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Paper by Gary McCarthy BL Monday 20th July 2009

Examinership 1. In this seminar I wish to deal, in brief form, with some of the more typical areas

that arise for consideration during the course of an examinership.

2. With the recent downturn in the financial fortunes of the country, it is an area that has seen very large increase in the number of applications being made. There has more recently been an increase in the number of high profile companies that have failed to make it through the process1, either due to an inability to find a suitable investor or alternatively due to creditor opposition.

The purpose of the Legislation 3. It is important to look at the purpose of the Companies (Amendment) Act, 1990

(“the Act”). The intention of the legislation is to provide a procedure for the rescue and return to financial health of an ailing but potentially viable companies.

4. The purpose of the Act has been considered in a number of decisions of the both the Supreme Court and the High Court in recent times.

5. In Re Atlantic Magnetics Limited [1993] 2 IR 561 McCarthy J said as follows:

"It is, I believe, of great importance to bear in mind in the application of the Act that 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 on it should not lie solely in the hands of one or more large creditors who can by appointing 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"

6. The purpose of the legislation was also considered by Clarke J. in the decision of

In Re Traffic Group Limited (In Examination) (under the Companies) (Amendment) Act 1990 [2007 No 348 COS]. In that case the Court was asked to consider whether or not the Court could take into account, in deciding whether

1 Thomas Read Group and Laragan Developments Limited.

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to confirm or to refuse to confirm a scheme of arrangement, the actions of the principals of the company in the lead up to and during the Examinership. In coming to the conclusion that the Court could take such matters into consideration (albeit at the confirmation stage), he considered the function and purpose of the legislation in the following terms:

"it is clear that the principal focus of the legislation is to enable, in an appropriate case, an enterprise to continue in existence for the benefit of the economy as a whole and, of equal, or indeed greater, importance to enable as many as possible of the jobs which may be at stake in such enterprise to be maintained for the benefit of the community in which the relevant employment is located. It is important both for the Court and, indeed, for Examiners, to keep in mind that such is the focus of the legislation. It is not designed to help shareholders whose investment has proved to be unsuccessful. It is to seek to save the enterprise and the jobs"

7. On that theme, it is instructive to note the comments of Clarke J. in Laragan

Developments Limited (In Examination) (ex-tempore Judgement of Mr. Justice Clarke 16th July 2009). In that case the court considered objections from a number of creditors2 following from which Mr. Justice Clarke refused to implement the scheme of arrangement put forward by the Examiner. Given the urgency of the matter Mr. Justice Clarke delivered judgement but has yet to deliver a written Judgment and intends to do so in due course. However in the course of the ex-tempore judgement on the 16th of July 2009, he indicated that the main reason for his refusing to approve the scheme was due to the nature of the company itself. Laragan Developments Limited is one of a number of companies within the Hanley group. It is beneficially owned by the principal of the Hanley Group and carries out business for either the principal or other companies within the Hanley Group. Mr. Justice Clarke held that Laragan had no customers of its own and found on the basis of the evidence before him that it was a “vehicle of convenience to provide a particular type of service to other companies within the group without any independent existence of its own”.

8. He refused to confirm the scheme on the basis that in his view that Laragan Developments Limited was not the type of enterprise which or the undertaking that the Examinership process was designed to protect. He said as follows:-

“and the truth is those and other factors can only lead to the conclusion that there was no true arm’s length business arrangement between Mr. Hanley and Laragan. Laragan was a vehicle of convenience. The arrangements that had been technically entered into, such as building contracts, were not in fact complied with. And I think that raised in my mind very serious questions about whether in truth Laragan was a type of enterprise

2 Over a four day period

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which – or undertaking that the examinership process is designed to protect”.

9. This decision will have important consequences for construction and

development companies that undoubtedly will be seeking the protection of the Court in the short to medium term.

10. Broadly speaking, there are two main stages to the process, the application for

the appointment of the examiner and if the examiner has been in a position to put together a scheme that has been approved by the requisite number of creditors, the confirmation stage.

Locus Standi to Petition the Court 11. Pursuant to section 3(1)(a) of the Act, the company, the directors, creditors and

members are given the locus standi to Petition to appoint an Examiner. Reasonable Prospect of Survival 12. The principal test is to be satisfied is to prove the company has a reasonable

prospect of survival. Section 2 of the Act is very clear on the obligations of the Petitioner who must satisfy the Court that the company and the whole or any part of its undertaking has a real prospect of survival as a going concern.

13. In Re Tuskar Resources plc [2001] I I.R. 668, McCracken J. considered the requirements of section 2(2) of the Act against the background of earlier legislation, stating (at p. 676) as follows:

“In Re Atlantic Magnetics Ltd (in Receivership) [1993] 2 I.R. 561 Finlay C. J. also 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. It seems to me that this is no longer the position under the Act of 1999 by reason of the wording of the new sub.-s. 2 (2). Under the Act of 1990 as originally enacted there would appear to be a wide discretion given to the Court. However, the new subsection prohibits the Court from making an order unless it is satisfied there is a reasonable prospect of survival. 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,

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the Court has to view the evidence in a different manner to that applicable prior to the Act of 1999.” (emphasis added).

14. McCracken J made reference to the case of In Re Atlantic Magnetics Ltd (in

Receivership) [1993] 2 I.R. 561, where Lardner J. in the High Court commented that the standard to be met was as follows:

“Does the evidence lead to the conclusion that in all the circumstances herein it seems worthwhile to order an investigation by the Examiner into the Company’s affairs and see can it survive, there being some reasonable prospect of survival?”

McCracken J. in Tuskar commented that the amendments introduced by the

Act of 1999 are much more in keeping with the decision of Lardner J. than with the decision of the Supreme Court. Although this judgment was delivered prior to the 1999 Amendment Act, it appears that this is the test that the Court ought use. This is particularly so when the Court considers the statutory purpose of the Examiner as outlined in section 1(1) of the Companies Amendment Act 1990, namely, the purposes of “examining the state of the Company’s affairs and performing such duties in relation to the company as may be imposed by or under this Act”.

15. Although the primary obligation rests on the Petitioner to satisfy the Court that

the company has a reasonable prospect of survival, the Court can and ought to consider other sources of evidence in forming a view on whether or not the statutory test has been met. In that regard it is usual for the Court to place significant weight on the opinion of the Independent Accountant and the report of the Interim Examiner, if he has been appointed. The 1999 Amendment Act has now made it obligatory for a Petitioner to prepare a report of an Independent Accountant who must in accordance with Section 3, (3A) of the Act provide detailed information concerning the company. Of particular importance is that he offers an opinion as to the whether or not the company has a reasonable prospect of survival and set out the conditions that must be complied with, in coming to that view. The Court places particular emphasis on the view of the Independent Accountant.

16. In Fergus Haynes (Developments) Limited v Companies Acts (Unreported, High Court, 1st September 2008), Laffoy J. approved the principles set out in the judgment of McCracken J and indicated that “objective evidence” was essential to support any application to appoint an Examiner. On the facts of the case before her, Laffoy J found that the figures presented in the Petition were almost entirely based upon directors’ estimates without any independent assessment or verification by appropriate independent professionals. She concluded that it was difficult to view the case advanced by the Petitioner as other than a “bald assertion”, which is not sufficient to satisfy the test in section 2(2) of the Act.

Good Faith

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17. The Companies (Amendment) Act 1999 introduced provisions dealing with obligations on the part of the Petitioner to act in good faith. Pursuant to section 4A of the Act, 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 Petition or the report of the Interim Examiner –

(a) has failed to disclose any information available to him which is material to the exercise with the Court of its powers under this Act, or

(b) has in any other way failed to exercise utmost good faith.

18. This section puts on a statutory footing earlier decisions of the Court in cases such as In Re: Selukwe Limited (20th December 1991, Unreported) (Costello J.) and Re: Wogans (Drogheda) Limited (No.2) (7th May 1992, Unreported) (Costello J.).

19. In the case of In the Matter of Wogans (Drogheda) Limited Costello J. refused

to confirm a scheme of arrangement by reason of a number of defects in the scheme, details of which are fully set out in the Judgment of Costello J. of the 7th of May 1992. In the course of his Judgment he emphasised the importance of exercising the utmost good faith in presenting information to the Court when making such an application. He said (at page 5 of the Judgment) as follows:

“When an application is made by a Company for a protection order under the 1990 Act, it seems to me that the Directors and all those associated with the application (including their professional advisors) are obliged to exercise the utmost good faith and that such a duty exists not just on an ex-parte application to appoint an interim Examiner but also in the application itself. This is because (a) of necessity, the Court must depend to considerable extent on the truth of what is told by the Company and (b) because of the potential injustice involved in the making of a protection order when the proper course is to wind up the Company. This duty involves an obligation to disclose all relevant facts material to the exercise of the Court of its discretion. A fortiori, it involves a duty not to deliberately mislead the Court by false evidence.”

