Supreme Court dismisses appeal for examiner appointment due to lack of evidence proving reasonable prospect of survival.

THE SUPREME COURT

316/09

Murray C.J.

Denham J.

Fennelly J.

IN THE MATTER OF VANTIVE HOLDINGS

AND IN THE MATTER OF VILLEER DEVELOPMENTS

AND IN THE MATTER OF PEYTOR DEVELOPMENTS

AND IN THE MATTER OF CARRAGH ENTERPRISES LIMITED

AND IN THE MATTER OF PARLEZ INTERNATIONAL LIMITED

AND IN THE MATTER OF MORSTON INVESTMENTS LIMITED

AND IN THE MATTER OF THE COMPANIES ACT 1963-2006

JUDGMENT of the Court delivered by Murray C.J. on the 11th day of August 2009

On the 17th July 2009 Vantive Holdings and, its related companies within the meaning of s. 4(5) of the Companies

(Amendment) Act 1990, Villeer Developments, Peytor Developments, Carragh Enterprises Limited, Parlez International

Limited and Morston Investments presented, ex parte, a petition to the High Court for an order pursuant to s. 2 of the

Companies (Amendment) Act 1990, as amended, seeking an order appointing Mr. Kieran Wallace as examiner in respect of

the petitioner and related companies. Pursuant to s. 5 of the Act of 1990 the company was deemed to be under the

protection of the Court from the date of the presentation of the petition to the expiry of 70 days from that date or on the

withdrawal or refusal of the petition, whichever should happen first.

Vantive Holdings is the petitioner and the High Court has determined that other companies are related companies within

the meaning of the Act. According to the affidavit sworn by Mr. Liam Carroll, a director of the petitioner, the business and

prospects of the petitioning company and the related companies are interdependent. The business relationship between

the respective undertaking is, he says, “entirely symbiotic”.

Certain directions were given by the High Court on that date and on the 28th July the petition came on for hearing before

the High Court. The Court granted liberty to the petitioner to correct and amend the petition in certain respects. On the

31st July 2009 Kelly J., ruled that the application for the appointment of an examiner be refused and that the aforesaid

petition be dismissed.

On that occasion counsel for the petitioner applied for a stay on the order of the High Court which was granted by the

learned High Court judge such a stay to be effective only until Tuesday 4th August 2009. The effect of the stay on the

order refusing the application and dismissing the petition was that the petition remained pending before the Courts and

the petitioner benefited from the consequential statutory protection during the continuation of the stay.

By Notice of Appeal lodged in the Supreme Court on the 4th day of August 2009 the petitioner appealed against the order

of the High Court refusing the application for the appointment of an examiner and dismissing the petition.

On the 4th day of August 2009 the petitioner applied to this Court for a continuation of the stay on the order of the High

Court pending the determination of the substantive appeal against the order of the High Court. On that date this Court

continued the stay until Tuesday the 11th day of August which was the date on which this Court heard the substantive

appeal.

The Issues

The primary and fundamental ground on which the High Court refused the application is the conclusion by the learned High

Court judge that the petitioner had failed to show to the satisfaction of the Court that there is a reasonable prospect of

the survival of the companies which is a precondition to the making of an order pursuant to s. 2 of the Act of 1990, as

amended. Thus the primary issue before the Court in this appeal is whether the High Court was correct in that conclusion.

In addition, the High Court decided that even if it had been satisfied that there is a reasonable prospect of survival of the

companies it would nonetheless, in the exercise of its discretion, refuse the applications for reasons which are referred to

in certain passages of the judgment cited below.

The petitioner also appeals from this latter conclusion of the learned High Court judge and that issue only arises if the first

and primary issue is resolved in favour of the petitioner.

Background

The principal activity of the petitioning company and also Morston Investments Limited is to raise finance for onward

lending to inter alia the related companies registered in Ireland. According to the affidavit filed on behalf of the petitioner

the principal activity of the related companies registered in Ireland consists of purchasing land, utilising funds borrowed

from the petitioner and Morston for development, investment and sales. The petitioner and related companies form an

integral part of a group of related contracting, development and investment companies known as the Zoe Group. The

aforementioned affidavit states that since its inception in the early 1980s the group has had a “hugely successful track

record in the development for sale or letting of apartments, offices and other commercial properties in the State”. In that

period the related companies have assembled a very substantial portfolio of investment and development outlets.

According to the petitioner among the most important of these is first of all a property in Sheriff Street Upper consisting

of 6 acres. These lands were purchased for the purpose of providing back-office and call-centre type commercial

accommodation and planning permission has been obtained for the provision of 32,357 sq. metres of office

accommodation. A second property highlighted by the petitioner as a key property is another 6 acre site of development

land at East Road, Dublin which was also acquired to provide back-office or call-centre type accommodation. Planning

permission has not been obtained but an application has been made to Dublin City Council for a mixed use development to

include 48,649 sq. metres of offices and 3,905 sq. metres of retail space and 73 residential units. It is asserted by the

petitioner in the affidavit grounding its application that “despite the current slow down, when the confidence in the

market returns, these sites will be at the forefront of the future development of Dublin”. The petitioner has also stated

that it and the related companies have suffered a number of “setbacks” due, inter alia, to:

ôA paralysis of the market for apartment sales àö;

ôPlanning difficulties in relation to significant office developments at North Wall Quayö;

ôA significant slow down in the wider economy along with a deterioration in the residential and other property

sectors”;

ôSignificant decline in the value of equity positions in which the groups have investedö;

ôShort term difficulty in meeting trade creditorsö;

The petitioner is heavily indebted to its banks and the above mentioned factors along with “tightened credit availability”

has affected the time frame for the development of a number of important sites and thereby interfered with the ability of

the petitioner (and Morston) to service its debts. As a consequence there is insufficient cash being generated from rental

income and apartment sales to service the liabilities of the petitioner and Morston and, as the grounding affidavit

acknowledges, “this jeopardises not only the future of those undertakings but, by extension, the related companies as

well”.

