High Court dismisses examinership petition against landlord as improper motive to avoid recent litigation settlement.

Neutral Citation: [2016] IEHC 524

THE HIGH COURT

[2016 No. 313 COS]

IN THE MATTER OF JJ RED HOLDINGS LIMITED

AND IN THE MATTER OF SECTION 509 OF THE COMPANIES ACT, 2014

JUDGMENT of Ms. Justice Baker delivered on the 15th day of September, 2016.

1. This judgment is given in an application to confirm the appointment of an examiner to the petitioning company, which is opposed by

a substantial creditor.

2. Tom Murray was appointed interim examiner of JJ Red Holdings Limited (“the Company”) by order of Costello J. on 18th August,

2016. The application to confirm his appointment as examiner is opposed by Henciti Limited, a limited liability company which owns the

landlord’s interests in the occupational lease under which the Company occupies the hotel and bar premises from which it conducts

the entire of its business. I will refer to the creditor who opposes the petition as “the landlord”. The petition is supported by all of the

employees who have signalled their approval in writing, and by the trade creditors. Revenue is neutral.

3. The petitioner argues that it has a very strong core business, which is now in profit and this argument is supported by the report

of the independent expert, and his supplemental report in response to a report adduced by the landlord.

The Company

4. The Company was incorporated on 28th April, 2006 for the purpose inter alia of the management of a hotel and ancillary hospitality

services. The directors and shareholders of the Company are two brothers, Emmet McDermott and Donie McDermott, both of whom

reside in Ireland. The Company is the trading operator of a hotel named Dublin Citi Hotel and Bar, trading from premises at 46 to 49

Dame Street, Dublin 2, a 27 bedroom hotel with licensed bar, a dance area and restaurant. The Company occupies the hotel premises

on foot of a lease made on 31st December, 2006 with the predecessors in title of the landlord for the term of 35 years from 1st

January, 2007 at a rent subject to five-year rent reviews. The Company has 54 employees of whom 40 are full time. In addition, the

directors and the child of one of the directors are also employees of the Company.

5. It is fair to say that the Company entered the hospitality sector at what was possibly the worst time to commence such a

business, and during the recession that began soon after the business opened, the Company made losses for a number of years. In

the first year the losses were a quarter of a million euro and the quantum of losses increased up to 2010 and declined thereafter. The

Company returned to profit, albeit a small profit, in 2013, and in 2015 showed a before tax profit of €403,000. It anticipates a greater

profit for the calendar year 2016, as profits of €312,000 are shown for the first six months of this year.

6. In the course of the recession the directors made substantial loans to the Company inter alia, to discharge staff wages, and during

that the time the directors themselves took no remuneration as directors. Some of these loans have been repaid.

The current balance sheet shows net shareholder total liabilities of €1,836,435, of which €387,195 represents directors’ loans. The

statement of affairs contained in the IER shows that the Company has a surplus of liabilities over assets in the sum of €1,451,385. A

statement of affairs prepared on a winding up basis shows a deficit of €1,744,605.

7. The up-to-date balance sheet shows creditors standing at €836,435, in addition to €1.1 m owed to the landlord for rent, full

particulars of which will appear below.

8. It is not disputed that the Company is insolvent.

The landlord

9. The landlord is a limited liability company incorporated in Ireland, owned by Paul Hennebry and his brother, Denis Hennebry, who

identify themselves as having upwards of 25 years experience in owning and operating hotels and licensed premises. The primary basis

on which the landlord opposes the petition is that the examinership process is said to be “designed to frustrate and evade” a

settlement entered into between the landlord and the Company three weeks before the petition was presented.

10. The landlord purchased the reversionary interest from a receiver appointed by Bank of Ireland by agreement made on 31st August,

2015 which was closed on 1st October, 2015. The arrears of rent were said then to be in the region of €1m, and the landlord took the

benefit of these arrears by separate assignment. The landlord has frankly said on affidavit that it was anticipated at the time of

purchase that it would rely on the forfeiture clause in the lease to take possession of the premises from which it was intended to

continue the hospitality business.

11. The purchase of the premises was funded by a loan from a US/Irish hedge fund, and the landlord’s indebtedness is in the region of

111% of the purchase price, the landlord having borrowed an additional €500,000 for the purposes of providing it with working capital

in anticipation of taking over the business.

12. Almost immediately after closing the sale, and after correspondence with the solicitors then acting for the Company had failed to

achieve an agreement regarding the arrears, the landlord served a forfeiture notice on 21st October, 2015, in reliance on the arrears

of rent, and sought to re-enter the premises on foot of the notice. The Company then commenced proceedings seeking declaratory

and injunctive relief on the pleaded grounds that the Company had a bona fide belief that the landlord, and later the receiver

appointed to the landlord, had agreed a permanent reduction in rent, (from €520,000 to €260,000 per annum) and that, as the

reduced rent was not in arrears, forfeiture did not lie. The Company obtained an ex parte injunction restraining the landlord from

taking possession on foot of the forfeiture notice, and the landlord opted to pursue the approach of seeking to bring the proceedings

on for hearing through the fast track process available in the Commercial Court.