20. In the case of Traffic Group Limited Clarke J. found that the actions of the

principals of a Company in the run up to, and during, an Examinership can be legitimately taken into account when deciding whether to confirm or refuse to confirm a scheme.

21. He referred to the decision of Costello J. in Re: Selukwe Limited (Unreported,

HC Costello J., 20th December 1991), who decided that it was appropriate to approve a 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.

At page 4 of his Judgment he held as follows:-

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“That the actions of those responsible for running the Company in the immediate lead up to the presentation of the Petition in respect of an Examinership and any failure to properly disclose all relevant facts to such an application, are factors which a Court can properly take into account is, therefore, clear.”

22. In the Traffic case, Clarke J. found that there had been wrongful acts in the

lead up to the presentation of the petition, but not withstanding that finding he confirmed the proposals for a scheme of arrangement. He held as follows:

“the Court should consider the extent to which it may be possible (either by virtue of the provisions of the scheme as presented or modifications suggested by the Court) to, as it was put by counsel for the Petitioners, “neutralise” the effects of any such wrongful actions. The extent to which measures can be put in place to ensure that those who may have been guilty of a lack of candour or other wrongful action do not themselves, benefit by it, is a factor to which significant weight should be attached. It is important, in my view, that in an appropriate case, Examiners should have regard to such factors in formulating schemes for presentation to the Court”.

23. In that regard it is of note that in Traffic, Selukwe, and Wogans the issue of

good faith was raised the confirmation stage, namely at the time when the Court was being asked to confirm proposals for a scheme of arrangement. This is normally when the Court takes these matters into consideration. Although the issue could arise at any stage it is only at that stage that the Court could consider whether or not the prospects of saving a significant number of jobs would outweigh any lack of candour (if so found) displayed by a Petitioner.

24. At 5.6 of his judgement in Traffic, Clarke J stated as follows:

“It is as against that background that Costello J. felt that the high prospects of saving a significant number of jobs outweighed the lack of candour displayed by the petitioners in Selukwe. It is also important to note that, in addition to the lack of candour displayed in Wogans, it is clear from the remainder of the judgment of Costello J., in that case that he was also motivated by what he perceived were significant deficiencies in the scheme then under consideration. In addition Costello J. characterised the scheme as one which was in reality a proposal for a new commercial enterprise whereby, in truth, the existing enterprise and existing jobs would have been written off. 5.7 It seems to me, therefore, that a Court should lean in favour of approving a scheme where the enterprise, or a significant portion of it, and the jobs or a significant portion

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of them, are likely to be saved. That is not to say that the Court should disregard any lack of candour or other wrongful actions. It does, however, seem to me that the Courts approach to such matters should take into account the following. 5.8 Firstly it needs to be recognised that there may be cases where the wrongful actions of those involved in promoting the Examinership are so serious that the Court is left with no option but, on that ground alone, to decline to confirm a scheme which would otherwise be in order. It is necessary, as Costello J. pointed out in Wogans, to discourage highly wrongful behaviour. 5.9 However in addition it seems to me that the Court should consider the extent to which it may be possible (either by virtue of the provisions of the scheme as presented or modifications suggested by the Court) to, as it was put by counsel for the petitioners, “neutralise” the effects of any such wrongful actions. The extent to which measures can be put in place to ensure that those who may have been guilty of a lack of candour or other wrongful action do not, themselves, benefit by it, is a factor to which significant weight should be attached. It is important, in my view, that in an appropriate case, Examiners should have regard to such factors in formulating schemes for presentation to the Court. 5.10 Where there is a high level of likelihood that the company can survive with a consequent saving of a significant enterprise and at least a significant proportion of the jobs at stake, the Court should lean in favour of confirmation, especially if appropriate remedial measures can be put in place to mark and deal with the consequences of any lack of candour or other inappropriate action on the part of those charged with the management of the company”.

Supreme Court decision in Gallium 25. The test for the appointment of an examiner was most recently reviewed by

the Supreme Court in the case of In the matter of Galium Limited t/a First Equity Group and in the Companies Acts [2009] IESC8. In that case the High Court (Mr. Justice McGovern) refused to appoint an examiner. Mr. Justice McGovern was not satisfied with the quality of the evidence and he described the evidence before him as being vague and nebulous particularly having regard to the nature of the business of the company. On appeal the decision was set aside on the basis that new evidence was placed before the Court

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which, according to the Supreme Court, had the effect of placing an entirely different complexion on the matters as they had appeared before the High Court.

26. In that case the central issue in contention was whether or not the Petitioner had satisfied the Court that the company had a reasonable prospect of survival as a going concern. In the Supreme Court, Mr. Justice Fennelly considered all of the authorities referred to above and came to the conclusion that the Petitioner had met the threshold required under the Act. In coming to this conclusion he stated as follows:-

“McCracken J. was undoubtedly correct to say that there is an onus of proof on the Petitioner. However, the statutory requirement is to show that “there is a reasonable prospect of a survival of the company” a Petitioner does not, by getting over that threshold, acquire a right to have an order made. I still think it is fair to say that the section confers a “wide discretion” on the Court, or alternatively, that the Court should take account of all the circumstances. The establishment of a reasonable prospect of survival merely triggers the power, which remains discretionary. The view of Lardner J., as expressed in Re Atlantic Magnetics could be described as pragmatic; he asked whether it “seems worthwhile to order an investigation by the Examiner into the Company’s Affairs”. The Court has the power to appoint an Examiner if satisfied that there is a reasonable prospect of survival of the company. The entire purpose of examinership is to make it possible to rescue companies in difficulty. The protection period is there to facilitate examination of the prospects of rescue. However, that protection may prejudice the interests of some creditors. The Court will weigh the existence and degree of any such prejudice in the balance. It will have regard to the report of the Independent Accountant. The Court has to take account of all relevant interests. The independent Accountant must consider 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”. This does not limit the range of interests to be taken into account by the Court under Section 2. The interests of employees cannot be excluded. In the case of an insolvent company, it is natural that the creditors would have the greatest interest in the future, if any, of the company. The Court will take a balanced approached, as suggested by the reference to the creditors as a whole.

27. Later in his judgement Fennelly J. stated as follows:-

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“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 suggests that liquidation is an even more hazardous alternative than an 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 the examiner is warranted”

28. The above judgment represents a restatement of the principles used by the

Court and rather than a change in the test to be used. As can be seen, the Court retains a wide discretion and places emphasis on the fact that the statutory framework allows for an examination of the company. It will usually allow the company the necessary breathing space to carry out an examination and so long as the relatively low threshold has been met, in most circumstances the Court will grant the necessary breathing space contemplated by the legislation. Importantly, the Supreme Court restated that the test does not require a “probability of survival” to be proved at the appointment stage.

29. I now would like to deal with a few areas of practical importance for practitioners.

Enforceability of guarantees post Examinership – Section 25A of the Companies Amendment Act 1990.

30. The provisions of 25A of Act contains important provisions in relation to

persons who have given guarantees in respect of debts of a company which has been granted protection under the Act. The salient provisions are as follows:- 25A(i) (1) The following provisions shall have effect in relation to the liability of any

person (‘the third person’) whether under a guarantee or otherwise, in respect of a debt (‘the debt’) of a company to which an examiner has been appointed:

(a) subject to paragraph (b) and save where the contrary is provided

in an agreement entered into by the third person and the person to whom he is liable in respect of the debt (‘the creditor’), the liability shall, notwithstanding section 24(6), not be affected by

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the fact that the debt is the subject of a compromise or scheme of arrangement that has taken effect under section 24(9),

(b) neither paragraph (a) nor any of the subsequent provisions of this subsection shall apply if the third person is a company to which an examiner has been appointed,

(c) if the creditor proposes to enforce by legal proceedings or otherwise the obligation of the third person in respect of the liability, then— (i) he shall— (I) if 14 days' or more notice is given of such meeting, at

least 14 days before the day on which the meeting concerned under section 23 to consider the proposals is held, or

(II) if less than 14 days' notice is given of such meeting, not more than 48 hours after he has received notice of such meeting,

serve a notice on the third person containing an offer in writing by the creditor to transfer to the third person (which the creditor is hereby empowered to do) any rights, so far as they relate to the debt, he may have under section 23 to vote in respect of proposals for a compromise or scheme of arrangement in relation to the company.