Currently the petitioner, and indeed the Zoe Group as a whole is insolvent. The Statement of Affairs at Appendix 1 of the

independent accountant’s report shows that according to the present balance sheet the group of companies have an

excess of liabilities over assets in the sum of €265,247,481.

Context of the Present Application

Although the group of companies had been in financial difficulties for some considerable time the present position was

precipitated by steps taken by ACC Bank plc when it made a demand upon Vantage Holdings for the repayment of

€63,960,000 The letter of demand was a demand within the meaning of s. 214 of the Companies Act 1963. This meant

that if the company failed to discharge its liabilities within 21 days it would be deemed by statute to be insolvent. This

would open the way for an application to be made to the Court to have the company compulsorily wound up. A similar and

parallel approach was adopted by the same bank in relation to Morston Investment Limited, a Jersey company with an

indication that proceedings to the same effect would be commenced in Jersey against the company should there be a

default of payment. The 21 days permitted under s. 214 was due to expire on Monday 20th July and with that in sight, on

the preceding Friday the petition was presented to the High Court and an application made for directions.

Survival of the Company as a Going Concern

In seeking to make its case that there is a reasonable prospect that the petitioner and related companies could survive as

a going concern under an examiner the petitioner acknowledges that if it or Morston were to be wound up in liquidation

proceedings it would inevitably precipitate the collapse of the entire group. The current insolvency of the group of

companies is due to the collapse of the property market. The assets of the group “have effectively been frozen by the

paralysis in the property sector”.

To contend with this rather disastrous situation the management of the company, in December 2008 prepared what is

described as “a high level business plan” for the ensuing three years “in which the focus will be on asset disposals and the

realisations of cash.”

The key points of this plan were summarised in the petitioner’s submissions in the following terms:

disposal of much of the Group’s residential stock through aggressive marketing and competitive pricing

disposal of a number of equity positions held by the Group

sale of a number of development sites (with the benefit of planning permission)

limited new development, other than pre-let or pre-sold properties

active management of the development portfolio to improve planning status and enhance value

some compromise with trade creditors

negotiated moratorium on certain interest payments

negotiated moratorium on loan capital repayments to the banks

employment of group employees and subcontracting staff over different phases of the business plan estimated at

circa 600 persons in total.

Counsel for the petitioner has pointed out that since the business plan was initiated the Group has settled with the vast

majority of its trade creditors and added:

AIB Bank plc (40.8% of total Group loans) and Bank of Scotland (Ireland) Ltd (26.8%) of total Group loans) agreed to

provide additional finance to deal with the Group’s creditors and to provide interest roll up. The vast majority of

unsecured creditors have now been paid from these facilities.

Bank of Ireland (9.3% of total Group loans), Anglo Irish Bank Corporation Limited (3.1% of total Group loans) and KBC

(1.9% of total Group loans) have also agreed to provide interest roll up.

Ulster Bank Ireland Limited (6.7% of total Group loans) and EBS Building Society (0.7% of total Group loans) have agreed in

principle to roll up interest.

At paragraph 70 of the petition it is asserted that “the restructuring which is required is a straightforward moratorium on

the repayment of the bank debts of the petitioner and Morston. It is envisaged that the petitioner and Morston will be in

a position to discharge all of their liabilities and in the circumstances a discount on the level of their borrowings will not be

sought or required. What is essential is simply the ‘breathing space’ to enable the Group to trade out of its present

difficulties.”

In short, the petitioner claims that all it needs is time “to concentrate on a secure planning gain on existing assets and

maximise the inherent value in its development sites” (paragraph 80).

The petitioner appears to rely in particular on the key sites at Upper Sheriff Street and East Road for the success of its

survival plan. Of those properties it states, at paragraph 49 of the Affidavit, that “when the confidence in the market

returns, these sites will be at the forefront of the future development of Dublin”.

The petitioner also relies on the report of the independent accountant which it has presented to the Court in accordance

with its statutory obligations. The petitioner points out that the independent account has concluded that the petitioner

and the related companies would have a reasonable prospect of survival as a going concern and that conclusion was

based on 3 preconditions namely:

(a) The restructuring of the company’s loans to terms appropriate to revised project timelines and

future cash inflows,

(b) A scheme of arrangement providing for a compromise with inter group creditors, and

(c) Retention of key management.

The petitioner also placed a great deal of emphasis on the very negative consequences of a liquidation by way of

compulsory winding up which, in the present circumstances would be inevitable if an examiner was not appointed. It

pointed out that “If the petitioner or Morston were to be wound up it would inevitably precipitate the collapse of the

entire Group and the unemployment” of 600 persons. It would be impossible for “the petitioner or the related companies,

and indeed the wider Group, to avoid collapse”.

A winding up of the companies now would result in a shortfall of assets over liabilities in the region of one billion euro.

According to the independent accountant “on a winding up the secured creditors would not be repaid in full”. A winding

up, it was submitted, would lead to a “fire sale” of assets as they would have to be disposed of in a disorderly manner in

a collapsed property market.

In the light of all the considerations relied upon the petitioner says that it is in the interests of all concerned, including

the creditors, that an examiner be appointed on foot of the petition on the grounds that given the time to continue

trading as envisaged by the business plan there is a reasonable expectation that the petitioner and related companies

would survive as a going concern.