13. The proceedings came on for hearing before Barrett J. on 19th July, 2016 when the case was called on for hearing for several

days. Negotiations led to a written compromise being entered into between the parties at the end of the first day.

The settlement agreement

14. The settlement agreement entered into between the parties was made on 19th July, 2016 and, insofar as it was possible to do so,

the terms thereof were made an order of the court by Barrett J.

15. The agreement contained an acknowledgement by the Company that the passing rent was the annual amount of €520,000, the

figure claimed by the landlord, and also provided for the payment of an agreed figure for arrears of rent totalling €850,000, an

immediate payment of €115,000 by way of the balance of rent for the current quarter, €100,000 by way of security deposit and

€150,000 as a contribution to the costs of the landlord.

16. The settlement agreement also contained detailed provisions for enforcement, including a provision that the landlord could

immediately obtain an order for possession and a declaration that the lease was validly forfeited on the happening of any event of

default. Also included was a provision that the landlord could forthwith, upon the happening of any default, enter judgment against

the directors of the Company in the amount of €730,000.

17. The primary argument advanced by the landlord in opposition to the application to confirm the appointment of the examiner is that

the presentation of the petition was an abuse of process in that it is an attempt by the Company and/or its directors to avoid the

obligations arising under the settlement entered into only three weeks prior to presentation of the petition. The argument is that no

other problem or litigation is apparent from the operation of the Company or from the matters outlined in the petition save the dispute

between the Company and its landlord, and the settlement of that dispute in July, 2016. It is argued that the petition is a collateral

attack on a concluded agreement and court order, and that the effect of the examinership will be a write-down of that agreement

and the reduction of the liabilities of the Company and the arrears of rent agreed to be paid thereby.

18. The landlord also points to the history of the Company and to the fact that a petition was presented to wind up the Company in

2012 by a receiver appointed to the landlord in the context of substantial arrears of rent. It was only after the receiver presented a

winding up petition that the arrears of rent were paid on 23rd October, 2012. The landlord says that the Company has been

historically in default of its obligation to discharge rents pursuant to the lease. The landlord asserts that the Company has been in

profit only because it did not pay the full amount of the reserved rent under the lease for any of the relevant years.

The report of the independent accountant

19. For the purposes of the presentation of the petition an independent report was prepared pursuant to s. 511 of the Companies Act

2014 (“the Act”) by Neal Morrison, partner in McInerney Saunders, (“the IER”). The IER shows the view of the expert that the

Company has a reasonable prospect of survival as a going concern, the threshold test under the Act. But that view is conditional.

20. Several conditions are identified as essential to ensure the survival of the Company as a going concern as follows:

a. “An immediate renegotiation of repayment basis of the settlement arrangement with the landlord”

b. “Securing of additional finance to meet the cash flow requirements of the Company in meeting the renegotiated

schedule”

c. “The acceptance of an appropriate scheme of arrangement by creditors in the approval of the High Court”

21. A key to the prospects of success is a requirement to renegotiate the agreement with the landlord and the securing of additional

finance. The independent expert also reports that the interests of the creditors as a whole, and the members, are best served by

avoiding a winding up.

22. It is suggested that additional rooms are hoped to be opened in late 2016 and that no additional capital requirement will arise as

these rooms are in an adjoining premises and are already suitably furnished. The view of the independent expert is that the Company

does have a reasonable prospect of survival as a going concern having regard to demand in the hospitality industry in Dublin

generally, but provided what is called the “cash flow demands arising from the historic overhang on rental levels in the lease and the

upward only rent clause” are dealt with.

23. The IER proposes a business plan with indicative write down to c. 80% of unsecured debts with the main body of creditors and an

“achievable arrangement being made with the landlord”, as well as a commercial loan to provide cash flow to meet the obligations

arising from the settlement.

24. The IER identifies what must be presumed to have been the instructions received by Mr. Morrison that the directors had “hoped

to meet their obligations on payment of arrears through the raising of a commercial loan from a financial institution”, but that the

result of the settlement had been to “crystallise an additional €1 million debt” on the balance sheet and that the payment plan

demands of the terms of settlement “would have had a severe impact on the cash flow of the business”. The IER suggests that the

directors had “commenced an application with their financial institution” for funds to meet the settlement but that the funds were not

secured “in time”.

25. It is quite clear that the Company cannot meet the obligations under the settlement without a loan or cash injection from some

source as well as an achievable arrangement to reschedule at least the time frame for discharge of the obligations in the settlement,

if not a write-down on quantum.

26. I consider below whether the evidence in the IER is credible with regard to the prospect of obtaining finance, and whether the

Company has any reasonable prospect of securing finance.

Evidence of the landlord’s expert

27. The landlord engaged Neil Hughes of Baker Tilly Hughes Blake to review the IER and he has furnished an affidavit and a report and

supplemental report to the Court for the purposes of the hearing. He expresses the view that the landlord is unlikely to compromise

having regard to the closeness of the settlement and that the settlement represented a fairly considerable concession on the rent

claimed by the landlord in the Commercial Court proceedings. He also points to the obvious fact that the proposed payment to

unsecured creditors of €669,148, representing 80% of the €836,435 said to be owed to unsecured creditors on the last balance

sheet, will have to be funded from additional borrowings or cash investments.