(ii) if the said offer is accepted by the third person, that offer shall, if the third person furnishes to the examiner at the meeting concerned a copy of the offer and informs the examiner of his having accepted it, operate, without the necessity for any assignment or the execution of any other instrument, to entitle the third person to exercise the said rights, but neither the said transfer nor any vote cast by the third person on foot of the transfer shall operate to prejudice the right of the creditor to object to the proposals under section 25,

(iii) if the creditor fails to make the said offer in accordance with subparagraph (ii), then, subject to subparagraph (iv), the creditor may not enforce by legal proceedings or otherwise the obligation of the third person in respect of the liability,

(iv) subparagraph (iii) shall not apply if a compromise or scheme of arrangement in relation to the company is not entered into or does not take effect under section 24(9) and the creditor has obtained the leave of the court to enforce the obligation of the third person in respect of the liability,

(d) if the third person makes a payment to the creditor in respect of the liability after the period of protection has expired, then any amount that would, but for that payment, be payable to the creditor in respect of the debt under a compromise or scheme of

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arrangement that has taken effect under section 24(9) in relation to the company shall become and be payable to the third person upon and subject to the same terms and conditions as the compromise or scheme of arrangement provided that it was to be payable to the creditor.

(2) Nothing in subsection (1) shall affect the operation of— (a) section 5(2) (f), or (b) any rule of law where by any act done by the creditor referred to

in that subsection results in the third person referred to therein being released from his obligation in respect of the liability concerned.”

31. There are a few important aspects of Section 25A of the Act. Firstly, it is cast

wider than just guarantees and applies “in relation to the liability of any person (“the third person”) whether under a guarantee or otherwise, in respect of a debt of a company to which an examiner has been appointed.”

32. Secondly, the type of service of the notice that is required has yet to be fully decided by the courts. The Act provides that a notice must be served upon the third party but it does not offer any guidance as to the nature of the service. The question is whether service must be effected personally or would service by post or otherwise be sufficient? Could a third party be served by sending the notice to his place of residence or place of business, or served on his family or agents? In what situations would the Courts be willing to deem service sufficient?

33. This is very important as if service is not effected properly the guarantor cannot sue on foot of the guarantee post examinership.

34. All the Act says is that it must be served on the third person and must contain an offer in writing in respect of the rights that the guarantor may have under Section 23. In a number of examinership’s the guarantors have encountered problems in serving the notice personally.

35. In the case of Ely Medical Group Limited (Under Examination) Mr. Justice Kelly, in an ex-tempore judgement heard evidence from one of the creditors (who had a guarantee) that the person who had given the guarantee had deliberately evaded the service of the notice. On the facts of that case the Court was prepared to deem service good.

36. There is no guidance in the legislation. In the Rules of the Superior Court a document is defined in Order 121 Rule 1 to include a pleading, notice, affidavit or order. Order 121 Rule 2 provides as follows:-

The delivery or service of any document under these Rules, for which personal service is not required, shall be effected by leaving the document or a copy thereof (as may be appropriate) at, or sending the document or a copy thereof (as may be appropriate) by registered prepaid post to, the residence or place of business in the State of the

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person to be served or the place of business in the State of the solicitor (if any) acting for him in the proceedings to which the document relates.

37. It is arguable therefore that all is required is the service of the notice by posting

of the document but having regard to the importance of the correct service of the document. Judicial interpretation of the section would be welcome.

Birchport –Treatment of secured creditors. 38. The other area that I wish to deal with is the treatment of secured creditors and

whether or not there has been a change in Judicial attitude following the decision of in Re Birchport Limited.

39. In that case the High Court approved a scheme of arrangement where the ACC Bank were owed a sum of €1.37million secured on a lease held by Birchport Limited in respect of the Ocean Bar in Dublin. The sum due to ACC Bank was compromised to €950,000, which represented the agreed value of the leasehold interest. Following the decision of the High Court in Birchport Limited it was reported in the press that there had be a significant change in the manner in which the Court dealt with secured creditors in the context of an Examinership. There appeared to be a source of worry in banking circles that Birchport was an authority for the proposition that a bank can be forced to write down the value of its commercial loans secured against company assets and be forced to continue as a lender to the company as part of the Examinership process. In so far as such concerns exists as reported in the press, it would appear to me that these concerns are not warranted.

40. When approving a scheme of arrangements one of the matters that a Court may take into consideration is whether or not the proposed Scheme of Arrangement treats each class of creditors (including secured creditors) fair and equitably and that the scheme does not unfairly prejudice the interests of any interested party.

41. One of the tests used in establishing whether or not a person has been unfairly prejudiced is a comparison with how they would do if the company were to go into receivership and liquidation as against the scheme. Accordingly, when looking at the position of the secured creditors the Court should and must take into consideration the value of the secured interest. Prior to the recent significant decrease in the value of property, it was common for secured creditors in any scheme of arrangement to be paid 100% of their debt (albeit over a longer period of time). However in recent times the value of that security has been invariably fallen. The Examiner when formulating the proposals, in order to be fair to all creditors, can only give the secured creditor the actual value of the security as distinct to the value of the loan. Thus in Birchport, the ACC agreed to reduce the value of its debt from €1.37 million to €950,000.00 and treat the balance of its claim against the company as an unsecured creditor. This was done with the agreement of ACC Bank who agreed to support the scheme and the company. In so far as it has been reported that a secured debt

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can be written down by the Court and a bank could be forced to in effect renegotiate its facilities with the Bank, this appears to be incorrect.

Repudiation of certain contracts. 42. Under Section 20 of the Act the Court is given jurisdiction to repudiate any

contract “under which some element of performance other than payment remains to be rendered by both the company and the other contracting party or parties”.

43. This section is important in the context of many of the companies that are seeking the protection of the Court presently. It is common for companies to advance an argument to the effect that one of the reasons that they in financial difficulties is due to the very high level of rents under leases that were negotiated during better times.

44. The Act does not allow for a scheme of arrangement to contain any modification that would have effect of reducing the amount of rent to be paid under a lease (Section 25B of the Act). As a result many companies in financial difficulties, seek the Court approval of a repudiation of a lease under Section 20 of the Act. At the same time the Court is asked to determine the amount of the loss or damage as they have suffered, which can be included as an ordinary unsecured creditor of the company in any scheme.

45. Section 20 provides as follows:- (1) Where proposals for a compromise or scheme of arrangement are to be

formulated in relation to a company, the company may, subject to the approval of the court, affirm or repudiate any contract under which some element of performance other than payment remains to be rendered both by the company and the other contracting party or parties.

(2) Any person who suffers loss or damage as a result of such repudiation shall stand as an unsecured creditor for the amount of such loss or damage.

(3) In order to facilitate the formulation, consideration or confirmation of a compromise or scheme of arrangement, the court may hold a hearing and make an order determining the amount of any such loss or damage and the amount so determined shall be due by the company to the creditor as a judgement debt.

(4) Where the examiner is not a party to an application to the court for the purposes of subsection (1), the company shall serve notice of such application on the examiner and the examiner may appear and be heard on the bearing of any such application.

(5) Where the court approves the affirmation or repudiation of a contract under this section, it may in giving such approval make such orders as it thinks fit for the purposes of giving full effect to its approval including orders as to notice to, or declaring the rights of, any party affected by such affirmation or repudiation.

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46. As can be seen from Section 20 of the Act, the only contracts that Section 20

apply to are contracts which there is some element of performance other than the payment of monies. It would appear that this applies to leases as they contain non monetary leases such as obligations to repair the premises and other non-monetary obligations.

47. It is also noteworthy in Section 20(1) of the Act that the application for repudiation can only be made when it is likely that proposals are to be formulated by the use of the words “are to be formulated”.

48. It is thought therefore that the the application for repudiation under Section 20 can only be made if the Examiner forms the view that it is likely that a scheme of arrangement will be put to the creditors of the company.

49. It also appears that application for repudiation cannot be made after a scheme has been formulated and sent to creditors.

50. Finally, one matter which might be of importance is that it appears that if the

scheme of arrangement is put before the Court and not approved under Section 24 of the Act that the repudiation has has full effect despite the failure of the scheme. This may be of little practical significance having regard to the fact that it is likely, if the scheme of arrangement were to fail that the company, that the company would go into liquidation.

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CPD SEMINAR

Paper by John Breslin BL Monday 20th July 2009

LIQUIDATION CONTENTS A. SUMMARY B. BASIC CONCEPTS C. RECENT IRISH CASE LAW ON LIQUIDATIONS. D. TRANSNATIONAL LIQUIDATIONS A. SUMMARY 1. The purpose of this paper is briefly to outline the legal background to liquidations

with a view to highlighting current issues of interest. Those issues of interest are (a) recent Irish case law, and (b) current issues in transnational liquidations.