The Decision of the High Court

The essential findings of fact made by Mr. Justice Kelly in the High Court are recited in the following passages of his

judgment:

“The petitioner is an Irish company, as indeed are all of the other companies named in the title with the exception of

Morston Investments Ltd that is a company incorporated in Jersey. I am satisfied on the basis of the evidence put before

me that these are related companies and that Morston is a company in respect of which this Court could make a winding

up order. I am also satisfied that a company called Stradbally Investment Company Unlimited together with Vantage

Holdings owns the entire shareholding in Villeer. I am also satisfied that the necessary resolutions authorising an

application to this Court for the appointment of an examiner were passed by the board of the petitioner and each of the

related companies. The evidence satisfies me that the business and indeed the prospects of the petitioner and the

related companies are interdependent. The petitioner and Morston raised the finance which is required by the related

companies registered in Ireland as well as the finance required by other connected companies in the wider group of

companies which are not party to these proceedings. When the petitioner and Morston borrow monies, they lend those

funds onwards to the related companies registered in Ireland as required. These borrowings then take the form of inter

company debt to fund this group in its commercial undertakings. It follows, as is said in the petition, that the related

companies registered in Ireland are essential to the purpose and undertaking of the petitioner and Morston since they

require the finance which the petitioner and Morston raise through bank borrowings while for their commercial life the

related companies registered in Ireland are dependent upon the petitioner and Morston for the provision of finance. The

relationship between them has been described as symbiotic.

The principal activity of the related companies is purchasing land with the funds borrowed from the petitioner and Morston

for development and sales. Large amounts of land some developed, some partially developed and some undeveloped are

owned by the companies in suit and the wider group. The petitioner and the related companies form an integral part of a

group of related contracting development and investment companies known as the Zoe Group. That consists of a large

number of additional companies which do not form part of the present proceedings but its undertaking and prospect is

nevertheless dependent upon the continued survival of the petitioner and the related companies.

Much of that is written in what I might call management speak and seems to boil down to this: The banks were asked to

put a moratorium on interest payments and not to call in the loans and in the meantime work was going to be done on

new developments, obtaining planning permission for more properties and the sale of some sites and the sale of residential

accommodation. Given the collapse in the property market, one could be forgiven for being sceptical about those

proposals; but apparently the banks were supportive of them. They probably had little choice. Allied Irish Banks, which

holds some 40.8 per cent of the group debt, and Bank of Scotland Ireland Ltd. which holds 26.8 per cent of the group

debt, agreed to provide additional finance to deal with the group's creditors and so to provide interest roll up net of rental

income. Those funds have been used to discharge all of the unsecured creditors with the exception of the revenue

commissioners. The other banks Bank of Ireland, which holds 9.3 per cent of the debt, Anglo Irish Bank with 3.1 per cent

of the debt; KBC Bank Ireland with 1.9 per cent of the debt; Ulster Bank with 6.7 per cent of the debt; and EBS with .7

per cent of the loans agreed also to provide interest roll up. ACC Bank consistent with its subsequent approach rejected

the request for forbearance. It holds 10.7 per cent of the group's debt.

So complex is this structure that in presenting the petition to the Court the number of companies involved in the group

was misstated as 49 rather than the 51 companies which are in fact in the group. Indeed, the three directors of the

companies in suit Messieurs Liam Carroll, David Torpey and John Pope are directors of an enormous number of other

companies. In the case of Mr Carroll, he is a director of 203 companies; in the case of Mr Pope he is a director of 166

other companies; and in the case of Mr Torpey, he is a director of 62 other companies. Most of these companies are

incorporated in Ireland but some are incorporated in Jersey, Northern Ireland and the Netherlands.

The financial ill health of the companies in suit has been known for some time. In December 2008 a meeting took place

with bank or creditors to address the problems. The companies sought additional funds to settle with creditors and obtain

a two years' interest roll up net of rental income from the bankers. A three year business planning was prepared. This

business plan was directed in particular to, and I quote "Concentration on more focused new development, active

management of the development portfolio to improve planning status and enhance value, the disposal of much of the

company's residential stock through aggressive marketing and competitive pricing, the disposal of a number of equity

positions held by the group, the sale of a number of development sites with the benefit of planning gain no longer

regarded key to the group's undertaking, negotiation of a two year moratorium on certain interest payments, loan capital

repayments to the bank, and employment of group employees and subcontracting staff over different phases of the

business plan estimated at approximately 600 persons in total." And that's the end of the quotation.”

The essential conclusions of the learned High Court Judge were set out in the following paragraphs:

“As is clear, I have the gravest reservations about the projections on which the independent accountant has relied

in forming his opinion. They appear to me to be lacking in reality given the extraordinary collapse that has occurred

and the lack of any indication of the revival of fortunes in the property market. The valuations in question are out

of date and can hardly be described as truly independent.

Thus I am not satisfied that the petitioners have discharged the onus of proof of showing that there is a reasonable

prospect of the survival of the companies. Even if I were so satisfied, I still have a discretion on the question of the

appointment of an examiner. I would be disinclined to exercise it in favour of the petitioners. First it is clear that

there is something artificial about what is involved here. The only creditors are banks. They will be able to take

steps to realise their debts and deal with the property. They would wish to maximize the return on that and thus

can be expected to enhance the property's value as they see fit with the view to obtaining a greater realisation.

They have already behaved in this way. The only employment threatened is not the 650 people who are mentioned

but in all about 100 who are directly employed. The figure of 650 mentioned in the documents is largely made up of

subcontractors. They will be required if the partially completed developments are to be finished, as the banks have

indicated will be the case. Indeed, I think it's also likely that the employees, properly so called, will have to be

retained in large measure when the development of the lands takes place in any event. The whole exercise seems

designed to assist shareholders whose investment has proved to be unsuccessful. As Mr Justice Clarke has already

said in the case which I have quoted from, that is not the purpose for which the legislation was intended.

In these circumstances, not being satisfied that there has been demonstrated to the Court a reasonable prospect

of survival, I refuse to appoint an examiner, I dismiss the petition, and I withdraw the protection of the Court from

the petitioners.”

Submissions of the Petitioner

Counsel for the petitioner did not take issue with the test applied by the learned High Court Judge in approaching the

primary issue, namely, whether there was a reasonable expectation that the petitioner and related companies would

survive as a going concern. He did submit that in deciding to refuse the application the learned High Court Judge did not

give sufficient weight to the following matters:

(a) The co-operation of the overwhelming majority of the bankers to the appellant and the related

companies;

(b) Uncontradicted expert evidence regarding the future prospects of the property market;

(c) The absence of third party creditors – whose indebtedness has been discharged as a result of the

restructuring already achieved – which greatly assists the prospects of survival;

(d) The presence of a business plan which had already won the active support of almost 90% of the

creditors of the appellant and related companies.

