impaired by a scheme may object to the scheme on the grounds set out in section 25 of the Act. Costello J., held that:
“…the courts discretion under s. 24(3) to confirm, or to confirm subject to modifications, or to refuse to confirm the scheme proposed is not limited by the grounds set out in s. 25. If an abuse of the court’s processes has been established, I do not think that the court should ignore it and consider on its merits a scheme which had subsequently been prepared. To do so would be to condone the abusive behaviour and encourage similar conduct in the future".
In Traffic Group Ltd v Companies Acts Clarke J. used the courts discretion having regard to the fraudulent preference taking into account fairness of the scheme as a whole. He was cautious in his finding of fraudulent preference that he could safely reach a tentative conclusion. That if the company were to be wound up there would be sufficient funds to meet the entitlements of the Revenue as a preferential creditor. He referred to Re Antigen Holdings Ltd, ‘that a court can approve of a scheme, in all the circumstances, even where a creditor may be likely to do worse under the scheme than the same creditor might on a winding up.’ That it cannot be disproportionate to the position of the creditor when deciding to approve the scheme as apposed to winding up the company, taking into account any other creditors under both alternatives. Clarke J. held that:
“For those reasons I was not satisfied that there was any proper basis of sufficient weight to outdo the undoubted prospects for the survival of the enterprise and the maintenance of most of the jobs involved which form the other part of the balance. For those reasons I was not satisfied that it would have been appropriate to decline to approve the scheme and was prepared to approve same…"
In Gallium v Companies (Amendment) Act 1990 the company appealed to the Supreme Court against the judgement of the High Court on the grounds that the learned trail judge erred in reaching his conclusion by attaching excessive weight to the views of two creditors. Fennelly J. referred to McGovern J. dictum during the High Court trial that he was “most unhappy with the quality of the evidence" regarding the prospects of the company, which he described as “vague and nebulous, particularly having regard to the nature of the business of the company." He referred especially to the information given to the two creditors mentioned above, “which presented a picture which was totally at variance with the profit and loss account for the year ended 31st December 2007.""
Justice Fennelly stated that the purpose of examinership is to make it possible to rescue companies in difficulty that the protection period was there to facilitate examination of the prospects of rescue. Following the same principle in Re Antigen Holdings Ltd, that when approving a scheme of arrangement it may prejudice the interests of some creditors. That ‘the court will weigh the existence and degree of any such prejudice in the balance.’ When considering whether examinership would “be more advantageous to the members as a whole and the creditors as a whole than a winding-up of the company…" The evidence from the independent account must reflect this consideration. Fennelly J. went on to explain the rational of his decision to appoint an examiner taking the balanced approach taking into account the creditors as a whole and the interests of employees stated:
“The evidence suggests that there is a reasonable prospect of survival. The test does not require probability of survival to be established. Investment markets are hazardous markets at present. The company is in an extremely risky business. However, the comparative figures set out in the statement of affairs strongly suggest that liquidation is an even more hazardous alternative than the attempt at rescue by means of the appointment of an examiner. The presence of the combined elements of extremely adverse prospects, especially for unsecured creditors, on liquidation and the absence of any argument of prejudice to creditors or others from examinership persuade me that the order should be made. I am satisfied that the appointment of an examiner is warranted."
In 2009 the courts were faced with cases coming before it attempting to push the tests already set down as precedent one in particular was the Vantive Holdings known as the Zoe Group saga (Zoe).
Two petitions were lodged and two appeals to the Supreme Court in respect to the petition were made. Starting from the 17th day of July 2009 and ending on the 6th day of October 2009 a total of 82 days. ACC Bank recalling its loans made to Zoe and Zoe group seeking the courts protection they sought to have an examiner appointed.