28. Mr. Hughes expressed the view that the condition requiring funding cannot be met and that the figure required to be raised of

€1.7 million is far outside the capacity of the Company in all the circumstances.

29. The cash flow projections in the IER are criticised by Mr. Hughes on a number of grounds, the most important one for my decision

being that the cash flow projections, which are described as somewhat optimistic even by the independent expert, make no provision

for the payment of the settlement amount, or the payment of the 80% dividend in respect of past creditors, and as Mr. Hughes points

out, the net results of a scheme of arrangement which provided for a mere 20% write down, would have the effect that the Company

would be exiting the examinership process insolvent on a balance sheet basis.

30. The IER suggests that the projected cash flow figures have been stress tested over the projections for twelve months, and so

tested, the opinion of the independent expert is that the Company would remain cash positive in 2017, albeit only if 2016 sales levels

were achieved.

31. I accept the argument of Mr. Hughes that cash flow projections are a key element in the considerations of the court under its

examinership jurisdiction, a key indicator that the company has a reasonable prospect of survival. The suggestion that insurance was

omitted from the figures has been partly explained in the supplemental IER, that the insurance is met under general expenses. Be that

as it may, the cash flow projections contain no provision for the payment of the historic liabilities of €1.7m, or thereabouts, nor any

provision for interest on any loan that might be secured to deal with these liabilities.

32. In response, Mr. Morrison in his supplemental IER, points to the fact that his projections included a contingent provision of

€20,000 per month, that his projections are based on an improbable scenario that there would be no increase in turnover from the

2016 figures, and do not include the anticipated revenue from the additional fifteen rooms. He says he does not envisage all three of

these negative scenarios arising, and is now even more of the view in his second report that the cash flow projections do include the

higher rent. Taking all anticipated elements into account he expects the cash holding of the company at the end of the twelve month

period to December 2017, to be €140,000, €84,000 less than what he projected in his first report. He says he is satisfied the

Company could meet an additional €130,000 increase in rent, or even more.

Possible investors

33. Counsel for the petitioner points to the fact that two private persons have written letters expressing interest in investing in the

Company in consideration of the transfer of shares. These expressions of interest are couched in the usual terms one would expect,

and are made subject to the usual due diligence and other conditions. There is nothing in these letters that points to the amount of

information the investors had when they wrote the letters, and whether they knew of the historic debt of almost €2m, including the

€1.1m to the landlord which the Company now carries. Having regard however to the fact that these potential investors did know

about the examinership process, it can be expected that they knew there was some historic debts and that the company is currently

insolvent.

34. With regard to the possibility of securing additional finance to meet cash flow requirements, the supplemental IER says that the

writer was “advised that funding is available in the form of investor funding in the amount of €500,000 which was made available

immediately and that a further €250k is to be made available during the period of protection”. Mr. Morrison was told that a letter and

evidence of funding would be available to the court, and while evidence of funds was available from the potential investors and each

of them provided a letter, the letters from each were no more than indicative, contingent and conditional letters of support and of a

general interest to invest in the company in consideration of the transfer of shares. While Mr. Morrison is correct that funding to meet

the cash flow problems of the Company can come from sources other than formal lending institutions, the best that the company can

provide at this stage is evidence of possible funding for €500,000, less than a third of what would be required to meet all creditors,

and broadly speaking a third of what would be required to meet the full payment to the landlord and the 80% payment to unsecured

creditors.

35. The total funding that would be required to achieve the proposed payment to the unsecured creditors and the full payment to the

landlord, even if the dates for payment to the landlord are extended is €1.7 million, and this does not include the costs of the

examinership.

36. I accept the evidence of Mr Hughes that the absence of evidence to support the likelihood that commercial finance would be

available is somewhat remarkable in an application of this type. Furthermore, it is apparent on the figures presented to the Court that

the possible available investment of €500,000, together with the rather elusively described €250,000 said to be “available during the

examinership process”, is nowhere near sufficient to meet the cash flow demands and the payments under the terms of settlement.

37. In all of the circumstances I consider that there is no real prospect that funding will be available to meet an arrangement with

creditors that would protect the quantum of the arrears and other payments agreed to be made to the landlord. The evidence does

not in the circumstances suggest that the Company has a reasonable prospect of survival unless the quantum of the arrears and a

variation on the due dates are both achieved.

38. The threshold test to be met by a petitioner under the Act is that a company has a reasonable prospect of survival following the

approval of a rescue plan. The evidence in the present case is that any scheme of rescue will require substantial funding, either by

investors or commercial lenders. The standard of proof may be said to be relatively low, and all that is required is evidence of a

reasonable prospect of survival, not a probability that a company will exit the protection with some or all of its undertaking intact. As

I noted in In re Claremorris Tourism Limited [2015] IEHC 796:

“The test is whether a reasonable prospect of success of the company is shown, not whether all factors that might lead

to that success have been established”. (para. 26)

39. In the circumstances and having regard to the standard to be met, I consider that the IER does point me to the Company having

a reasonable chance of survival, but conditional upon the Company being inter alia in a position to renegotiate and fund the payment

to the landlords. The Company and its directors say that it is their intention to meet all of the obligations of the settlement

agreement, but that more time is needed. This seems to me to be a misunderstanding of the role of the examiner in the process to

which I now briefly turn.