(e) That the learned trial Judge failed to attach sufficient weight to the employment prospects

associated with the survival of the appellant petitioner and the related companies.

Counsel pointed out that the property market in Dublin cannot absorb a portfolio of the scale of that built up by the group

of companies to which they belong. In a liquidation the value of the property would suffer from its already depressed

state and the market would be thrown into an unprecedented degree of turmoil. This, he said, has implications not just for

this group of companies and its creditors but also for the wider market as a whole and those who have an interest in it.

The learned trial Judge relied, he submitted, incorrectly on his own view of the future prospects of the property market

and did not give sufficient weight to the expert views presented in the petition and the report of the independent

accountant.

Counsel for the petitioner also took issue with the statement of the learned trial Judge that the companies in question

“would move from their present position of insolvency with debts well in excess of a billion euro to having net assets of

just short of €300,000,000, the precise figure being €290,436,290”. A comparison between the consequence of a

liquidation and the current position of the company was not appropriate. When examining the turnaround envisaged by

the petitioner so as to enable it and the related companies to survive as a going concern the starting point should be the

present trading position of the petitioner and related companies as set out in the statement of affairs produced at

Appendix 1 of the independent accountant’s report. This shows an excess of liabilities over assets of some €265,000,000.

Thus, the business plan of the petitioner and related companies does not involve a movement, it was submitted, “from

their present position of insolvency with debts well in excess of a billion euros to have net assets of just short of

€300,000,000” as stated by the learned trial Judge but rather a change of the balance sheet of the appellant and related

companies from €290,000,000 approx. This would represent an improvement in the company’s asset position of

€555,683,771 over a period of three years. Counsel submitted that while this may be an optimistic view it is far from the

€1.3 billion turnaround assumed by the learned trial Judge. Even if that projection represents an overestimation of the

likely recovery by up to 50% this would still result in the company’s return to a position of solvency. Given the key factors

relied upon by the petitioner with the support of the creditor banks and the independent accountant it was submitted

that the petitioner and related companies should be treated as having established a reasonable expectation of their

survival as going concerns.

Submissions on behalf of ACC plc

Mr Lyndon McCann made brief submissions on behalf of ACC Bank plc in support of the High Court judgment. Responding to

Mr Cush’s reliance on support of examinership from the banks, he argued that the banks may not be motivated by a belief

that the companies have a reasonable prospect of survival. They could, for example, see an examinership as a means of

achieving more orderly realisation of assets. He submitted that the two key companies, Villeer and Peytor, not having

carried out any development to date, have no trade creditors. He said that there was no evidence that the banks were

committed to fund ongoing development. Finally, he submitted that there was a critical deficiency of evidence regarding

the prospects of any uplift in the property market over the next three years. Evidence of future economic development

would be necessary.

Statutory Provisions

The conditions for the appointment of an examiner in respect of the petitioner is governed principally by s. 2 of the

Companies (Amendment) Act 1990 as amended by the Companies (Amendment) (No. 2) Act 1999 and in respect of the

related companies principally by s. 4 of the Act of 1990.

It is important to note that s. 2 as it was originally enacted in the Act of 1990 left a broader discretion to the Court in

deciding whether to appoint an examiner. Section 2(1) conferred on the High Court a general discretion to appoint an

examiner in respect of a petitioning company which was unable to pay its debts and which had not been wound up.

Subsection 2 of s. 2 of that Act, prior to amendment, provided that the Court might “in particular make an order under

this section if it considers that such an order would be likely to facilitate the survival of the company … as a going

concern”. (emphasis added).

That subsection was replaced by a new subsection inserted by the Act of 1999 which specified that “the Court shall not

make an order unless it is satisfied that there is a reasonable prospect of the survival of the company … as a going

concern.” (emphasis added).

In Keane’s Company Law (Third Edition, Butterworths 2000), the author observed as regards the provisions of the Act of

1999 “thus, it would seem that an order could have been made where, for example, the Court was satisfied that the

company’s assets would be more effectively realised for everyone’s benefit than in a winding up, even if there was no

prospect of the company itself surviving.” However, the Oireachtas by amending s. 2 of the Act of 1990 by means of s. 5

of the Act of 1999 raised the threshold, so to speak, with regard to the conditions which must be fulfilled if the Court is

to have power to appoint an examiner. As the Act now clearly provides the Court cannot make an order appointing an

examiner unless it is satisfied that there is a reasonable prospect of the survival of the company and the whole or any

part of its undertaking as a going concern.

Section 12 of the Act of 1999 makes a similar amendment in respect of s. 4 of the Act of 1990 so that the Court may not

make an order appointing an examiner in respect of a related company unless it is satisfied “that there is a reasonable

prospect of the survival of the related company, and the whole or any part of its undertaking, as a going concern”.

Section 2 of the Act, as amended, provides, so far as relevant, as follows:

(1) Subject to subsection (2), where it appears to the court that—

( a ) a company is or is likely to be unable to pay its debts, and

( b ) no notice of a resolution for the winding-up of the company has been given under section 252 of

the Principal Act more than 7 days before the application hereinafter referred to, and

( c ) no order has been made for the winding-up of the company,

it may, on application by petition presented, appoint an examiner to the company for the purpose 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.

(2) The court shall not make an order under this section unless it is satisfied that there is a reasonable prospect of the survival of the

company and the whole or any part of its undertaking as a going concern.

Subsections (3) and (4) set out the circumstances under which a company may be considered insolvent a matter which is

not in issue in this appeal.

Section 3 of the Act governs the manner and form of a petition to the Court for the appointment of an examiner. The

Companies (Amendment) (No. 2) Act 1999 introduced two new subsections into s. 3 of the Act of 1990 so as to expressly

require that any petition presented under s. 2 of the Act would be accompanied by a report prepared by an “independent

accountant”.