The first petition Vantive Holdings Ltd -v- Companies Acts JUDGMENT of Mr. Justice Kelly delivered on the 31st day of July 2009. The independent accountant’s report and scheme of arrangement showed that, if an examiner was to be appointed that the company would be able to enhance site value though planning permission, build out and develop existing sites with planning permission and sell completed residential and commercial retail units. The report stated that a significant surplus will be generated which would be used to fund future developments. An issue arose as to the how independent was the accountant as the accountant was also the Zoe groups auditor. The difficulty that the court had was that at that time in Ireland, the markets were very unstable therefore; the court had to rely on economic indicators that showed that there was no prospect of turning around for at least three years or possibly more. Commercial markets were grossly over subscribed and the residential sector was hardly moving at all. The independent accountants report was based on assumptions after consulting with management of the Zoe group, that there was no evidence of any independent view being formed by him or any evidence that the accountant had consulted with anybody else. The court stated that the report was “fanciful".
According to the scheme of arrangement presented by the accountant, three requirements had to be met for the company’s survival; “The first is a scheme of arrangement involving a rescheduling of the repayment of bank debt and a moratorium on capital payments being accepted by the creditors and approved by this Court. The second is a compromise with inter-group creditors and a third, the retention of the existing management of the companies." The court had grave reservations about the accountants’ projections and the evidence used to form this opinion. The court stated ‘They appear to me to be lacking in reality’. Kelly J was not convinced that they had discharged the onus of proof in showing that there was a reasonable prospect of survival. He went on to say that, he had discretion on appointing an examiner and felt that there was something artificial in the petitioners claim. The only creditors were the banks and that they could realise their debts and deal with the properties. The claim that 650 jobs would be lost was in reality only about 100 people that were directly employed with the companies the rest was made up of sub-contractors. Kelly J went on to say that, ‘…the whole exercise seems designed to help shareholders whose investment has proved to be unsuccessful.’ That it was not the purpose for which the legislation was intended.
Appeal to the Supreme Court, Vantive Holdings v Companies Acts, JUDGMENT of the Court delivered by Murray C.J. on the 11th day of August 2009. Held that ‘In short there is a complete absence of any objective evidence or material in the affidavits filed by the petitioner,’ that the petitioner placed considerable reliance on the report that the market condition was likely to change. The report affirmed the fact that there was a significant slowdown in the wider economy. This is the reason that the Zoe group found its self in the situation that it was in. the court went on to evaluate the report in detail and came to the same conclusions as that of the High Court, that there was no evidence to validate the assumptions. The Zoe group claimed that their assets were ‘effectively frozen by the paralysis of the property sector.’ ‘That the market is undergoing an unprecedented adjustment,’ it was clear that the companies could not survive without the courts protection. Murray C.J. held:
“…it is perfectly obvious that some evidence of likely improvement in the property market is absolutely essential. Neither the affidavit of Mr Carroll nor the accountant's report makes any attempt to supply this deficiency. The court has been informed that valuations exist. They have not been placed in evidence. In their absence, it is not possible for the court to reach any conclusion on the question of "reasonable prospect of survival.""
Murray C.J. concluded:
“Accordingly, the Court concludes that the petitioner has not established that its strategy for a future orderly disposal of the key assets of the company is credible or reasonably viable. It is not necessary to revisit the question of future financing since the Court is satisfied on the above finding alone that the petitioner has not demonstrated that there is a reasonable expectation that it or the related companies could survive as a going concern. Accordingly the appeal is dismissed and the order of the learned High Court Judge refusing the application for the appointment of an examiner is upheld."
Zoe group made an application to enter a second petition before De Valera J. on the 14th day of August 2009 at 10pm, which was granted. Vantive Holdings & Ors -v- Companies Acts the JUDGMENT of Mr. Justice Clarke delivered on the 11th day of September 2009.
The ACC bank claimed that because the Supreme Court upheld the High Courts dismissal of the first petition that the second petition would amount to an abuse of process. Cooke J. dismissed the claim made by ACC bank ‘that the application was an abuse of process or that the matter was res judicata’. Referring to Cooke J. dictum on Friday 21st August 2009 and reflected on the written judgement of 24th August 2009:
“…that there was nothing in the Companies (Amendment) Act 1990 (“the Act"), which prohibited the presentation of a second petition but that the intervention of some special circumstance or explanation would be required."