The role of the examiner

40. The directors of the Company and the independent expert both predicate their arguments on an assertion that it is the intention

of the Company to discharge the full amount due to the landlord, albeit some rescheduling of the €1.1m owed to the landlord is

essential for the company to survive. However, while the IER is a fundamental document for the purpose of an examinership, it is for

the examiner to determine a fair and reasonable means by which the liabilities of the company can be met so that it can survive as a

going concern. The preliminary report of Mr. Murray sets out his view that the “repayment basis” of the terms of settlement must be

agreed. He says he has engaged Messrs. Morrissey’s, auctioneers and valuers, to “prepare a report”. The landlord points to this fact

as indicative of a view on the part of the examiner that the quantum is to be reviewed, or at least that a review must be considered.

While no further evidence was available, counsel for the interim examiner suggested that the reason why Messrs. Morrissey’s was

engaged was to advise on the likely result of a rent review, but having regard to the fact that the rent review is not due until

October, 2016, and that it is clear that the review provision is a “upwards only” provision, it is difficult to see why a formal report

would have been obtained at this juncture by the examiner, mainly to deal with the likely additional rent post examinership.

41. Further, Mr. Murray does not say in his report that it is his view at this stage that payment of the full amount of the arrears

agreed to be paid to the landlord would result in a fair and accurate basis on which the creditors could be expected to agree a

scheme of arrangement.

42. It is not to be forgotten that while the directors in the Company may hope and intend that the examiner would achieve the result

by which the landlord would receive all monies due under the settlement agreement, the examiner, as an independent person, charged

with the interests of the creditors as a whole, is not bound by such an assumption or even agreement, and having regard to the fact

that €1.7m in accrued liabilities had to be dealt with in a scheme of arrangement, a very substantial cash injection would be required

to achieve that end. Mr. Morrison fairly points this out in his supplement report at p. 6, where he points to the fact that: -

“It is not for the landlord to determine that there will be no agreement with the examiner in relation to the terms of the

scheme of arrangement yet to be drafted. A scheme would be prepared and considered by all creditors in accordance with

their particular classifications within the scheme. The Companies Act provides for a relatively mapped voting on a Scheme

and the landlord would be entitled to vote in accordance with the practice and procedures set out in the Companies Act.”

43. This accurately states the legal position and neither the Company, its directors, it shareholders nor the landlord may determine

the course of the examinership and it is for the examiner to prepare a scheme which is fair and equitable to all creditors, and to

present an appropriate funding for a scheme to the creditors.

44. Counsel for the Company also points to the fact that the interest of the secured or large creditor cannot be the governing or

single factor which guides the court in considering whether to appoint an examiner. Counsel relies on para. 26 of my judgment in In re

Claremorris Tourism Limited: -

“The position of a large creditor, while it cannot be ignored, and while the argument it makes must be met, cannot be

allowed to be the single or governing factor in the court's considerations.”

45. Thus the effect of the process cannot be directed or preordained by the Company, its directors or shareholders. The process is to

be independently carried out in the interest of all creditors. As Denham J. noted, quoting from the judgment of Cooke J. in the High

Court, in In re Vantive Holdings [2010] 2 I.R. 198, the legislation has the effect that a scheme devised by an examiner may radically

alter the structure and ownership of a company, and the future interest not merely of those persons but also of distant creditors.

46. The confirmation of the appointment of the examiner engages the exercise of discretion. If the result of the process intended to

be, or is likely to be, a variation of the settlement agreement, I turn now to consider whether it can be said that the petition is

presented for a collateral and improper purpose.

The motivation in presenting the petition

47. The landlord argues that the petition ought to be dismissed in the exercise of my discretion. It is argued that the petition was

presented for an ulterior motive and without good faith, that the settlement was a sham and that the petition is an attempt to

renegotiate or avoid its terms. Counsel for the petitioner argues that the only relevant motivation for the purposes of the hearing

before me is the motivation of the Company in bringing the petition for examinership.

48. Irvine J. in O’Flynn & Anor. v. Carbon Finance & Ors. [2014] IEHC 458, identified an improper motive in the presentation of the

petition, and both counsel rely on her judgment, and her decision to refuse to confirm the interim protection.

49. It is argued that the settlement was not a sham or device in order to buy time, and that had that been so, the Company would

have no useful purpose in making the first payment, and the bona fides of the Company is further borne out by the fact that no

proposal is made by it to reduce the quantum of its liability to the landlord, and that what is proposed is a variation in the timeframe.

The law

50. The Supreme Court decision in In re Gallium Limited [2009] IESC 8, [2009] 2 I.L.R.M. 11 is the starting point for the analysis of

the jurisdiction of the court to appoint an examiner to an insolvent company, and the statement at para. 46 of the judgment of

Fennelly J. remains the key proposition with regard to the discretionary nature of the remedy. A petitioner must show that the

company has a reasonable prospect of survival if examinership is to be granted, but

“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 the survival merely triggers the power, which remains

discretionary.”

51. The landlord relies in particular on the judgment of the Supreme Court in the second judgment in In re Vantive Holdings. An

application to appoint an examiner to Vantive had been rejected by Kelly J. in the High Court and his decision was upheld on appeal.