Those two new subsections provide as follows:

“(3A) In addition to the matters specified in subsection (4), a petition presented under section 2 shall be

accompanied by a report in relation to the company prepared by a person (in this Act referred to as ‘the

independent accountant’) who is either the auditor of the company or a person who is qualified to be appointed as

an examiner of the company.

(3B) The report of the independent accountant shall comprise the following:

(a) the names and permanent addresses of the officers of the company and, in so far as the

independent accountant can establish, any person in accordance with whose directions or instructions

the directors of the company are accustomed to act,

(b) the names of any other bodies corporate of which the directors of the company are also directors,

(c) a statement as to the affairs of the company, showing in so far as it is reasonably possible to do so,

particulars of the company's assets and liabilities (including contingent and prospective liabilities) as at

the latest practicable date, the names and addresses of its creditors, the securities held by them

respectively and the dates when the securities were respectively given,

(d) whether in the opinion of the independent accountant any deficiency between the assets and

liabilities of the company has been satisfactorily accounted for or, if not, whether there is evidence of a

substantial disappearance of property that is not adequately accounted for,

(e) his opinion as to whether the company, and the whole or any part of its undertaking, would have a

reasonable prospect of survival as a going concern and a statement of the conditions which he

considers are essential to ensure such survival, whether as regards the internal management and

controls of the company or otherwise,

(f) his opinion as to whether the formulation, acceptance and confirmation of proposals for a

compromise or scheme of arrangement would offer a reasonable prospect of the survival of the

company, and the whole or any part of its undertaking, as a going concern,

(g) his opinion as to whether an attempt to continue the whole or any part of the undertaking would be

likely to be more advantageous to the members as a whole and the creditors as a whole than a winding-

up of the company,

(h) recommendations as to the course he thinks should be taken in relation to the company including, if

warranted, draft proposals for a compromise or scheme of arrangement,

(i) his opinion as to whether the facts disclosed would warrant further inquiries with a view to

proceedings under section 297 or 297A of the Principal Act,

(j) details of the extent of the funding required to enable the company to continue trading during the

period of protection and the sources of that funding,

(k) his recommendations as to which liabilities incurred before the presentation of the petition should be

paid,

(l) his opinion as to whether the work of the examiner would be assisted by a direction of the court in

relation to the role or membership of any creditor's committee referred to in section 21, and

(m) such other matters as he thinks relevant.”

Decision

As counsel for the appellant petitioner pointed out the test to be exercised by the Court in reaching its determination,

concerning “the reasonable prospect of the survival of the company and the whole or any part of its undertaking as a

going concern” is uncontroversial and it was the test applied by the learned High Court Judge. The learned trial Judge had

cited the dicta of McCracken J., in In the matter of Tuscar Resources plc [2001] 1 I.R. 668 which Fennelly J., has in turn

cited with approval in In the matter of Gallium Limited trading as First Equity Group (Unreported), the Supreme Court 3rd

February 2009. The passage in McCracken J’s judgment is the following:

“In re Atlantic Magnetics… Finlay C.J. also stated 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-section 2. Under the Act of

1990 as originally enacted there would appear to be a wide discretion given to the Court. However, the new sub-

section prohibits the Court from making an Order unless they are satisfied there is a reasonable prospect of survival.

If the Court is to be “satisfied”, it will have to be satisfied on the evidence before it, which is in the first instance

the evidence of the Petitioner. If that evidence doesn’t satisfy the Court, the order cannot be made, and in my

view this is tantamount to saying that there is an onus of proof on the Petitioner at the initial stage to satisfy the

Court that there is a reasonable prospect of survival. For this reason, the Court has to view the evidence in a

different matter to that applicable prior to the Act of 1999.”

In the Gallium case Fennelly J., went on to say

“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 the 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 the 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 “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 will have the greatest interest in the future, if any, of the company. The court will take a balanced

approach, as suggested by the reference to the creditors as a whole.”

Accordingly the first step which a Court must take in examining an application for the appointment of an examiner is

whether, on the evidence or material placed before it the Court it is satisfied that the company has a reasonable prospect

of survival, as regards the whole or any part of its undertaking, as a going concern. A Court must be so satisfied before it

has jurisdiction to take the further step so as to exercise its broader discretion whether, in all the relevant circumstances

of the case, an examiner should be appointed. It is at this second step that the other factors, including those that are

mentioned by Fennelly J., may be taken into account on their own. The general circumstances may of course be part of

the factual matrix to which the Court has regard when deciding whether there is a reasonable expectation of survival.

However for the purpose of deciding whether a petitioner has satisfied the Court as to the first step in the test it is not

sufficient for a petitioner to simply demonstrate that the assets of the company could be disposed of in a more orderly

fashion to the benefit of its creditors since the provisions of subsection (2) preclude that as a sufficient test at that

stage. Equally the fact that liquidation might be a far less attractive option from the point of view of the members of the

company or its creditors is not sufficient to meet the test laid down in subsection (2) nor is the fact that the chances of

the company surviving being simply better than an inevitable collapse following liquidation sufficient to meet the test. In

order to be satisfied that a company has a reasonable prospect of survival as a going concern the Court must have

before it sufficient evidence or material which will permit it to arrive at such a conclusion on the basis of an objective

appraisal of that evidence or material. Mere assertions on behalf of a petitioner that a company has a reasonable

prospect of survival as a going concern cannot be given significant weight unless it is supported by an objective appraisal

of the circumstances of the company concerned and an objective rationale as to the manner in which the company can

be reasonably expected to overcome the insolvency in which it finds itself and survive as a going concern.

The opinion of the independent accountant as set out in the report which a petitioner is required to provide to the Court

under the provisions of the Act, must be given due weight. Again, the weight to be attached to the accountant’s opinion

will depend on the degree and extent to which he supports that opinion by his or her own objective reasoning and the

appraisal of material or factors relied upon for reaching his or her conclusions.

