High Court dismisses examiner's claim for revenue priority but orders receiver to disclose funds for potential discharge.

Neutral Citation Number: [2009] IEHC 556

THE HIGH COURT

2008 514 COS

IN THE MATTER OF SHARMANE LIMITED

AND IN THE MATTER OF THE COMPANIES ACTS 1963-2006

AND IN THE MATTER OF GUERNEVILLE LIMITED

AND IN THE MATTER OF THE COMPANIES ACTS 1963-2006

AND IN THE MATTER OF DREEMDALE LIMITED

AND IN THE MATTER OF THE COMPANIES ACTS 1963-2006

AND IN THE MATTER OF EATONCROFT LIMITED

AND IN THE MATTER OF THE COMPANIES ACTS 1963-2006

AND IN THE MATTER OF REDFONT LIMITED

AND IN THE MATTER OF THE COMPANIES ACTS 1963-2006

AND IN THE MATTER OF CHARDERMONT LIMITED

AND IN THE MATTER OF THE COMPANIES ACTS 1963-2006

AND IN THE MATTER OF PUB POOL LIMITED

AND IN THE MATTER OF THE COMPANIES ACTS 1963-2006

AND IN THE MATTER OF DREW INTERNATIONAL LIMITED

AND IN THE MATTER OF THE COMPANIES ACTS 1963-2006

AND IN THE MATTER OF LINCOLE LIMITED

AND IN THE MATTER OF THE COMPANIES ACTS 1963-2006

AND IN THE MATTER OF ATWELL HOLDINGS LIMITED

AND IN THE MATTER OF THE COMPANIES ACTS 1963-2006

AND IN THE MATTER OF JESTDALE LIMITED

AND IN THE MATTER OF THE COMPANIES ACTS 1963-2006

AND IN THE MATTER OF KIRKVALE LIMITED

AND IN THE MATTER OF THE COMPANIES ACTS 1963-2006

ALL FORMERLY IN EXAMINATION UNDER THE COMPANIES (AMENDMENT) ACT 1990 (AS AMENDED) AND NOW IN

RECEIVERSHIP

JUDGMENT of Ms. Justice Finlay Geoghegan delivered on the 17th day of December, 2009

1. The applicant is the former Examiner of each of the above named companies and certain related companies. On 31st July, 2009, an

order was made pursuant to s. 29(1) of the Companies (Amendment) Act 1990, that the former Examiner be allowed remuneration and

outlay and legal expenses in the amounts set out in the Schedules to that order. On 23rd February, 2009, on the application of the

former Examiner, certain of the companies ceased to have the protection of the Court. On 20th March, 2009, the former Examiner, in

the course of a confirmation hearing, informed the Court that he was no longer recommending that the Court confirm the Schemes of

Arrangement. On that day, pursuant to s. 26 of the Act, an order was made that the protection period cease for all remaining nine

companies and ACC Bank plc (“ACC”) appointed Mr. Martin Ferris as Receiver (“the Receiver”) of each of the companies named in the

title to this application, and Ulster Bank Limited appointed a receiver over certain assets of the Pub Pool Limited.

2. On 31st July, 2009, it was indicated to the Court that there was a potential dispute between the former Examiner, on the one

hand, and the Receiver and ACC, on the other, in relation to the timing and priority of the payment of the remuneration, costs and

expenses of the former Examiner approved by order of the Court. Liberty was given to bring this application. The dispute raises an

issue as to the proper interpretation of s. 29(3) of the Act of 1990, in the context of the receiverships of certain of the companies

named in the title.

3. The former Examiner and the Receiver have each sworn affidavits setting out certain facts relevant to this application. The

Receiver states that he is the Receiver of each of the companies named in the title, having been appointed by ACC on 20th March,

2009. Neither his appointment nor any debenture under which he was appointed was exhibited. Nothing may turn on this, save that it

appears that he is both Receiver and Manager of at least certain of the companies. Counsel, on his behalf, confirmed he is Receiver

and Manager of the companies still trading. A number of the companies operate public houses. Those companies in receivership

continue to trade so as to maintain the public houses as going concerns and thereby maximise realisations on the sale of the assets.