The same petitioners sought to present a second petition to the High Court founded on factual material, expert opinion and evidence

either available to or obtained by it at the time of the hearing of the first petition which the Court held was consciously, deliberately,

and contrary to legal advice withheld from the Court. The Supreme Court allowed the appeal from the decision of Cooke J., who had

allowed the presentation of the second petition, on the basis that the presentation of the second petition was an abuse of process.

While the Supreme Court accepted that the then relevant Act of 1990 did not prohibit the presentation of the second petition for the

appointment of an examiner, the Court considered that special circumstances and explanation would be required. Of relevance for the

subject application was the proposition stated by the Court, that a petitioner must present all relevant information to the Court and

the fact that the Supreme Court rejected the second petition in its inherent jurisdiction to protect the integrity of the due process

and of the administration of justice.

52. Of critical importance to the decision of the Supreme Court was the proposition that, while the interests of those who might

benefit in the examination process must be taken into account under the legislation, the legislative considerations and the interests of

those persons could not of themselves override the obligations on the petitioner not to abuse the process of the Court.

53. Murray C.J. said the following at para. 29 of his judgment:

“[29] The appointment of an examiner on foot of a petition has laudable objectives which in general terms are designed

to facilitate the survival of a company as a going concern notwithstanding its insolvency if it demonstrates that it has a

reasonable prospect of survival. Once the petition is lodged the company is entitled to the protection of the court which

may be to the serious detriment of its creditors and that protection continues while the matter is pending before the

court. It comes to an end once the application is refused (subject to any stay which keeps alive the petition pending an

appeal) or, if successful continues for up to 70 to 100 days. The protection of the court could be artificially obtained if it

were possible for a petitioner, after its first petition had failed, to proceed (even though such a step was not envisaged

at the time of the first petition) with one or more successive petitions on the basis of additional evidence,

notwithstanding it had been available and deliberately withheld, at the first petition, and thus extend further the

protection of the court from its creditors pending at least a hearing which resulted in its refusal. Again, to permit a

party to make the same application on foot of withheld evidence by way of petition, without excusing exceptional

circumstances, would undermine the principle of finality, which the courts have always considered essential to the

integrity of the administration of justice. As Hamilton C.J. observed in In re Greendale Developments Ltd. (No. 3) [2000] 2

I.R. 514 at p. 528 ‘… the finality of proceedings both at the level of trial and possibly more particularly at the level of

ultimate appeal is of fundamental importance to the certainty of the administration of law, and should not lightly be

breached’”.

54. While the judgment in the second petition in In re Vantive Holdings was concerned primarily with the finding of the Court that the

presentation of a second petition was an abuse of process, the judgment of Murray C.J. made it clear that he considered it wrong in

principle that the protection of the court could be “artificially obtained”.

55. Denham J. in her judgment stressed that, while Cooke J. was correct that the statutory test did require the Court to consider

whether the Company could survive, it was not the “overriding consideration”, the statutory test was one factor to be weighed in

the balance of all other relevant factors and principles which included the finality of litigation and the actions of the petitioner. The

interests of creditors are not the determinative overriding considerations (para. 83). A court would not reject a petition and

examinership merely for the purposes of disapproval of misjudgement, past mistakes or even misconduct on the part of directors, but

it was a factor to be weighed.

56. The Supreme Court relied to a considerable extent on the principle from Henderson v. Henderson [1843] 3 Hare 100, that there be

finality in litigation.

57. While one could argue that the judgment in In re Vantive Holdings is confined to the particular facts of that case, where the

litigation in respect of which finality was thought to be desirable was the presentation of a petition for examinership, the approach of

Denham J. was more far-reaching and does not confine itself to repeat or successive applications for examinership which ought not to

be permitted to drag on or be prolonged. At. para. 87 she said the following:

“The court has an inherent power to prevent the misuse of its procedures which would be unfair to a party to litigation

or which would bring the administration of justice into disrepute.”

58. The emphasis therefore, was not merely on the desire to have finality in the individual type of process contemplated, but also to

ensure that the administration of justice was not brought into disrepute, and as she put it later in her judgment, that there be

“closure on an issue”.

59. I consider that In re Vantive Holdings is authority, not merely for the propositions that there not be successive unexplained and

unjustified petitions seeking the protection of the court in respect of the same company, but also that if the presentation of the

petition has the effect of re-opening an issue between parties which had already been determined that it may be an abuse of process

to permit that to happen. This is consistent with the approach of the court in the other cases to which I turn.

60. In In re Traffic Group Ltd. [2007] IEHC 445, [2008] 3 I.R. 253 Clarke J. did confirm the appointment of an examiner,

notwithstanding what he found to be wrongful actions or lack of candour on the part of the petitioners in the immediate run-up to the

presentation of the petition, because there was, in his view, a high chance of successfully preserving the enterprise and most of the

jobs concerned, and because he considered it possible for him to make the order, if the petitioners gave an undertaking not to have

any role in respect of the company for the period of 18 months, which was given. However, Clarke J. regarded lack of candour as a

relevant factor to be weighed with other factors.