Since, the court may not make an order appointing an examiner unless it is satisfied that there is a reasonable prospect of

the survival of the company as a going concern, it follows that there is an onus on the appellant to satisfy the court that

such a reasonable prospect exists. The applicant must provide objective evidence to satisfy the court of this fact.

Examinership is a process designed to facilitate the rescue or survival of companies in financial difficulties. Whether the

appointment of an examiner is supported by creditors of the company and the extent and reasons for that support is a

relevant consideration but not determinative in considering whether there is a reasonable prospect of survival.

It is not necessary, at the stage of application for the appointment of the examiner to show that the company will

probably survive. The period of protection is designed to provide a “breathing space,” during which the company will be

protected from actions by its creditors, particularly a petition for winding up. The period of protection is short. It is

intended to enable the examiner, if appointed, to look into the financial state of the company.

The fact, if established, that there is a reasonable prospect of survival of the company does not lead automatically to the

appointment of the examiner. It merely triggers the power. The court retains a broad discretion. The court may consider

whether one or more creditors will suffer prejudice as a result of the appointment of an examiner. The interests of the

employees of the company and of employment generally may also be relevant. The independent accountant is required by

section 3B(g) of the Act as amended to express his opinion as to whether “an attempt to continue the whole or any part

of the undertaking would be likely to be more advantageous to the members as a whole and the creditors as a whole than

a winding-up of the company.” Thus it must be relevant to the exercise of the court’s discretion to consider the effects

of the alternatives of an examinership and of a winding-up. It is not possible to envisage every circumstance which may

bear on the exercise of the court’s discretion. The above are but a number of examples.

Reasonable Expectation of Surviving as a Going Concern

The genesis of this petition is that the petitioner and the related companies (the Group) are insolvent and unable to meet

their liabilities as they fall due. The reasons for this are set out in the verifying affidavit sworn by a director of the

petitioner, Mr. Liam Carroll. The insolvency is due, inter alia, to a paralysis of the residential market and an unprecedented

collapse and decline in the property market generally. This situation was precipitated by the decision of ACC plc to

demand payment of certain debts due and owing to it or to seek a winding up of Vantive Holdings and Morston in default.

The foregoing has occurred in an environment of severe contractions in the wider economy and restrictions on the

availability of credit.

In this context a three year business plan was drawn up in December 2008 by the petitioner and related companies which

it is claimed would permit the Group to trade out of its current difficulties and continue as a going concern.

The essential basis on which this business plan is founded was stated in the verifying affidavit in the following terms:

“On the basis of an orderly realisation over a 30 month period of residential property holdings which were not

essential to the undertaking of the petitioner and the related companies together with development land which is no

longer regarded as vital for their future construction projects, and having regard to the more streamlined business

which would remain at the end of that period, I believe that the Group would be in a position, with the support of

its banks, to trade through its current difficulties.”

There are two critical elements to the business plan the first of which is an orderly realisation over a thirty month period

of certain property assets of the companies and secondly extensive support of the banks in the meantime.

In contending that there is a reasonable expectation that the companies concerned can survive as a going concern the

petitioner placed great emphasis on the support which it has received from all but one of its lending banks and the Court

considers it convenient to deal with that aspect of its proposals first.

The three year business plan was presented to the banks in December 2008. The response of the banks is outlined in

paragraph 57 of the verifying affidavit where it is stated “the response from the great majority of the bankers to the

petitioner and Morston was very positive”. It then went on to point out that Allied Irish Banks plc and Bank of Scotland

(Ireland) Ltd agreed to provide additional finance to deal with the Group’s existing creditors and to provide interest roll up

(net of rental income). As a result the affidavit states that the Group has now discharged the vast majority of its

unsecured creditors utilising these facilities. The evidence in the affidavit also indicated that Bank of Ireland, Anglo Irish

Bank, and KBC Bank Ireland plc agreed to provide interest roll up (net of rental income). Ulster Bank Limited and the

Educational Building Society have agreed in principle to also provide interest roll up (net of rental income).

The only financial institution which did not engage in this forbearance was ACC Bank plc. That bank holds some 10.7% of

the Group’s debt.

There is no doubt that the moratorium agreed by the banks (two of them in principle) is a valuable and very positive step

for a company which is insolvent and which is endeavouring to provide a basis which will allow it to trade out of that

insolvency.

The fact that the strategy contemplated by the business plan does not envisage any write down of debts or the injection

of outside equity are also positive indicators as regards the strength of the business strategy.

Furthermore, it may be said that the strategy has been successfully implemented to some extent insofar as the banks

have provided finance that has enabled the companies concerned to pay off the bulk of their former unsecured creditors.

The petitioner has also placed great emphasis on the fact that the banks, having examined the business plan, reacted

“positively” to its contents. Equally they point to their expressed support for the current application for the appointment

of an examiner. The exception in each case was ACC plc which did not engage with the business plan and at the hearing

in the High Court adopted a neutral stance as regards the application for the appointment of an examiner. In this appeal

ACC have argued that an examiner should not be appointed.

A key element in the financial aspects of the business plan adopted by the petitioner and related companies is the

provision of finance in the future by the banks, other than ACC, which would enable the companies to discharge their

liabilities to their day to day creditors according as these arise in the course of the further development and sale of their

assets in an orderly fashion.

It is rather striking that there is not to be found anywhere in the material or evidence furnished to the Court any

commitment by any bank to continue to provide financing in the future for the day to day operations of the companies.

Nor is there to be found any explicit statement from the companies that they have been given such a commitment. This

contrasts with the very explicit statements such as are to be found in paragraphs 55 and 57 of the verifying affidavit that

the companies expressly sought and actually obtained from the banks in question the funds necessary to settle with its

then creditors and an express commitment to provide interest roll up (net of rental income) either as an actual

commitment or a commitment in principle. This is dealt with very explicitly in paragraph 57 of the verifying affidavit and it

is remarkable that if a commitment to the future financing of the companies in question had been obtained, even in

principle, that it is not there, nor elsewhere, stated.