Recent Irish case law Coolfadda 2. The most important recent decision of interest to practitioners in this field is the

decision of Laffoy J in Coolfadda Developers Limited.3 In that case the High Court refused to exercise its discretion to continue the appointment of a provisional liquidator to a property development company where it was intended that the provisional liquidator would remain in situ for an extended and indefinite period to complete the build-out of projects. The learned trial judge distinguished the circumstances before her from UK cases where, particularly in the insurance/re-insurance sector, the courts contemplated a provisional liquidator continuing in office for very extended periods. She also held that the appointment of a provisional liquidator for an extended period was inconsistent with the intent of the legislation: a provisional liquidator is intended as a ‘stopgap measure.’4 The company appealed to the Supreme Court and the appeal was heard on 7 July 2009. In a judgment delivered on 14 July 2009 the Supreme Court upheld the decision of the High Court, but did not hold that the appointment of a provisional liquidator for a lengthy period in an exceptional case was prohibited by the Companies Acts.

Le Chatelaine Thudichum

3 Unreported, High Court, 25 may 2009, Laffoy J. 4 At page 13 of the judgment.

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3. Another important decision is the decision of Murphy J in Le Chatelaine Thudichum

Limited.5 The evidence in that case was that a director of the company had permitted a creditor to remove cash and stock from the company’s premises shortly before it went into insolvent liquidation. The learned trial judge found that the removal of the company’s assets was not a fraudulent preference for the purposes of section 286 of the Companies Act 1963 but he did hold that it was a fraudulent transfer of the company’s assets for the purposes of section 139 of the Companies Act 1990 (both of which provisions are discussed below). This is apparently the first ruling on the scienter required to prove a fraudulent transfer. The High Court held that where a company is deprived of assets to which it is lawfully entitled then this constitutes a fraudulent preference within the meaning of section 139.

Other cases 4. Reference is also made to two recent decisions of Laffoy J which relate to important

procedural issues. The first is Re Riviera Leisure Limited6 and deals (amongst other things) with the content of a proper statutory demand, and questions as to service of such a letter. The second is Re Lycatel (Ireland) Limited7 and highlights the risks inherent in settling a claim brought by way of a winding-up petition. Both of these decisions will be addressed in context.

Transnational liquidations 5. It is axiomatic that a great deal of trading in Ireland has a transnational element.

This involves businesses domiciled in EU Member States but obviously beyond, most notably the United States of America and, increasingly, the Asian region. As regards insolvencies (including corporate reorganizations) within the EU (except Denmark) the EU Insolvency Regulation provides a coherent structure for the orderly conduct of insolvency proceedings in the jurisdiction where the company’s ‘centre of main interests’ is located. As regards jurisdictions outside the EU, the position is less satisfactory. Whilst there is a Common Law jurisdiction to assist foreign insolvency proceedings, its scope can be uncertain. Furthermore, Ireland has apparently not taken steps to adopt a UNCITRAL model law on cross-border insolvency, notwithstanding its adoption by very many of Ireland’s trading partners outside the EU. This situation needs to be rectified.

B. BASIC CONCEPTS 1. There are, in general, two types of liquidation.8 The first is a court-supervised

process which usually commences with a winding-up petition presented under Section 213 of the Companies Act 1963 (‘CA 1963’). The procedural rules are contained in Order 74 of the Rules of the Superior Courts (‘RSC’). Section 213 provides a number of circumstances in which a petition may be granted for the

5 [2008] IEHC 349. 6 [2009] IEHC 183.

7 [2009] IEHC 264. 8 See, generally, Forde, Kennedy and Simms The Law of Company Insolvency (Second edn) (Dublin: Thomson Round Hall, 2008)

chapters 7-15; Courtney The Law of Private Companies (Second edn) (Dublin: Butterworths, 2002) chapters 25-27.

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winding-up of a company. The most commonly employed is Section 213 (e) which provides that a petition can be presented if the company is unable to pay its debts. Section 214 sets out circumstances which if they prevail will mean that a company is deemed to be unable to pay its debts. This is where demand is made for the payment of a debt exceeding €1, 269.74 is made and the money is not paid within 3 weeks of such demand.

2. The decision of Laffoy J. in Re Riviera Leisure Ltd9 discusses important procedural

aspects of the statutory demand procedure. The High Court’s decision highlights the following important procedural safeguards which petitioning creditors must pay particular attention to are as follows:

• Section 214 (a) of CA 1963 requires an effective statutory demand: case law

is clear that in order to be effective, the demand should be unequivocal, of a peremptory character, and unconditional:, or at the learned Judge pithily put it “you owe the petitioner €X, pay up”. The correspondence in question also occluded the implication that Section 214 (a) would apply i.e. that the company would be deemed to be unable to pay its debts. All the letter in question conveyed was that the company had not paid on foot of an early demand (for a different amount) and that a petition to wind op was going to be issued immediately. This falls short of what the Act requires.

• Service was defective: Section 214 (a) requires the 21 day letter to be left at

the company’s registered office. The Petitioner in this case sent the letter by ordinary pre-paid post. But for an acknowledgment by the deponent for the company in question that the letter of demand was actually delivered, the Petition could have been struck out for defective service of the 21 day letter.

3. A Petition will be dismissed, or its presentation will be restrained, if the company in

good faith and on substantial grounds disputes any liability in respect of the debt alleged to be the subject matter of the Petition. Equally, if the subject matter of the bona fide dispute is not the debt itself but a cross-claim, the Petition will be dismissed. These issues had been discussed by Clarke J. in Re Emerald Portable Buildings Systems Ltd.10 The cross-claim must be one of substance, and must be one which the company has been unable to litigate, and must it must be in an amount exceeding the amount of the Petitioner’s debt.11 A winding up petition is not a legitimate means of seeking to enforce payment of a debt which is bona fide disputed. An important issue in this case was that the company was raising complaints with regard to the quality of goods sold to it long before the Petitioner embarked on the winding-up process. The Court stressed that it is inappropriate for a member of the firm of solicitors acting for the Petitioner to swear the affidavit of suitability with regard to the proposed official liquidator.

4. The court’s power to appoint a liquidator is found in Section 225 of CA 1963.

9 [2009] IEHC 183, Unreported, High Court, Laffoy J. 30 March 2009. 10 [2005] IEHC 301. 11

Clarke J. approved the principles set out by the English Court of Appeal, in particulars Nourse LJ, in Re Bayoil S.A. [1999] 1 All

ER 374.

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5. The other type of liquidation is a voluntary liquidation. The liquidation is voluntary in

the sense that it is commenced by shareholders (if the company is solvent) or creditors (invariably where the company is insolvent). This occurs where a liquidator is appointed by the shareholders to a solvent company. This is a members’ voluntary winding up. This can occur, for example, where a special purpose company has been formed for a specific project which has been brought to fruition and the shareholders wish to distribute the assets of the company in a liquidation. The other main type of non-court supervised liquidation is where a liquidator has been appointed pursuant to a creditors’ meeting – this is referred to as a creditors’ voluntary winding up. In such circumstances the creditors resolve to wind-up the company and appoint a liquidator of their choice. In a voluntary liquidation the liquidator is appointed not by the Court but by the members or creditors (as appropriate). A liquidator appointed out of court has the right, however, to invoke certain powers available to him or her under CA 1963. Some of these are considered below.

6. A liquidation is compendiously the pronouncement of the death of, and the

distribution of the assets of, the company. All proceedings against a company in compulsory liquidation are automatically stayed.12 A liquidator appointed out of court can apply to court for an order staying proceedings against the company. If an official liquidator wishes to bring or defend proceedings he is required to seek the leave of the court. The function of the liquidation is to enable the company’s assets to be collected and distributed to those entitled thereto according to the applicable statutory priorities. Once this is done then the company is dissolved.