61. Counsel relied also on my judgment in In re Step One Permanent Solutions Limited [2015] IEHC 284, where the failure to disclose

relevant material facts was regarded as one factor which engaged my discretion to decline the petition and refuse to make the

appointment, and where I considered that an obligation of utmost good faith arose at all stages of the process.

62. The landlord also relies on a judgment of Kelly J. in In re Missford Limited [2010] IEHC 11 in which he accepted that the company

had met the threshold that there was a reasonable prospect of the survival of the company and the whole or any part of its

undertaking as a going concern, but refused in the exercise of his discretion to confirm the appointment of an interim examiner.

63. In refusing the application Kelly J. was in particular influenced by the egregious breaches of company law, revenue law and the

obligations that the company owed to its employees and the likely “beneficial effect for delinquent directors”. The analysis of Kelly J.

involved him considering the interests of the various creditors and the employees and weighing those against the egregious behaviour

that he found.

64. Clarke J. delivered judgment in In re McSweeney Dispensers Ltd. [2011] IEHC 494 and did appoint an examiner notwithstanding an

argument by a substantial creditor, AIB, that the principal purpose behind the petition was to enable the existing shareholders to

retain control of the company by means of a significant reduction in bad debt but where the business had been badly run and

significant capital extracted.

65. At para. 4.5 of his judgment, having considered the judgments of the Supreme Court in In re Gallium Ltd. and In re Vantive

Holdings Ltd., and his own judgment in In re Traffic Group Ltd., he pointed to the fact that the “purpose of examinership is not to

absolve shareholders from the consequences of a failed venture” and that the Court must analyse with some care “the extent to

which the scheme as a whole is fair not only as and between the various categories of creditors but also between the creditors on

the one hand and shareholders on the other.” Clarke J. considered that as his concern was to assess whether there was a reasonable

prospect of survival and as he was not satisfied that the only possible outcome of examinership was the one for which AIB

contended, that the appointment should be confirmed.

66. While Clarke J. in In re McSweeney Dispensers Ltd. was dealing with the argument of AIB that the interests of shareholders were

those which were sought to be protected, not much difference is evident with regard to the interests of the shareholders and those

in a small privately owned company such as the one in issue in these proceedings which is jointly owned by two brothers. If the sole

purpose of the examinership process is to protect the company for their benefit as opposed to the interests of the company and its

undertaking, a court might have cause for concern. If, as is argued by the landlord, the sole purpose of this petition is to protect the

Company from being required to perform obligations freely, and it says irresponsibly, entered into only three weeks before the petition

was presented, then the motive for the presentation of the petition could be seen as one by which the Company seeks to avoid those

obligations and is less focused on the protection of the enterprise than on a desire to reschedule or renegotiate that agreement.

67. The exercise of examining the “motive” in presenting the petition does not in my view involve the court considering the subjective

intention or conscious purpose of the petition, but can involve looking at the probable outcome of the petition and whether that might

have as a collateral effect the mischief to which Denham J. referred. It is not necessary for the court to rest its discretionary

approach on a finding of actual subjective motive in the true sense. If the effect of the appointment of an examiner is to set at

naught a court order or compromise of court proceedings recently entered into, there is a real risk that the process would in its

practical effect fail to further the administration of justice, and amount to a collateral attack on previous judgments, orders or

compromise.

The presentation of the petition: good faith?

68. After describing the terms of settlement entered into on 19th July, 2016, the petition identifies what is described as “the sources

of the present difficulties of the company” as follows:

22. The directors had intended that the Company was to meet its obligations in the Terms of Settlement through raising a

commercial loan from a financial institution. The result of this legal action by Henciti was to crystallise an additional €1

million debt on the Company’s balance sheet and the payment plan has had a severe impact on the cash flow of the

business.

23. While the directors of the Company progressed an application with their financial institution the Company could not

draw down funds in time and the payment due on 9 August 2016 was not made. As a result by letter dated 10 August

2016 the solicitors for Henciti wrote to indicate that they intended to re-enter the matter in the Commercial List of this

Honourable Court and to seek the orders set out in Clause 2 of the Terms of Settlement. By further letter dated 12

August 2016 the solicitors for Henciti wrote to indicate that the matter had been re-entered and listed before Costello J.

on 19 August 2016.”

The correspondence I refer to below was fully exhibited.

69. In his first replying affidavit on behalf of the Company, Emmet McDermott says that it was “the immediacy of threatened actions

by the landlord”, and not an attempt to “frustrate and evade the Settlement Agreement”, that precipitated the presentation of the

petition, and that Costello J. was fully appraised of the terms of settlement, of the default and the immediacy of the threat that the

lease would be forfeit.

70. The affidavit also avers that at the hearing of the application before Costello J., it was stated that it was not the intention of the

Company that the amounts due to the landlord on foot of the terms of settlement be reduced, and that the approach of the Company

to the settlement is that it will require a rescheduling of payments rather than a reduction in quantum.

71. At para. 10 of this affidavit, Mr. McDermott continues:

“The reason for the Company not complying with the terms of the settlement were not foreseen at the date of entering

into the agreement and the examinership process was not considered as an option at the time that the terms of

settlement were concluded nor was it subsequently embraced as a mechanism for frustrating the rights of the Landlord to

the sums payable on foot of the terms of settlement”.