Counsel for the petitioner has argued that the commitment to such future financing is implicit in the fact that it was also

seen as part of the business plan presented by the companies to the banks and the banks have been very supportive, as

has been demonstrated, of the business plan and the appointment of an examiner.

The onus remains on the petitioner to establish on the balance of probabilities any facts that are relied upon in support of

the application being made. Given that evidence of a commitment by any of the banks to the future financing of

developments by the petitioner or related companies, if it existed could have been readily and easily given, given the

absence of any direct evidence of such a commitment and that at best there is only an equivocal suggestion that this

might be the case, the Court is not satisfied that the petitioner has shown that a commitment by the banks to such

future financing is available to it for the purpose of considering and determining this application.

Taken on its own that conclusion would not necessarily be fatal to the petitioner’s application. If the petitioner were to

satisfy the Court that the other key aspects of its proposals namely the orderly development and disposal of key assets

during the course of the business plan the question of such future financing might well be a matter that could be

addressed in the course of the examinership, if an examiner were appointed, particularly having regard to the forbearance

which nearly all the banks have been willing to exercise regarding the interest falling due.

The Court will now turn to consider the case made by the petitioner as regards that key aspect of its business plan

namely, the orderly disposal of its assets over an extended period.

The Orderly Disposal of Property

In his submissions counsel for the petitioner submitted that the correct starting point for the assessment of the current

state of the petitioner and related companies is that disclosed in the statement of affairs of June 30th 2009 which

discloses an excess of liabilities over assets in the amount of €265 million rather than the much more negative picture that

necessarily emerges from the statement made by the independent accountant concerning the excess of liabilities over

assets in the event of a liquidation. The real issue, and this was addressed by the learned High Court Judge is whether

the petitioner and related companies have discharged the onus on them to satisfy the Court, on the basis of objective

evidence or material, that a most critical part of their proposals for the future of the Group, namely the orderly disposal of

key properties is sufficiently sound for the Court to rely upon it when deciding whether there is a reasonable expectation

that the companies can survive as a going concern.

As already pointed out the petitioner starts from the position where not only has its assets been devalued but its

capacity to develop and exploit its assets has been halted or at least considerably slowed down due to the

unprecedented collapse and paralysis of the property market. Another important dimension to the difficulties facing the

companies in the property market is the restriction on the availability of credit which is referred to in the verifying

affidavit. No attempt has been made to examine whether there will be any positive developments in the availability of

credit generally and any effects on the future of the property market.

The three year business plan was not placed before the Court.

Although issue was taken with certain observations in the judgment of the trial Judge on the future of the property

market, no issue was taken with the statements which he made concerning the current state of the market it being

accepted that the difficulties which it faces are so notorious that he properly took judicial notice of those conditions. In

his judgment he observed as regards current market conditions that “the commercial market, particularly in Dublin where

much of the properties are located, is grossly over subscribed and the residential sector is hardly moving at all”.

The fact is that the property market, both residential and commercial, is in a grave recession. The companies which are

the subject matter of this application are not the only companies or groups affected by that recession. Other companies

must also have residential and commercial properties completed or ready for development with a view to sale or letting

should the economic climate, and that surrounding the property market in particular, permit. There is no attempt made at

any stage to consider what impact, if any, the volume of other comparable properties on the market might have for the

petitioners’ future expectations.

According to the petitioner its ability to trade out of its current state of insolvency depends on an orderly realisation of

its assets over a thirty month period and certainly within the ambit of the three year business plan. The petitioner

identified two sites in particular as key sites namely 69 Sheriff Street Upper comprising 32,357 sq metres of office

accommodation and 1 – 3 East Road, Dublin being a mixed use development to include 48,649 sq. metres of offices and

3,905 sq. metres of retail space, plus 73 residential units.

Indeed at paragraph 75 of the verifying affidavit it was stated “These development sites are absolutely key to the

ongoing prospects for the business and any threat to the same would undermine the ability of the petitioner and related

companies to survive as a going concern”. The affidavit then went on to say in the next paragraph that “these assets

have effectively been frozen by the paralysis in the property sector. The inability of the Group to trade normally was due

to the current unprecedented market circumstances”. That is the current situation in which the petitioner and related

companies find themselves and the fundamental concern of the trial Judge was the absence of any convincing or

objective evidence which would satisfy the Court that a key element in the petitioner’s survival plan was reasonably or

sufficiently viable to overcome its current insolvency in the face of current market conditions.

Leaving aside for the moment the opinions expressed by the independent accountant in his report, which will be examined

in more detail later, the Court has carefully considered the affidavits filed on behalf of the petitioner and the material

placed before it.

Remarkably there is no attempt to analyse possible or likely future developments or trends in the property market. There

are some statements of expectation or aspiration concerning potential orderly disposal of the assets on the market in the

future. At paragraph 77 of the verifying affidavit it is asserted that the key developments referred to “would, once

complete, represent quality assets which I believe will quickly regain value once the current property market difficulty

abate”. It was in this context and with the aid of the moratorium on repayments accepted by the banks that it was

asserted, at paragraph 78 “What is essential is simply ‘the breathing space’ to enable the Group to trade out of its

present difficulties”. The question still remains as to whether there is a proven reality, to a reasonable extent, to the

petitioner’s proposals.

In short there is a complete absence of any objective evidence or material in the affidavits filed by the petitioner (again

leaving aside for the moment the independent accountant’s report) which could lead the Court to conclude that there

were some underlying objective rationale or material supporting the petitioner’s contention that the market conditions

would change in the short to medium term so as to permit the properties in question to be disposed of in an orderly

manner so as to enable it to benefit from any enhanced value.

Of course the petitioner placed considerable reliance on the report of the independent accountant to support its

contention that market conditions were likely to change so that the companies in question could be disposed of in an

orderly fashion as envisaged by the business plan and by reference to the valuations placed on key assets by the valuers

referred to in the report of the independent accountant. The Court will now turn to a consideration of his report.