“for present purposes this court is satisfied that the material is of sufficient apparent cogency and detail to warrant that the petition be heard and that the material be considered".
“In those circumstances, the Court concluded that “to ascertain whether [there is a reasonable prospect of survival] in the present case on the basis of the evidence and information now proposed to be presented", it would be necessary to hear the petition. It is this issue with which the Court is now concerned."
Clark J. was not satisfied that the companies of the Zoe Group generally have a reasonable prospect of survival in the sense on which that term is used in the Act. That the court has no jurisdiction to appoint an examiner and the petition failed.
Appeal to the Supreme Court, Vantive Holdings & ors appeal brought by ACC Bank, JUDGMENT of Murray C.J. delivered on the 14th day of October 2009 (Appeal upheld).
Murray C.J. in addressing the issue of “Abuse of Process" stated:
“Citizens have the right of access to the Courts so that their entitlements, rights and obligations may be determined in accordance with due process. Due process means a right to a fair and complete hearing of the issues of law and fact in any proceedings. The Courts have always had an inherent jurisdiction to stay or dismiss proceedings which abuse the due process of the administration of justice where to do otherwise would seriously undermine its effectiveness or integrity. In addition under the Rules of Court the Courts have, in civil proceedings, the power to dismiss proceedings on the grounds that they are “frivolous"or “vexatious". Indeed abuse of process may take many forms according to the context or the nature of the proceedings, such as whether they are criminal or civil. In this case the Court is obviously concerned with civil proceedings only."
In the Zoe group case with regard to the second petition Justice Clarke seemed to be at odds that all the other banks were not opposing the petitions stating: “…it is appropriate to briefly touch on the appropriate inferences to draw from the support (or lack of opposition) of Zoe Group’s bankers..." It would seem that the other banks new something that ACC did not. The whole issue in Ireland was the bank bail out and National Assets Management Agency (“NAMA"). Justice Clarke referred to NAMA in the attempt to understand why ACC Bank felt that they would not be prejudiced if the court was to appoint an examiner. The courts perspective changed from the first petition in relation to the second petition. If the court new the extent of the NAMA legislation at the time of trial I believe, the court might have ruled differently in hindsight. At paragraph 8.8 and 8.9 of the judgement tried to understand the proposed NAMA legislation. It would be of great benefit for banks not to call in their loans as NAMA was going to buy these loans off them even at a reduced rate the banks would not have to deal with the real property if they had to recall the loans themselves. At the time, ACC Bank did not know that only Irish banks were to be covered in this scheme by the government. The judges opinion on NAMA was:
“It is likely to be motivated in its policies and actions by whatever it believes is likely to maximise the chance of recovering as much money as possible. Whether, having regard to the timescale within which it might operate, or other factors, it might view the best course of action somewhat differently from a commercial bank, is not a matter on which I can, or should, express any view."
Ireland faced unprecedented levels of unemployment with companies closing down all over the country. The government had to come to grips with this very serious issue and the economics of the state. In 2009 more examinations where issued than in 2010, in the earlier year it would seem that the courts sought to save jobs and business, in the later year it would seem to be the opposite. The figure below shows the trends from 2009 to present.
In an article by Brian Edgar Butler, he draws his attention to the jurisprudence of law and economics that, ‘It asserts that the tools of economic reasoning offer the best possibility for justified and consistent legal practice.’ That the theory of law is a social tool to promote economic efficiency taking into consideration legislation to improve market conditions.
This paper can be best summarised by a statement made by Paul H. Rubin a Professor of Economics and Law at Emory University in Atlanta:
“Law and economics stresses that markets are more efficient than courts. When possible, the legal system, according to the positive theory, will force a transaction into the market. When this is impossible, the legal system attempts to “mimic a market" and guess at what the parties would have desired if markets had been feasible."