4. The trading companies are in receipt of revenue from the operation of the public houses and the first issue is whether the former

Examiner is entitled, pursuant to s. 29(3), to have his fees discharged out of the revenue received by the relevant company in

receivership, as he contends, or whether the Receiver is entitled to insist that he wait until the disposal of the assets of the

company. There is a subsidiary issue which primarily relates to Sharmane Limited.

5. Section 29 of the Act, as amended, insofar as relevant, provides:

“29. (1) The court may from time to time make such orders as it thinks proper for payment of the remuneration and

costs of, and reasonable expenses properly incurred by, an examiner.

(2) Unless the court otherwise orders, the remuneration, costs and expenses of an examiner shall be paid and the

examiner shall be entitled to be indemnified in respect thereof out of the revenue of the business of the company to

which he has been appointed, or the proceeds of realisation of the assets (including investments).

(3) The remuneration, costs and expenses of an examiner which have been sanctioned by order of the court (other

than the expenses referred to in subsection (3A)) shall be paid in full and shall be paid before any other claim,

secured or unsecured, under any compromise or scheme of arrangement or in any receivership or winding-up of the

company to which he has been appointed.

(3A) . . .

(3B) In subsections (3) and (3A) references to a claim shall be deemed to include references to any payment in a

winding-up of the company in respect of costs, charges and expenses of that winding-up (including the

remuneration of any liquidator).

(4) . . .

(5) . . .”

6. The judgment delivered on 30th July, 2009, in relation to the substantive application by the former Examiner for

payment of remuneration, costs and expenses, makes clear that no order would be made by the Court depriving the

former Examiner of the benefit of section 29(2). Accordingly, the former Examiner is now entitled to be indemnified in

respect of his remuneration, costs and expenses (as approved by the Court), “out of the revenue of the business of the

company . . . or the proceeds of realisation of the assets . . ..”

7. The first submission made by counsel for the Receiver is that s. 29(2), when properly construed, gives to the company,

and through it, to the Receiver, an option to pay the former Examiner’s remuneration, either out of the revenue of the

business of the company or the proceeds of realisations. I do not consider that the section can be so construed. Rather,

it appears to me to give to an examiner a right to be indemnified in respect of his approved remuneration, costs and

expenses, either out of the revenue of the business of the company or the proceeds of realisation of assets or,

potentially, both. The plain meaning of the words in the section gives a right to an examiner to be indemnified out of the

revenue of the business of the company or the proceeds of realisation. In the absence of any words which imply a

contrary intention, it appears to me that the option to look to either follows the right given. In addition, sub-section

29(3) only makes sense in the context of an examiner having a right to be indemnified both out of revenue and

realisations.

8. The more difficult question is the priority which s. 29(3) creates for an examiner’s remuneration, costs and expenses in

a receivership where the company continues trading and is in receipt of revenue in the course of its trading operations.

The former Examiner contends that the wording of the section entitles him to be paid out of the current trading revenue

of the companies in receivership prior to the discharge of weekly trading expenses, such as employees’ remuneration or

payments to suppliers, as these are claims in the receiverships within the meaning of section 29(3).

9. The Receiver and ACC dispute that the weekly operating expenses of the companies trading in receivership are a claim

in a receivership within the meaning of section 29(3). On the Receiver’s affidavits, it appears that the primary weekly

expenses are payments to employees, payments to suppliers and payments to a company called “CLS Crystal HTS

Limited” (“CLS”). The Receiver explains at para. 9 of the affidavit sworn on 23rd October, 2009, that CLS “were engaged

by me to manage the pubs within the group which function was formerly carried out by the Directors of the company. The

costs incurred by CLS Crystal HTS Limited is paid from cashflow”.