7. An important concept in insolvency law is the doctrine of ‘relation back.’ This is

relevant to the situation where a company is wound up by the Court on foot of a winding up petition. If a company is liquidated by petition, then the date of the liquidation is deemed to commence upon the date of the presentation of the petition. This is the doctrine of ‘relation back’.13 It is a mechanism that has its roots in bankruptcy law and ensures that insofar as is possible, all unsecured creditors are treated equally by reference to the date of insolvency rather than by reference to the happenstance of the date when the winding-up order is made. This provision is in one sense the lynchpin of insolvency law: it marks the date of insolvency for the purposes of provisions which seek to prohibit the alienation of assets during the liquidation to the detriment of the unsecured creditors of the company. Accordingly section 218 CA 1963 prohibits the disposition of a company’s property once the winding-up has commenced. This presents particular difficulties with regard to the operation of bank accounts.14 It also presents practical issues for a petitioner who, after presenting a petition, decides to settle with the company e.g. by receipt of a payment or security for the petitioner’s claim. This is because the decision to withdraw a petition may not always be entirely within the gift of the petitioner. Another creditor may apply under Order 74 r 18 of the Rules to be substituted as petitioner. If this relief is granted, and the company is wound up, the payment to

12 Section 222 CA 1963. 13 Section 220 (2) CA 1963; the provision does not apply where there has beforehand been a resolution voluntarily to wind up. In

general, see discussion by Fennelly J in Re Eurofood IFSC Limited [2004] 4 IR 370 at 406, and Kearns J in Emo Oil Ltd v Sun

Alliance and London Insurance plc [2009] IESC 2. 14 Re Industrial Services Co Ltd [2001] 2 IR 118; Re Worldport Limited, [2005] IEHC 89.

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the first petitioner will be set aside under section 218 of CA 1963. These issues are discussed by Laffoy J in Lycatel (Ireland) Limited.15

8. In any event, the serious consequences flowing from the presentation of a winding-

up petition are such that it is also a general principle that the court will not allow a petition to be left outstanding for a substantial period.16

9. Another important concept in understanding the legal position of liquidators is that,

in general, the provisions of bankruptcy law are incorporated into the insolvency code.17 This has important implications with regard to rules as to the priority of payments, the manner in which claims are proved, and the impact of insolvency set-off in the liquidation. Given the breath of these several topics it is not appropriate to deal with them in detail in the context of this paper.18

Liquidator’s duties 10. The liquidator’s principal function is to get in the assets of the company so that they

can be distributed pari passu among the company’s unsecured creditors, subject to the payment of preferential debts.19 A liquidator also has a vast array of duties vis á vis the functions of the Director of Corporate Enforcement. A detailed analysis of these is beyond the scope of this paper. Readers should refer to chapter 9 of Cahill Company Law Compliance and Enforcement.20

11. Lord Diplock21 noted the following effects of a winding-up order:

1. The custody and control of all the property and choses in action of the company are transferred from those persons who were entitled under the Memorandum and Articles to manage its affairs on its behalf to a liquidator charged with the statutory duty of dealing with the company’s assets in accordance with the statutory scheme. Any disposition of the property of the company otherwise than by the liquidator is void.

2. The statutory duty of the Liquidator is to collect the assets of the

company and to apply them in discharge of its liabilities. If there is any surplus he must distribute it among the members of the company in accordance with their respective rights under the Memorandum and Articles of Association. In performing these duties in a compulsory winding-up the liquidator acts as an officer of the Court, and if the company is insolvent the rules applicable in the law of bankruptcy must be followed.

15 [2009] IEHC 264. 16 MHMH Ltd v Carwood Barker Holdings Ltd [2006] 1 BCLC 279. 17 Section 284 CA 1963. 18 See Courtney and Forde op cit. for detailed discussion. 19 In the main, the Revenue Commissioners but also local authorities in respect of rates etc. 20 (Dublin: Tottle, 2008). 21 In Ayerst (Inspector of Taxes) v C & K (Construction) Ltd [1976] AC 167 at 176-177.

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3. All powers of dealing with the company’s assets, including the power to carry on its business so far as may be necessary for its beneficial winding-up, are exercisable by the Liquidator for the benefit of those persons only who are entitled to share in the proceeds of realization of the assets under the statutory scheme. The company itself as a legal person, distinct from its members, can never be entitled to any part of the proceeds. Upon completion of the winding-up, it is dissolved.

12. A summary of the effects of the appointment of an official liquidator can be found in

MacCann and Courtney.22 13. A creditor who has taken valid security over the company’s assets will normally stand

outside the liquidation and look to liquidate the asset in discharge of its claim. It is of course open to a secured creditor to abandon his security and prove in the liquidation although this is, nowadays, rare. By reason that a secured creditor is able to take an assets ‘out of the pot’, one of the liquidator’s principal initial functions is to scrutinize the validity of any security purported granted by the company. For example, a basic check will be to verify that if the company has granted security, that this has been registered pursuant to section 99 CA 1963 – or any other applicable registration system.

14. By reason of a raft of legislation dealing with corporate governance, and the

establishment of the Office of the Director of Corporate Enforcement, a liquidator also has important functions with regard to the investigation and reporting of malpractice. These are ‘of potentially of great significance in the detection of breaches of company law, the prosecution of such breaches and the enforcement of company law generally.’23 Another vital aspect of the liquidator’s duties is his obligation to bring proceedings under section 150 of the Companies Act 1990 for an order restricting the ability of the respondent to be or become a director of a company, or disqualification proceedings under section 160 of the Companies Act 1990. This paper will not focus on this aspect of a liquidator’s functions.24

Liquidator’s powers 15. An official liquidator has a wide range of powers available to collect information.25

More limited powers are available to a liquidator in a voluntary liquidation.26 However, these powers are supplemented by the ability on the part of the liquidator in a voluntary winding up to apply to court pursuant to Section 280 CA 1963 to have questions determined or powers exercised. This is the principal procedural vehicle by which some of the powers discussed below are to be brought. The liquidator also has powers to bring certain applications designed to swell the asset-base available to him for distribution. These include the following (insofar as they are relevant to the cases to be discussed):

22 Op cit pp 434-436. 23 Cahill op cit p 395. 24 For detailed treatment see Cahill op cit Parts D and E. 25 Sections 231, 232, 243, 245, 245A, 246-248 of CA 1963. 26 Section 276 CA 1963.

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• Application for direction that assets have been fraudulently transferred. • Application for direction that transfer granted are a fraudulent preference.

16. It is proposed to briefly discuss each of these in turn. Section 139 CA 1990 – Improper Transfer of Assets 17. Section 139 of CA 1990 provides as follows:

1. ‘Where, on the application of a liquidator, creditor or contributory of a company which is being wound up, it can be shown to the satisfaction of the court that –

(a) any property of the company of any kind whatsoever was disposed of either

by way of conveyance, transfer, mortgage, security, loan, or in any whatsoever whether by act or omission, direct or indirect, and

(b) the effect of such disposal was to perpetrate a fraud on the company, its

creditors or members, the court may, if it deems it just and equitable to do so, order any person who appears to have the use, control or possession of such property or the proceeds of the sale or development thereof to deliver it or pay a sum in respect of it to the liquidator on such terms or conditions as the court sees fit.’

18. Section 139 (2) provides that the Section does not apply where the transaction in

question is a fraudulent preference within the meaning of Section 286 of CA 1963. In addition, the position of bona fide purchasers for value are protected by means of Section 139 (3).

19. The leading commentators27 note that the Section is intended to replace the

Conveyances (Ireland) Act 1634 which enabled a liquidator to seek to set aside a disposition of company assets put beyond the reach of creditors and thus to defraud them. Those commentators note as follows:

In order to set aside a disposition of assets the liquidator does not have to prove that the company intended to defraud its creditors. Rather, he has the lower evidential burden of merely establishing that the effect of the disposition has been to defraud the creditors.

This interpretation was adopted by the High Court in Re Le Chatelaine Thudichum Ltd (see below).

Fraudulent Preference 20. Section 286 (1) of CA 1963 provides that, in summary, any conveyance, mortgage or

transfer of goods, payment or other act relating to property made or done by or against the company which is unable to pay its debts they fall due, which transaction

27 MacCann & Courtney Companies Acts 1963 – 2006 (Dublin: Tottel, 2007) at page 1256.

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is in favour of any creditor and is done ‘with a view to’ giving such creditor, or any surety or guarantor for the debt due to the creditor, a preference over the other creditors of the company, is deemed a fraudulent preference if the transaction takes place within 6 months of the winding-up of the company. Where the person in whose favour the transaction is effected is a ‘connected person’ then the risk period is extended from 6 months to 2 years. For these purposes a ‘connected person’ includes a director of the company, a shadow director of the company, and persons connected with a director within the meaning of Section 26 (1) (a) of CA 1990.