The independent accountant’s report also takes, as its starting point, the description of the difficulties of the Group set

out in Mr Carroll’s affidavit. The accountant refers to: the "seizing up of the market for apartment sales resulting in a

significant overhang of unsold apartments;” to "planning difficulties in relation to significant office developments;" to a

"significant slowdown in the wider economy, along with a deterioration in the residential and other property sectors;” and

to a "significant decline in value of equity positions in which the Group have invested.”

He then describes the high level business plan of December 2008.

The accountant emphasises that:

“All the information contained in this report has been extracted from, or provided by,

• The books and records of the company; and

• Discussions with the Company’s Directors and Management.”

The Statement of Affairs of each of the six companies as of 30th June 2009, provided pursuant to section 3B(c) of the

Act shows a total net deficit of some €265 million. This Statement is based on normal accountancy practice. Properties

are valued at book value.

Section 6 provides the crucial opinion, pursuant to section 3B(e) of the Act, that “the companies have a reasonable

prospect of survival if a suitable scheme of arrangement can be implemented.”

The accountant states that this “opinion” is “based” on “the companies trading projections” contained in Appendix 5 to

his report. He then says:

“I have discussed with the management of the companies the assumptions upon which the projections have been prepared.”

The accountant’s crucial opinion follows in these terms:

“6.2 Based on these projections, the companies have a reasonable prospect of survival if a suitable

scheme of arrangement can be implemented. This would allow the companies the opportunity to:

• enhance site value through planning permissions

• build out and develop existing sites with planning permission

• sell completed residential, commercial and retail units

Through the above actions it is projected that the Group would generate a significant surplus which

would then be used to fund future development.

6.3 In my opinion, subject to the following conditions, the companies, and the whole or any part of its

undertakings, would have a reasonable prospect of survival as a going concern:

• A scheme of arrangement allowing for rescheduling of the repayment of bank debt to include interest

roll up (net of rental income) and a moratorium on capital repayments (net of proceeds of asset

disposal) being accepted by the creditors and approved by the High Court.

• A scheme of arrangement providing for a compromise with inter Group creditors.

• Retention of key Management.

It is to be noted that the accountant expresses no view about the reasonableness of the projections in Appendix 5 or

about the assumptions upon which they are based. He restricts himself to saying that he has discussed these matters

with the management of the companies. Consequently, the court does not have the benefit of any opinion from the

accountant bearing on the viability of the projections.

Appendix 5 is, of course, crucial. It is said to contain “trading projections.” In fact, Appendix 5 is expressed as a “Group

consolidated Balance Sheet as at 30/6/09.” It is “Based on a going concern.” It contains no “trading projections,” in the

sense of sales or purchases over any defined period. Appendix 5 is headed: "Estimated Going Concern Statement of

Affairs." The Assets of the Group are described in very general terms such as: "Investment Properties;" "Shares in Quoted

Companies;" "Stocks and Work in Progress Completed Residential Developments;”[combined] “Projects under Development"

and "Landbank." Appendix 5 shows a surplus for the Group of total assets over total liabilities in the sum of €290 million.

Insofar as it is based on valuations, we have only:

“Valuations supplied by CBRE and Hooke and MacDonald in December 2008. Assuming development of existing sites and orderly

asset disposal over 3 years.”

There are a number of obvious problems about the valuations which underlie this Statement of Affairs. Firstly, and most

crucially, no valuations have been exhibited. Secondly, the valuations are said to have been supplied in December 2008,

not 30th June 2009. Thirdly, they appear to be based on an “assumption,” without any expression of opinion as to

whether that assumption is reasonable. The assumption is that there will be “development of existing sites and orderly

asset disposal over 3 years.” No other evidence is provided to validate these assumptions.

It is not possible for the court to reach any conclusion about the prospects of survival of the companies as a going

concern in the absence of any evidence about the likely future development of the property market. Mr Carroll says that

the companies trading and dealing with its assets are “effectively frozen by the paralysis of the property sector.” He says

that the market is undergoing an unprecedented adjustment. In short, it is clear that the companies are unable to survive

in current market circumstances without protection of the court.

Against this background, in order to persuade the court that the companies have a reasonable prospect of survival, it is

perfectly obvious that some evidence of likely improvement in the property market is absolutely essential. Neither the

affidavit of Mr Carroll nor the accountant's report makes any attempt to supply this deficiency. The court has been

informed that valuations exist. They have not been placed in evidence. In their absence, it is not possible for the court to

reach any conclusion on the question of "reasonable prospect of survival.”

The opinion of the independent accountant is explicitly based on a number of assumptions, which are not verified by

evidence. The accountant himself refrains from expressing any opinion about them. Those, such as valuers, who have

made the assumptions, have not given evidence; nor have their reports been put in evidence. The report of the

independent accountant is not based on evidence. Thus it cannot be of any value in assisting the court to determine

whether the companies have a reasonable prospect of survival.

In his written submissions counsel for the petitioner contended that the actions of all the bank creditors who exercising

forbearance on repayments and support for the petitioner’s application, “speaks louder than words”. However, it cannot

be without some significance that none of those banks have spoken in support of the proposition that there is a

reasonable expectation of the survival of the petitioner as a going concern if an examiner is appointed. There may be

other advantages to the bank creditors if an examiner was appointed short of the survival of the petitioner as a going

concern such as the more orderly or controlled disposal of assets but that is of course not the test. The relevant fact is

that the basis on which the banks support the petitioner’s application has not been articulated to the Court and no

opinion has been expressed on their behalf that the appointment of an examiner could reasonably be expected to result in

the survival of the company as a going concern.

Accordingly, the Court concludes that the petitioner has not established that its strategy for a future orderly disposal of

the key assets of the company is credible or reasonably viable. It is not necessary to revisit the question of future

financing since the Court is satisfied on the above finding alone that the petitioner has not demonstrated that there is a

reasonable expectation that it or the related companies could survive as a going concern. Accordingly the appeal is

dismissed and the order of the learned High Court Judge refusing the application for the appointment of an examiner is

upheld.