10. In Re Springline Limited (in Liquidation) [1999] 1 I.R. 467, the Supreme Court considered the meaning of a “claim” in s.

29(3) of the Act of 1990, in the context of a dispute as to the relative priorities of an examiner’s remuneration and a

liquidator’s costs, charges and expenses. The issue in that case was whether the liquidator’s costs, charges and expenses

were or were not a “claim” in a winding up of the company. In the High Court, Shanley J. had determined that the

remuneration, costs and expenses of an examiner did not rank in priority to those of an official liquidator. On appeal, the

Supreme Court reversed that decision. Keane J. (as he then was), in delivering a single judgment with which the other

two members of the Court agreed, concluded that an official liquidator who, in the course of his duties, performs work or

incurs liabilities in respect of which he is entitled to be remunerated or reimbursed would, in ordinary language, be properly

described as having a “claim” to the relevant sums, which was a claim in the winding up. Prior to reaching that conclusion,

he had referred to an extract from the judgment of Devlin J. (as he then was) in West Wake Price & Co. v. Ching [1957] 1

W.L.R. 45 where, at p. 55, in relation to the meaning of “claim” he said:

“I think that the primary meaning of the word ‘claim’ - whether used in a popular sense or in a strict legal sense - is

such as to attach it to the object that is claimed; and is not the same thing as the cause of action by which the

claim may be supported or as the grounds on which it may be based. In the Oxford Dictionary ‘claim’ is defined as

first, “A demand for something as due’; ‘an assertion of a right to something’, secondly: ‘Right of claiming; right or

title (to something or to have, be or do something; also on, upon the person, etc., that the thing is claimed from)’.”

11. Applying the primary meaning of “claim” as stated by Devlin J., and a similar reasoning to that applied by Keane J., it

appears to me that an employee who works for a company in receivership in respect of which he is entitled to

remuneration, may properly be described as having “a claim” to be paid his salary or weekly wage by the company in

receivership. Similarly, a supplier who agrees to supply goods or services to the company in receivership would, in ordinary

language, properly be described as having a claim to be paid by the company in receivership the agreed price for the

goods or services supplied. As such, I have concluded that the employees’ and suppliers’ right to be paid, in this case,

must be considered as claims in the receivership. Counsel did not refer to any authority on what constitutes a claim in a

receivership. In the absence of any special meaning, it appears to me it must follow that a claim against a trading

company in receivership is a claim in the receivership. Insofar as the current contracts with employees or suppliers were

entered into by the Receiver in the name of the company, it may be that, in accordance with s. 316(2) of the Companies

Act 1963, the Receiver is also personally liable, with a right to be indemnified out of the assets of the company. In such a

factual scenario, the Receiver’s entitlement to be indemnified is clearly a claim in the receivership.

12. An analysis of the contract with CLS to manage the public houses operated by the companies in receivership (as

described by the Receiver in his affidavit), leads to a similar conclusion that CLS, in ordinary language, has a claim against

the company in receivership pursuant to its contract for payment of its fees. It may, of course, also have a claim against

the Receiver, personally, depending on the terms of the contract. Insofar as the Receiver is using money generated by

the trading activities of the companies in receivership to discharge amounts due to employees, suppliers or CLS, it

appears to me that he must be considered as making payments to persons who have claims in the receivership.

13. Section 29(3), in accordance with its express words, gives to an examiner an entitlement to be paid before “any other

claim . . . in any receivership . . . of the company”.