21. The onus of proof is on the liquidator to establish that the dominant intention of the

transferor was to prefer one creditor over another.28 The proof of intention can be problematic. Obviously the state of mind of the controller of the company may be dispositive. Equally, the court is entitled to infer an intention to prefer from the surrounding circumstances.29

C. RECENT IRISH CASE LAW ON LIQUIDATIONS. Coolfadda Developers Ltd 22. In this case the Company sought the appointment of a provisional liquidator

pursuant to Section 226 of CA 1963. When a provisional liquidator is appointed the directors are functus officio. The appointment of an official liquidator automatically results in a dismissal of the workforce: this does not apply where a provisional liquidator is appointed. The appointment of a provisional liquidator constitutes the ‘opening’ of insolvency proceedings for the purposes of the EU Insolvency Regulation30 (see further below). In general, an application can be made to appoint a provisional liquidator so as to preserve the company’s assets in the interim period between the presentation of the petition and its hearing. In exceptional cases a provisional liquidator can be appointed in respect of a solvent company, e.g. as a measure ancillary to proceedings in respect of a deadlocked company under section 213 (f)/section 205 CA 1963.31 Because of the court’s reluctance to permit a substantial period of time to lapse between the presentation of a petition and its hearing, the tendency is not to countenance a provisional liquidator being in situ for a lengthy period.

23. In this case it was the candidly stated intention of the petitioner that the provisional

liquidator would maintain office for an indefinite period in order to allow it to complete 8 major developments throughout Munster. The learned trial judge, Laffoy J, held that Irish insolvency law did not contemplate a provisional liquidator having a ‘long-term status’. She held that it would not be appropriate ‘for the court to postpone making a winding up order and continue the provisional liquidations indefinitely, with the objective of giving the provisional liquidator power to finish out the development’.

28 Curran Construction Co. Ltd v Bank of Ireland Finance Ltd [1976/7] IRLM 175; Station Motors Ltd v Allied Irish Banks Ltd

[1985] IR 756. 29 See in particular Station Motors Ltd v Allied Irish Banks Ltd [1985] IR 756, and Re Industrial Design and Manufacturing Ltd,

Unreported, High Court of Northern Ireland, 25 June 1984, Carswell J. 30 Re Eurofood IFSC Limited [2004] 4 IR 370. 31 Re Tradalco Limited [2001] IEHC 89. See discussion at pp 436-438 MacCann and Courtney op cit.

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24. Laffoy J handed down her decision on 25 May 2009. Coolfadda Developers Ltd

(‘Coolfadda’) petitioned that it be wound up on the grounds of insolvency. The Petition was presented on 22 April 2009. On 22 April 2009, on the application of the Coolfadda, the Court appointed a provisional liquidator. Coolfadda, thereafter, indicated that it was its intention to have the Petition adjourned thereafter from time to time. The object was to finish out existing building contracts which were at risk of termination by the employer if an Order were to be made winding-up the Company. Coolfadda contended that finishing out the contracts would maximize funds available for creditors. Coolfadda averred that it had considered applying for the appointment of an examiner but concluded this was not an option. The trial judge inferred that this meant that Coolfadda was of the view that there was no reasonable prospect for the continuation of the business or part thereof. The trial judge found that Coolfadda was ‘hopelessly insolvent and no matter what happens it is never going to return to solvency’32.

25. The learned trial judge noted that the Court has a wide discretion to adjourn a

Petition and under Section 226 the Court has the power to appoint a provisional liquidator at any time after the presentation of the Petition. The learned trial judge noted certain English decisions, together with UK commentary, whereby in particular circumstances a bank was under the management of provisional liquidators for almost a decade;33 and insurance and reinsurance companies. The learned trail judge noted the particular circumstances of the UK instances of provisional liquidators being in situ for a lengthy period. In particular, with regard to insurance companies very often an insurance book will have a large number of contingent claims which require to be monitored and, if necessary settled/paid, before the business can properly be wound up (in the non-technical sense). The learned trial judge distinguished those particular circumstances:

There are specific features of the insurance industry which, in my view, justify the type of hybrid procedure which has developed in relation to insurance company insolvency in the United Kingdom, which combines provisional liquidations, which has the effect of staying creditor action, with the implementation of a scheme or arrangement. First, both here and in the United Kingdom the insurance industry is regulated at both domestic and European level ……. Secondly, because of the nature of its business. The assets and liabilities of an insurance company may not be as readily identifiable and quantifiable as the assets and liabilities of companies in other businesses. ……….

32 At page 14 of the Judgment. 33 Rafidian Bank: ‘The circumstances which gave rise to the application flowed from the invasion of Kuwait by Iraq in August 1990,

the imposition of international sanctions on Iraq and the subsequent freezing of the assets of the Bank in the United Kingdom at a time

when the Bank was subject to very substantial claims from creditors. It would appear that almost 18 years later the provisional

liquidators are still in place’.

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Thirdly, ………there is frequently a cross-jurisdictional dimension. None of the foregoing features is present in the company’s case….

She held as follows with regard to the application to adjourn from time to time:34

The law provides two methods of dealing with the insolvency of a company under the supervision and protection of the Court. One is winding up and the other is examinership. As is explained in Courtney……at par. 23.001, examinership is the process whereby the Court places a company under its protection and enables the Court to appoint an examiner to investigate the company’s affairs and to report to the Court on its prospects of survival. Where survival can be achieved, the Court may sanction a scheme of arrangement, which often involves part payment of the company’s creditors and which enables the company to continue in business. ………. Winding up, or liquidation, as both terms suggest, is the process whereby assets of the company are got in, realized and distributed among the persons entitled thereto by law and eventually the company is dissolved. Pending the making of a winding-up Order, Section 226 empowers the Court to appoint a liquidator provisionally at any time after the presentation of the Petition. The primary function of the provisional liquidator is to ensure the preservation of the company’s assets until the winding-up order is made. What is proposed in this case by the company, the Petitioner, is an extension of the appointment of a provisional liquidator and the continuation of his powers in a manner which is clearly not envisaged by the Act of 1963. Indeed, I would go so far as to say that the proposal goes against the spirit and intendment of the Act of 1963. The appointment of the provisional liquidator is a stop-gap measure pending the making of the winding-up Order and the appointment of the official liquidator, whose function is to liquidate the company in accordance with law. The official liquidator is given the powers by virtue of Section 231 of the Act of 1963 to achieve that objective, including, power “to carry on the business of the company insofar as may be necessary for the beneficial winding-up thereof” (Section 231 (1) (b)). As a matter of principle, I do not think it would be a proper exercise of the Court’s discretion under Section 226 to postpone the making of a winding-up Order so as to enable the provisional liquidator, who is appointed after the presentation of the Petition, to continue conducting most aspects of the business of the company with a view to maximizing the assets of a company. To do so would be contrary to the scheme of the provisions in the Act of 1963 in relation to compulsory winding up.

34 At pages 12 – 14 of the Judgment.

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There may be exceptional cases in which a Court would countenance adopting the approach urged by the company in this case. Having regard to the circumstances of the Company, as disclosed in the Petition and the verifying Affidavit, in my view, this is not an exceptional case and the approach advocated would not be warranted.

26. The Court had alluded to the possibility that a lengthy adjournment would create

considerable uncertainty in that dispositions of Coolfada’s property after the date of the Petition could be rendered void under Section 218 CA 1963.

27. Coolfadda appealed the decision of Laffoy J. The Supreme Court heard argument on

07 July 2009 and handed down judgment on 14 July 2009. The Supreme Court affirmed the decision of the learned High Court Judge. The judgment of the Court was delivered by Denham J. At paragraph 6 she noted that the application was ‘novel’:

In a sense the Company is seeking to have the provisional liquidator act to some extent as if he were an examiner.

28. The Supreme Court parted company with the High Court in holding that the court

does have jurisdiction in an exceptional case to adjourn, from time to time, a winding-up petition. However, the Court entered this caveat:

Such jurisdiction would arise rarely, and consequently a court would seldom be required to consider exercising such a discretion.

29. The court was swayed by the reasoning of the Court of Appeal in MHMH Ltd v

Carwood Barker Holdings Ltd.35 The court concluded:36

I am satisfied that there is a jurisdiction under the Companies Acts to grant adjournments from time to time on a petition for provisional liquidation of a company. Such jurisdiction is not contrary to the spirit of the legislation. However, it would arise only in exceptional cases where special circumstances exist. An example of such an exceptional case may be seen in [MHMH Ltd]. In general a provisional liquidation is a ‘stop-gap’ measure, however, in exceptional circumstances the court has jurisdiction to adjourn the matter from time to time. If such a jurisdiction arises a court has a discretion to exercise to determine whether there should be an adjournment. In this case that exceptional jurisdiction does not arise.

Re Le Chatelaine Thudichum Ltd37 30. These proceedings were an application by the liquidator for a declaration that a

transfer of goods and cash constituted a fraudulent preference for the purposes of Section 286 CA 1963 or alternatively a fraudulent disposition of the Company’s

35 [2006] I BCLC 279. 36 At para 16. 37 Unreported, High Court, 11 November 2009, Murphy J: [2008] IEHC 349.