72. Counsel for the landlord argues that an inevitable conclusion to be drawn from these averments is that at the time the settlement

was entered into the Company did not have funding from a bank or other source to meet the substantial obligations which it

undertook, and which involved the payment of half a million euro within weeks of its date.

73. To assess this proposition I need to examine the events that occurred after the settlement was agreed on 19th July, 2016. The

first tranche of payment in respect of current rent was paid by the due date, 29th July, 2016, in the sum of €115,000, and that

brought the rent up to date to the end of September, 2016. At the date of the presentation of the petition the sum of €425,000

being half of the agreed arrears of rent of €850,000 was not paid. At the date of the hearing of the application before me the

payment of €100,000 by way of security deposit then due was also not paid, and there remains now owing to the landlord by the

company the sum of €1.1 million euro (€850,000 in respect of the agreed sum for arrears of rent, €150,000 in respect of costs, and

€100,0000 by way of security deposit).

74. The landlord places particular emphasis on the letter of 9th August, 2016 from Moran & Ryan Solicitors, then acting for the

Company, sent on the day when the first of the two payments of €425,000 was to be met. I quote the letter in full:

“Dear Sirs,

We have been instructed by our client that while the funds of €425,000 in respect of the payment due today are in place,

their bank is unable to transfer the funds today.

Accordingly, the Bank has informed our client that payment will leave our client’s account shortly.

In the light of the above, our client would ask that your client please grant a short extension of time in order to allow for

the funds to be transferred to your client account.”

75. The solicitors for the landlord rejected the application for an extension and indicated that the matter would be re-entered in the

Commercial Court and that orders for judgment in accordance with the default provisions in the settlement would be sought. A date of

19th August, 2016 was notified the following day as being the date when the matter was to be heard by the Commercial Court.

76. In trenchant terms counsel for the landlord argues that the letter contained a number of untruths, and that evidence points

clearly to the fact that the money was not “in place” and that at best false instructions were given to Messrs. Moran & Ryan by their

client.

Finding on funding

77. I find on the evidence that funds to pay the first tranche of the arrears were not in place, there was no facility available from a

bank or any other person on 9th August, 2016, payment of which had been delayed by administrative matters. The letter did contain

untruths.

78. The tone of the IER suggests that the “crystallisation” of the debt to the landlord caused an immediate cash flow difficulty it is

hoped to resolve, but I consider that the evidence on affidavit points me to a different view. Assuming that the directors have put

their best foot forward in their replying affidavit to the opposition of the landlords, at best the Company can say that it negotiated

with the bank before the settlement was reached and before the landlord and tenant case came on for hearing. One must assume

that the negotiations with the bank happened at a time when the directors were hopeful of succeeding in the litigation and thus

putting the Company in a position where no arrears of rent had accrued, and where its cash flow or insolvency problems were much

less than they now are.

79. I agree with counsel for the landlord that the company was reckless in entering into the settlement agreement and was equally

reckless in instructing its solicitor to write to the landlord’s solicitor saying that the money was “in place”. This is for the following

reasons.

80. The evidence points to the directors having met with their bank in June, but no formal loan sanction, or even conditional loan

sanction, had issued. The directors have identified on affidavit a bank official with whom they were dealing and, this evidence not

having been cross-examined, the uncontested evidence is that the company was dealing with an identified bank official in an

identified bank. The directors met with their bank in June before the landlord and tenant case came on for hearing in the Commercial

Court and before it was compromised. The evidence does not show engagement in regard to the performance of the settlement.

81. Mr. McDermott’s evidence is that in June, 2016 he and his brother met with an identified official of Bank of Ireland to “discuss

finance for the Company” and that this bank official “seemed confident that the bank would be in a position to provide finance”.

Documentation was furnished to the bank between the end of June and early July. He goes on to say that “however the finance did

not ultimately become available although we were firmly of the view that it would”.

82. No correspondence with the bank, or no correspondence or memoranda of meetings or resolutions of the company are exhibited.

Nothing is said of what precisely the Company said to its bank, and the reason it said it required funding, or the amount sought. I

have accordingly no means by which I can ascertain the nature of the discussions, the amount of funding sought, or the reasons

given. I consider it relevant that the engagement with the bank continued only up to early July, i.e. before the case came on for

hearing in the Commercial Court, and extrapolate that the Company at that stage was confident it would succeed in obtaining the

declarations that it sought in those proceedings and would therefore be in a position to continue to trade from the premises at the

reduced rent for which it contended, one half of the rent expressly provided in the lease. No engagement with the bank close to the

time of the settlement, or thereafter, is said to have occurred.

83. The affidavit evidence points in my view to the Company not being in a position to meet the terms of settlement negotiated on

19th July, 2016, and while I can do no more than extrapolate from the facts, the engagement with the bank was in June and early

July, and did not continue up to the date of the settlement, when the agreement to pay over a million euro was formulated and made.

I find it remarkable, for example, that there is no averment in the affidavit that in the course of the lengthy negotiations leading up to

the settlement, the brothers made contact with the Company's bank or other possible investors to discuss whether funds would be

available to meet the payments which were agreed in the settlement.