14. The Receiver, in his affidavit, and counsel, on his behalf, submitted that if the Court were to conclude that s. 29(3)

gave priority to the former Examiner’s remuneration, costs and expenses over current or weekly expenses in a trading

receivership, that this would present great difficulties for the operation of any trading receivership which followed an

examinership. A somewhat similar submission appears to have been made on behalf of the liquidator to the Supreme Court

in Re Springline Limited (in Liquidation) and was considered by Keane J. He recognised that there was some force in the

liquidator’s submission in that case, as I do in relation to the submission made on behalf of the Receiver. However, he

concluded that the Court must take into account the underlying policy of the Act of 1990, and as stated by Finlay C.J. in

Re Holidair Ltd. [1994] 1 I.R. 416, where ambiguities or doubt arises concerning the construction of any sections in the

Act of 1990, the Court should seek to uphold the underlying policy of the Act of 1990. The policy of this Act is to provide

a period of protection for a company already insolvent so as to try and ensure that, if possible, some scheme of

arrangement might be made which would preserve the company or a part of its undertaking as a going concern. Unless an

examiner is given the very significant priority in respect of his remuneration, costs and expenses which is accorded by s.

29(3), it may be difficult, in practice, to find persons willing to take appointment as examiners and devote the significant

time which is required, having regard to the limited periods under the Act. Whilst for the reasons set out I do not consider

there is any ambiguity in the wording of s. 29, I am reinforced in my view as to its construction by the fact that it

appears consistent with the overall purpose of the Act.

15. I have also considered that a consequence of the manner in which I have construed s. 29(3), is that if either a

liquidator or a receiver is appointed and continues to operate the business of the company, then the examiner’s

remuneration, costs and expenses will rank in priority to the expenses associated with the operation of the business.

However, where a scheme of arrangement is put in place and the company itself continues to trade, s. 29(3) does not

give the examiner priority over the normal operating expenses of the company. It only gives a priority to be paid before

any claim under any compromise or scheme of arrangement and not prior to any claim against the company. It is common,

in schemes of arrangement, for the scheme to provide that creditors be paid the amounts due under the scheme within a

specified number of days after the effective date fixed for the scheme. The number of days will vary, depending on the

facts, but may run from a few days, to typically up to thirty days for unsecured creditors. In contrast to the position

which I have concluded in respect of a receiver continuing to trade, in a situation where claims under the scheme of

arrangement were to be paid thirty days after the effective date, a company would in the intervening period be entitled

to discharge the normal weekly outgoings of the company in advance of any payment to the examiner in respect of his

remuneration, costs and expenses. The payments due to the examiner only have to be discharged prior to any payment

under the scheme of arrangement.

16. I have concluded that there is a potential justification for this difference. Where a scheme of arrangement has been

approved by the Court, it is probable that a conclusion has been reached that the company is in a position to continue

trading as a going concern. In proposing a scheme of arrangement, an examiner will normally have ensured that sufficient

funds are available to provide for the continued working capital of the company, discharge the examiner’s fees and

discharge all claims under the scheme of arrangement. The intention is that the scheme of arrangement should permit the

company to return to solvency. In such circumstances, the examiner has reasonable security for his fees if paid prior to

payments under the scheme of arrangement, notwithstanding that in the intervening period, weekly outgoings would

continue to be paid.

17. By contrast, where an examiner is unable to propose a scheme of arrangement or recommend confirmation of a

scheme of arrangement, and the cessation of the examinership results in either a liquidation or receivership or both, in

practical terms, the ability of the examiner to recover such remuneration, costs and expenses as he may be allowed by

the Court, does appear to require the type of absolute priority concluded by the Supreme Court in relation to liquidations

in Re Springline Limited (in Liquidation) and by me on this application. In the case of a receivership, it is a matter for the

receiver and his appointer to determine whether a potential increase in value on realisation of the secured assets merits

the cost of continued trading. However, if a decision to trade is made and revenue is generated, then it must first be

applied in discharge of a former examiner’s remuneration. The alternative conclusion would permit a receiver to continue

to trade for an unlimited period even at a loss with no obligation to discharge the former examiner’s approved

remuneration, costs and expenses. Such a situation would create a significant disincentive to accept an appointment as

examiner to a company with charges.

18. Accordingly, I have concluded that the priority given to an Examiner in s. 29(3) entitles him to have his approved

remuneration costs and expenses paid out of the revenue of the business of the company in receivership in advance of

the weekly outgoings of the trading company.