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assets for the purposes of Section 139 CA 1990. Prior to the winding up of the company its managing director conducted a stock take after which the Respondent, who had been present for the stock take, took possession of cash sums on the premises totalling €9,500.00 and stock value of €112,080.00.

31. Murphy J. dismissed the fraudulent preference claim because he held that the

necessary intent – namely that the company had a dominant intention to prefer the transferee of the assets, had not been made out. However, as regards the fraudulent disposition claim, the learned trial judge held that there was a disposition of company property and the effect of the disposition was to perpetrate a fraud on the company, its creditors or members. The learned trial judge noted that there had, as yet, been no case law dealing with whether the test required by Section 139 was an objective or a subjective test. He held that, unlike Section 286 which focuses on the intention of the transferor company, the fraud criteria in Section 139 ‘merely requires that the company, its creditors or members be deprived of something to which it is, or to which they are, lawfully entitled’.38

D. TRANSNATIONAL LIQUIDATIONS39

The EU Insolvency Regulation Summary of Regulation

32. The EC Regulation on Insolvency Proceedings (Council Regulation (EC) 1346/2000) is

directly applicable in all EU member states save for Denmark. (It applies to Gibraltar, but not to the British Islands i.e. Jersey, Guernsey or the Isle of Man.) It does not apply to the liquidation or reorganisation of credit institutions or insurance undertakings. Nor does it apply to collective investment schemes. It applies on a company by company basis. It does not apply to a group of companies as such.

33. The Insolvency Regulation is based on a Convention which ambitiously provided for the state of the debtor’s ‘centre of administration’ to have sole insolvency jurisdiction with such proceedings having automatic effect as regard’s the debtor’s property in all member States. The Convention also sought to preserve the requirements as to preferential payments in states where assets were located. The Convention was never signed. The Regulation was adopted on 29 May 2000 and came into force on 31 May 2002. It does not attempt harmonisation of member states’ insolvency laws. Nor does it provide for a single insolvency proceeding. Article 3 (1) of the Regulation provides that the courts of the member state in which the ‘centre of the debtor’s main interests’ is located has jurisdiction to open insolvency proceedings: these are referred to as ‘main’ insolvency proceedings. Under Article 3 (2) the courts of another member state has jurisdiction to open insolvency proceedings in respect of the debtor if it has an ‘establishment’ there. This must be more than a transitory presence. Such proceedings are referred to as ‘territorial’ proceedings. Territorial proceedings only have effect as regards assets located within that member state. A territorial proceeding is secondary to the main proceeding.

38 The learned trial judge cited Courtney, The Law of Private Companies, (2nd Edn) 2002, par 27.093. 39 The following sections are a truncated version of a paper delivered on 22 May 2008 to the Irish Centre for Commercial Law Studies.

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34. Subject to particular rules at articles 5 to 15, article 4 (1) provides that each set of

insolvency proceedings is governed by its own domestic law. Main insolvency proceedings have effect throughout all member states, subject to the qualifications in articles 5 to 15, and save as regards any member state in which territorial insolvency proceedings are opened.

35. Articles 5 to 15 of the Regulation make specific provision for special rules with regard

to particular assets or situations: e.g. real property, rights in rem, rules of set-off, retention of title etc. It is not proposed to analyse them in detail.40

36. For the Insolvency Regulation to work properly, it is vital that the courts of Member

States recognise proceedings properly opened in other Member States – particularly the jurisdiction of the ‘centre of main interests’. As many of you are aware, the first case to go to the European Court of Justice on the interpretation of the Insolvency

Regulation was the Irish case of Re Eurofood IFSC Limited.41 In that case the fundamental question was whether the presentation of a petition for winding-up of the company and the appointment of a provisional liquidator to it by the Irish High Court brought about the opening of main proceedings under Art.3 of the Regulation. In particular, was the location of the centre of main interests to be considered to be in Italy – which was the jurisdiction where its parent company was incorporated? In brief, the High Court and the Supreme Court held that the company’s centre of main interests was in Ireland; that the appointment ex parte of a provisional liquidator constituted the ‘opening’ of main insolvency proceedings in Ireland; and that the Irish Court was entitled not to recognise insolvency proceedings in Italy due to a fundamental want of fair process. The European Court of Justice42 answered a number of questions of interpretation with regard to the Insolvency Regulation referred to it by the Supreme Court. In brief these may be summarised as follows:

• A Member State court being asked to open ‘main’ proceedings must properly

consider whether it has jurisdiction to do so. The regime under the Insolvency Regulation is not a ‘race to the courthouse’: rather, it is only the courts of the Member State where the centre of main interests is located that may properly open ‘main’ proceedings.

• The appointment of a provisional liquidator amounted to the opening of main

insolvency proceedings.

• There should be mutual trust between the courts of Member States subject to the exceptional qualification that a Member State was not requried to recognise proceedings conducted manifestly contrary to the Member State’s public policy.

Companies Acts Jurisdiction to wind up a foreign company and provide assistance

40 For further analysis I recommend the reader consults Moss, Fletcher and Isaacs The EC Regulation on Insolvency Proceedings

(Oxford: OUP, 2002) chapter 4. 41 [2004] 4 I.R. 370. 42 Case C-341/04 Eurofood IFSC Limited [2006] ECR 1-0000.

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Winding up a foreign company

37. Aside from cases covered by the EU Insolvency Regulation, the jurisdiction to wind up a foreign company derives from section 345 of the Companies Act 1963 (‘CA 1963’). If a company is incorporated outside Ireland it can be the subject of a compulsory winding up procedure provided that a sufficiently close connection can be demonstrated between its business and Ireland.43 On the basis of English authority on the equivalent of Section 345 of CA 1963, the court will have jurisdiction compulsorily to wind up a foreign company if the following three core requirements are met:44 (1) There must be a sufficient connection with [Ireland] which may, but does not

necessarily have to, consist of assets within the jurisdiction.

(2) There must be a reasonable possibility, if a winding up order is made, of benefit to those applying for the winding-up order.

(3) One or more persons interested in the distribution of assets of the company

must be persons over whom the court can exercise a jurisdiction.

Providing assistance to foreign liquidation process

38. Aside from cases covered by the EU Insolvency Regulation, the statutory power to provide assistance to a foreign liquidation is circumscribed. Section 250 of CA 1963 provides that an order made by a court in a country designated for the purposes of that section and made for or in the course of the winding up of a company may be enforced by the High Court as if it were an order made by the High Court. Only Great Britain and Northern Ireland have been recognised for this purpose. But these jurisdictions are covered by the Insolvency Regulation. Section 250 has been superseded as regards member states (other than Denmark) by the Insolvency Regulation. This provides for the recognition and enforcement of winding up orders made by the court where the company has its ‘centre of main interests.’ It is, of course, possible that section 250 could be activated in respect of other jurisdictions. At the moment, in practical terms, it appears to be a dead letter.

39. Even when operative, the scope of section 250 is limited. It applies only to

liquidations: it does not apply to reorganisations. It requires a specific foreign court order: it does not explicitly envisage the Irish court fashioning its own order to meet the particular situation at hand. Accordingly, where the assistance required cannot be stipulated by the foreign court in a manner recognisable by an Irish court, a foreign insolvency officer may be hamstrung by section 250’s inherent lack of flexibility. The equivalent situation in the UK was criticised by the Cork Committee Report on Insolvency Law and Practice 1982. In consequence the United Kingdom Parliament enacted section 426 (4) of the Insolvency Act 1986. This provides that the courts having insolvency jurisdiction in any part of the United Kingdom ‘shall assist the

43 MacCann and Courtney op. cit. p 616. 44 Stocznia Gdanska SA v Latreefers Inc (No 2) [2001] 2 BCLC 116, at 137.

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courts having the corresponding jurisdiction in … any relevant country…’ For these purposes a ‘relevant country’ is designated by the Secretary of State. Courtney notes that the examiner of Re Business City Express Limited availed of this provision in seeking enforcement of a scheme of arrangement so as to bind English creditors.45

Common Law A pragmatic approach 40. Since the latter part of the nineteenth century the Common Law courts have from

time to time been required to deal with complex international liquidations, and to resolve conflicts of jurisdiction. In addition, the pragmatic approach of the Common Law continues to be a recurrent theme as legislative responses are fashioned. The approach of the Common Law has been largely informed by recognising the benefits of international comity; albeit that this has been tempered by a healthy degree of pragmatism, and recognition of the territorial limitations inherent in the liquidator’s powers, and the court’s jurisdiction. It could be said that the Common Law invented the concepts of a ‘main’ and ‘ancillary’ winding up – concepts which have been enshrined in the EU Insolvency Regulation and UNCITRAL Model Law (see below).