84. I conclude that the engagement with the bank did not include a proposal or request that the bank would provide funding for the

settlement, and accordingly that the averments in the second affidavit of Mr. McDermott that he believed the finances would become

available is not based on a realistic view of the options and that it is unlikely in the circumstances that finances to meet the

settlement would now become available, or were reasonably believed to be available on 9th august 2016 when the letter seeking

indulgence was sent to the landlord.

85. It is clear that when Mr. McDermott went to negotiate with his bank the company was already insolvent, and the context of the

negotiations appears to me to more probably have been the insolvency and general financial needs of the Company in that context

where it had liabilities excluding rent in almost a million euro, and the perceived need to operate and control rooms in an adjoining

premises, rather than a perceived need to deal with the arrears of rent which that stage the Company appears to be confident that it

would not be required to pay.

86. A fundamental element of the undertaking of the Company also is the fact that it has little asset value, and the occupational

lease that it enjoys contains a standard upward only rent review clause in respect of which it is common case that the rent is likely

to increase by a substantial amount, and an increase of €160,000 per annum was mentioned in the course of the hearing albeit this

was no more than an indicative figure. I accept the evidence of Mr. Hughes that the possibility of raising finance on this leasehold

interest is limited in the light also of the historic losses of the Company and because the Company was unable to meet the terms of

the settlement in the last month. The Company has little to offer in the way of fixed security. This makes it less likely that commercial

funding will be available.

87. The Company did discharge the first payment due under the settlement agreement on time, and the payment of the sum of

€115,000 offered no benefit to the directors personally as the amount they agreed to pay under the settlement agreement was

agreed not to be reducible by any amount paid under that clause. In circumstances where there was no useful purpose to be served

in making the first payment as a matter of objectively ascertainable fact, it is argued that the Company did have an intention at the

time of the settlement agreement to perform the obligations. I disagree, as the amount of the payment was small enough to have

been readily payable from current account, and had the first payment been missed the landlord could have re-entered the matter in

the court before the Long Vacation. A longer delay was inevitable once the Vacation had started. I do not for that reason take much

comfort in the fact that the first payment was made.

88. I consider that the language used in the petition wrongly gives the impression that the funding was expected and unforeseen

circumstances led to the cash flow problems identified. The funding was not in place, no reasonable prospect existed that it would be

obtained, and the petition was an attempt to buy more time to meet the obligations of the settlement agreement.

89. For the reasons explained above I consider it probable that the examiner will not be in a position to raise funding to meet the

settlement terms and that the result of the process is likely to be the variation to the detriment of the landlord of its terms.

90. Thus the collateral effect of the examinership will in my view be to allow the Company to avoid a recently negotiated and complex

settlement of proceedings, and would fail to respect the principle of finality of litigation, or the solemnity of the entering into a

compromise and having its terms ruled by a court.

The employees

91. Unusually perhaps, in this examinership, the evidence points to the fact that the permanent employees are unlikely to loose their

jobs even were an examiner not to be appointed. The directors of the landlord have indicated in their affidavit that they intend to

continue the employment of all permanent employees other than the directors and the son or child of one of them. They are prepared

to give an undertaking under oath to the court that this would be so. Some time was taken in the course of submissions to me as to

whether the employees would have the benefit of the European Communities (Protection of Employees on Transfer of Undertakings)

Regulations 2003, S.I. 131 of 2003, but having regard to the clear position being adopted by the landlord, I consider that the position

of the employees is secure irrespective of the result of this application. Indeed, some of the supporting letters from unsecured

creditors points to the high calibre of staff in the business and in maintaining a very high level of service.

92. I am satisfied that the interests of the employees will not be adversely impacted by the refusal to confirm the appointment.

Conclusion

93. The majority of cases in which examinership is sought are where a company has historic unsustainable liabilities that are required

to be met if the company is to continue as a going concern. This was the position in In re Claremorris Tourism Limited and recent

applications have emerged in the context of significant historic debt arising from the banking and property price collapse. However,

examinership is a broad remedy and the mere fact that a debt or liability is recent does not of itself mean that the protection of the

court may not be given. It is the purpose or effect of the appointment that raises issue of improper motive in the instant case, not

the recent nature of the liability giving rise to the need to call for protection. However, it can readily be seen that to seek protection

in regard to a threat arising from a very recent debt may require the court to be satisfied that its process is being fairly and properly

engaged.

94. I am satisfied that the effect of the appointment of an examiner in the present case is that a very recent settlement of

contentious litigation is likely to be avoided or varied, and that the true purpose of the petition is to avoid the onerous terms of that

settlement. I consider that the petition was an attempt to buy time but that time has run out for this company.

95. I reject the suggestion that the approach of Clarke J. in In re Traffic Group Ltd., where arrangements were put in place to

neutralise the wrongdoing of the directors is appropriate in the present case. The court has a power in the course of the examinership

process to direct an inquiry into the behaviour of a director, to make certain orders or provisions with regard to the ongoing

engagement by the directors with the company, the payment of directors remuneration etc. I consider that the motive was that of

the Company and not merely a personal motive or purpose of its directors, and that no process or order I might make would avoid the

consequences in respect of which I have concern.

96. The petition is to be dismissed in the exercise of my discretion. I am not satisfied that it was presented in good faith.