19. The second issue in dispute between the parties is fact-specific to this examinership and receivership. The former

Examiner, in his affidavits, states that at a time when it was anticipated that Schemes of Arrangement would be put in

place, he agreed to accept a discounted figure from the companies for remuneration because of the limited money

available. At paragraph 13 of the affidavit sworn on 23rd September, 2009, he states that he agreed to this discounted

figure on the basis that it would be made available to him as soon as the Schemes were approved. Further, as he was

anxious to be paid immediately, several companies in the group made payments to him towards his remuneration costs in

the weeks before the examinership came to an end. The total amount received was €545,000. The former Examiner states

that the money came from the following companies:

Sharmane Limited €100,000

Atwell Holdings Limited €75,000

Pub Pool Limited €150,000

Kirkvale Limited €120,000

Dreemdale Limited €100,000

20. The above monies appear to have been paid to the former Examiner’s solicitors and held in their client account

pending the outcome of the s. 24 hearing. When no schemes of arrangement were approved and the examinership was

brought to an end, these funds were returned by the former Examiner’s solicitors to the Receiver. The Receiver, in his

affidavit, states that all funds returned on behalf of the former Examiner were used by him for working capital purposes

and, in particular, for the discharge of amounts owing in respect of supplies made during the examinership.

21. The former Examiner contends that the monies held by his solicitor and returned to the Receiver constituted revenue

of each of the companies listed above and, accordingly, the Receiver was obliged to apply the money in discharge of the

former Examiner’s remuneration, costs and expenses prior to using it to pay any other claim in the receivership. The

monies were returned to the Receiver after the commencement of the receivership, but prior to the determination by the

Court of the amounts due to the former Examiner in respect of his remuneration, costs and expenses. At the hearing, the

parties did not make submissions in relation to a receiver’s obligation prior to the determination by the Court of the

remuneration, costs and expenses due to an examiner. I do not propose making any finding in that regard. If it becomes

necessary to do so there will have to be further submissions prior to determination of that issue. What the submissions did

seek to address was whether or not €100,000 attributed to Sharmane Limited should properly be regarded as revenue of

Sharmane Limited, such that on its return it ought to have been available to discharge the former Examiner’s

remuneration, costs and expenses approved in relation to Sharmane Limited. The Receiver disputes the fact that it

constituted revenue of Sharmane Limited, as he contends that Sharmane had no source of income. The former Examiner

contends that Sharmane did receive payment from the subsidiaries for administrative and management work carried out

for those companies and that the payment returned was “revenue” of Sharmane for the purposes of section 29(3). It is

not possible for me to resolve that dispute on the current facts stated in the affidavits. It is for this purpose, inter alia,

that the former Examiner seeks the second relief in the notice of motion, which is an order directing the Receiver to

disclose all monies received by each company since the commencement of the receivership.

22. It does not appear to me that I should now make the order sought in paragraph 2 of the notice of motion. This would

impose a significant administrative burden on the Receiver. It follows from this judgment that at least from 31 July 2009

(and possibly earlier), the Receiver was obliged to apply any revenue of the companies in receivership in discharge of the

former Examiner’s approved remuneration, costs and expenses prior to making any other payment which is a claim in the

receivership of the relevant company as determined in this judgment. I consider that the Receiver should be given an

opportunity of ascertaining which of the companies in respect of which the former Examiner is due amounts for his

remuneration, costs and expenses in accordance with the order of 31st July, 2009, were in receipt of revenue since that

date and make the necessary arrangements to immediately discharge the amount due to the former Examiner or pay over

the revenue received if less than the amount due. I would only intend making an order, as sought in paragraph 2 of the

notice of motion, in respect of any company which the Receiver contends has not, since 31st July, 2009, had any

revenue of the business of the company or proceeds of realisations of any assets, or only of an amount less than the

amount due to the former Examiner. I will hear the parties as to the timing for this first step and the precise form of order

to be made.