41. Insofar as the English Common Law is concerned, an English liquidation is to have

universal effect. But the Common Law recognises the inherent limitations on a liquidator’s power to recover assets located abroad. There seems no reason to assume that this approach would not be persuasive in an Irish Court. The approach is authoritatively summarised as follows (for the purposes of the English Common Law) by Millet J in Re International Tin Council:46

Although a winding up in the country of incorporation will normally be given extra-territorial effect, a winding up elsewhere has only local operation. In the case of a foreign company, therefore, the fact that other countries, in accordance with their own rules of private international law, may not recognise our winding up order or the title of a liquidator appointed by our courts, necessarily imposes practical limitations on the consequences of the order. But in theory the effect of the order is world-wide. The statutory trusts which it brings into operation are imposed on all the company’s assets wherever situate, within and beyond the jurisdiction. Where the company is simultaneously being wound up in the country of its incorporation, the English court will naturally seek to avoid unnecessary conflict, and so far as possible to ensure that the English winding up is conducted ancillary to the principal liquidation. In a proper case, it may authorise the liquidator to refrain from seeking to recover assets situate beyond the jurisdiction, thereby protecting him from any complaint that he has been derelict in his duty. But the statutory trusts extend to such assets, and so does the statutory obligation to collect and realise them and to deal with their proceeds in accordance with the statutory scheme.

45 Op. cit. par 26.064.

46 [1987] Ch 419 at 446-7.

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42. Such a power includes the power to direct remittal of assets from a local ancillary winding up to a ‘main’ winding up in another jurisdiction. In McGrath v Riddell,47 Lord Hoffmann said this:48

The primary rule of private international law which seems to me applicable in this case is the principle of (modified) universalism, which has been the golden thread running through English cross-border insolvency law since the eighteenth century. That principle requires that English courts should, so far as is consistent with justice and UK public policy, co-operate with the courts in the country of the principal liquidation to ensure that all the company’s assets are distributed to its creditors under a single system of distribution. That is the purpose of the power to direct remittal.

43. Although the court will have the power to direct a local liquidator to remit assets to a

principal liquidation conducted overseas49, there is authority for the proposition that the court has no power to apply foreign insolvency rules, and has no power to disapply its own insolvency rules.50 Accordingly, an Irish court might well be reluctant to direct a liquidator to remit assets to a foreign liquidation which did not substantially honour the principle of pari passu liquidation. The word ‘substantially’ is used here because it could not rationally be argued that there must be exact ‘congruence’ between the Irish system and the foreign system for the winding up of companies. English cases have cited with approval the following dictum of a US bankruptcy court in Re Blackwell:51

It would be a mistake to construe [the provision in the US Bankruptcy Code enabling co-operation by a US court] to mean that a court must find effective congruence between the distribution schemes of the United States and the country in which the foreign proceeding is pending. The problem with such an approach is that every country has its own scheme of priorities, reflecting local public policy choices that may or may not be shared by other countries. One country may give priority to internal tax claims, priming even secured lenders. Yet a third may give special treatment to social claims enforced by government entities. Were one to insist on congruence, it is doubtful that any court would ever find it appropriate to grant relief under [the provision]. Congress can be fairly presumed to have been familiar with the wide variety of distributional schemes worldwide. Its provision should not therefore be construed to effectuate an intent clearly at odds with structure and overall purpose of [the provision]…to provide a mechanism for cooperation with foreign proceedings.

UNCITRAL Model Law 44. Recognising the daunting task associated with providing a more harmonious setting

for the implementation of international measures to promote effective and orderly

47 [2008] UKHL 21. 48 At para 30. 49 Re Matheson Brothers Ltd (1884) 27 Ch D 225. 50 Re Bank of Credit and Commerce International (No 10) [1997] Ch 213. 51 270 BR 814 (Banks WD Tex 2001).

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international insolvencies, the United Nations Commission on International Trade Law (UNCITRAL) published on 30 May 1997 Draft Model Legislative Provisions on Cross-Border Insolvency.52 This will be referred to as ‘the UNCITRAL Model Law.’ Fletcher outlines the rationale behind the UNCITRAL Model Law:

The essential purpose of the Model Law is to create a better environment for dealing with international insolvency, supported by appropriate provisions incorporated into the enacting states’ domestic legislation, thereby giving rise to uniformity of provision over a selected range of key matters affecting cross-border cases. To facilitate this process, the Model Law is so drafted as to enable each enacting state to insert into the text of the enacted Article such specific references as are necessary to enable the provision to function as an integral part of the insolvency law of that state. This is achieved by means of instructions, printed within square brackets, which indicate what terms, or cross-references to the enacting state’s existing legislation, should be inserted into the text of the Article at that point…Cumulatively however the states which do so will develop a corpus of mutually compatible legislative provisions. Once a critical mass of enacting states has been achieved, the practical benefits will be come substantial, and the sense of moral obligation incumbent upon other states to accept these standardized provisions should intensify.

45. Accordingly, the UNCITRAL Model Law seeks to promote harmonisation of enacting

states’ insolvency laws when dealing with cross-border issues: this is seen as a more efficient and pragmatic approach than waiting for a series of bilateral treaties or conventions to materialise, or for the development of regional initiatives – such as the Insolvency Regulation, the Montevideo Treaties of 1889 and 1940 (applicable in Latin America), or the Nordic Bankruptcy Convention of 1933.

46. The UNCITRAL Model Law focuses on four key areas which must function smoothly

for there to be a proper system of international insolvency: these are as follows:

(a) to enable a foreign insolvency officer to have a right of access to the courts of the enacting state where it is expedient for the insolvency officer to ask it to take action of some kind;

(b) to provide for the recognition of foreign insolvency proceedings;

(c) to provide a positive legal framework for the provision of co-operation between

the courts and insolvency officers of enacting states;

(d) to provide for the effective co-ordination of insolvency proceedings. 47. For the purposes of this paper is not proposed to consider the text of the UNCITRAL

Model Law in detail. For present purposes four points might be noted.

52 See chapter 8 of Fletcher Insolvency in Private International Law (2nd edition) (Oxford: OUP, 2005)).

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48. First, the UNCITRAL Model Law borrows certain basic concepts from the Insolvency Regulation – namely ‘main’ and ‘non-main’ (territorial) proceedings, the debtor’s ‘centre of main interests’, and the ‘establishment’ of the debtor.

49. Second, the United Kingdom has recently enacted the UNCITRAL Model Law in the

Cross-Border Insolvency Regulations 2006. These regulations apply the UNCITRAL Model Law to cross-border insolvencies extending beyond the European Union (which is already covered by the Insolvency Regulation). These regulations will apply to insolvency proceedings of undertakings excluded from the Insolvency Regulation and not covered by other EU legislation. They also apply to insolvency proceedings of undertakings covered by the Insolvency Regulation where third country creditors or assets are involved. The regulations do not, however, apply to third country credit institutions.

50. Third, the Model Law applies even in the absence of reciprocity. 51. Fourth, the Model Law proceeds on the basis that enacting state can provide that

‘judge made’ solutions can continue to be implemented. Conclusions on transnational issues 52. The EU Insolvency Regulation provides a coherent and relatively predictable

framework for the conduct of international insolvencies and reorganisations within the member states to which the Regulation applies.

53. Aside from cases which come within the terms of the Insolvency Regulation, Irish law

is lacking in having in place statutory procedures which will facilitate the assistance of overseas liquidations and reorganisations. This contention is made for the following reasons. (For the avoidance of doubt, all of the following comments are confined to non-Insolvency Regulation cases.)

54. The Common Law can fill the gaps to an extent. But the balance of authorities seem

to make it clear that in exercising its discretion the court may only apply Irish law, and may not disapply Irish law. The disapplication of Irish law might, in certain circumstances, be of overall benefit.

55. There is a lot to be said for a provision equivalent to section 426 of the UK

Insolvency Act expressly giving the court the discretion to assist a foreign liquidation or reorganisation. Provision should be made that this power exists in respect of designated countries. The legislature might also clarify that the exercise of such a discretion includes the ability to disapply Irish bankruptcy provisions – e.g. pari passu distribution, set-off. Whether, and if so the extent to which, those provisions are to be disapplied or suspended should, it is suggested, be for the judge to decide in an individual case.

56. Finally, there seems to be no reason why Ireland should not join in the process of

adopting the UNCITRAL model law so that it can play its part in a network of states that provides for a rational, and predictable, scheme for working out cross-border

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insolvency issues. In so doing, it should preserve the flexibility for the Common Law to apply in cases where a legislative response is unavailable. Then Ireland should have a complete ‘suite’ of effective solutions for tackling cross-border insolvencies outside the European Union.