Supreme Court allows appeal appointing examiner after new evidence shows reasonable prospect of company survival.

THE SUPREME COURT

Appeal No. 007/2009

Geoghegan J.

Fennelly J.

Kearns J.

In the matter of Gallium Limited Trading as First Equity Group and in the matter of the Companies (Amendment)

Act 1990

An appeal by Gallium Limited

Appellant/Petitioner

JUDGMENT of Mr. Justice Fennelly delivered the 3rd day of February, 2009.

1. On 13th January 2009, McGovern J, in the High Court, gave an ex tempore judgment refusing the petition of the above-

named Gallium Limited (“the company”) for the appointment of an examiner pursuant to section 2 of the Companies

(Amendment) Act, 1990 (“the Act of 1990”) as amended.

2. An interim examiner had been appointed by the High Court (Gilligan J) on 23rd December 2008. It was then ordered that

the petition be heard on 12th January. A number of orders have been made staying the effect of the order of McGovern J

pending the hearing of this appeal.

3. The appeal was heard on 20th January 2009. The Court decided to set aside the order of McGovern J and to appoint the

interim examiner as examiner to the company.

4. New evidence was placed before this Court on appeal, which had the effect of placing an entirely different complexion on

matters as they had appeared before the High Court. The Court allowed the appeal and made an order appointing an

examiner.

5. This judgment gives the reasons for the decision of the Court to appoint an examiner.

6. The Act of 1990 made it possible to rescue troubled companies. It provides for a protection period, a temporary breathing

space, provided that the court can be persuaded, on presentation of the petition, that there is a prospect of survival.

7. 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.

8. Subsections (3) and (4) deal with proof of a company’s insolvency, a matter which is not in issue in the present case.

9. Section 3 provides that a petition may be presented, inter alia, by the company. The court may appoint an interim

examiner (section 3(7)).

10. The Companies (Amendment) (No 2) Act, 1999 made provision for an independent accountant’s report to assist the

court in deciding the key question, set out in section 2(2), as to whether the company has “a reasonable prospect of……

survival.”

11. That Act introduced two new sub-sections into section 3 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.”.

12. The company presented a petition to the High Court seeking the appointment of an examiner on 23rd December 2008,

grounded on an affidavit of Mr Tom Dowling, one of the company’s two directors and shareholders. This was supported by

the report of an independent accountant. Gilligan J made an order on that date appointing Kieran Wallace, Chartered

Accountant, of KPMG, as Interim Examiner of the company until 12th January. He ordered the advertisement of the

petition and fixed Monday 12th January 2009 for the hearing of the petition.

13. The petition came on accordingly for hearing before McGovern J. Two creditors, represented by counsel, opposed the

petition, relying on an affidavit sworn by one of them, Mr Barry Lyons. For present purposes, it will suffice if I refer to the

single aspect of that affidavit which caused concern to McGovern J. Mr Lyons deposed that information furnished by Mr

Tom Dowling, on behalf of the company, in January 2008 regarding the financial state and prospects of the company had

turned out to be “incorrect and inaccurate.” In particular, Mr Lyons claimed that Mr Dowling said in an e-mail of 21st

January that the company had made a pre-tax profit of €4.5 million in 2007 and that he could anticipate a profit of Stg£10

million in 2008. He also complained generally about the quality and extent of information provided by the company

14. McGovern J dismissed the petition in an ex tempore judgment on 13th January 2009. He stated that he was “most

unhappy with the quality of the evidence” regarding the prospects of the company, which he described as “vague and

nebulous, particularly having regard to the nature of the business of the company.” He referred especially to the

information given to the two creditors mentioned above, “which presented a picture which was totally at variance with the

profit and loss account for the year ended 31st December 2007.”

15. The company has appealed to this Court against the judgment of the High Court. In its notice of appeal, it complains

that the learned trial judge erred in reaching his conclusion regarding the prospects of survival of the company, and, in

particular, in having regard to and attaching excessive weight to the views of two creditors as expressed in the affidavit of

Mr Barry Lyons.

16. It is both appropriate and convenient to address this last matter immediately. The company has placed material before

this Court to explain any gaps or discrepancies in the information provided to the two creditors. Mr Alan Barry, the other

director and shareholder of the company, explains the adjustment of the profit figure of €4.5 million as arising from the need

to reclassify an unrealised gain of €2.5 million, taking it out of the profit-and-loss account and that this was duly recorded in

a note to the 2007 accounts. He says that the prediction of Stg£10 million profits for 2008 should have been expressed in

euros, but more importantly that it was made before the drastic reduction in asset values which took place following the

banking crisis of 2008.

17. The company has provided these and other explanations in a detailed e-mail to the two creditors. Crucially, those

creditors have consequently withdrawn their opposition to the examinership and are now supporting it. Counsel for the

company acknowledged that the new information had not been before McGovern J and that it might have been better to

have had the hearing of the petition adjourned before the High Court and to have furnished the evidence at that stage.

18. At any event, it is clear that an issue of principal concern to the learned trial judge has now been resolved to the

satisfaction of the objecting creditors and that the petition should be considered on its broader merits.

19. In addition, Mr Kieran Wallace, the interim examiner, in an affidavit sworn on 12th January expressed the view that the

company had a reasonable prospect of survival and that the protection of the court should enable him to seek investors and

formulate a Scheme of Arrangement. In a further affidavit sworn on the day before the hearing of the appeal, said that he

had received six separate expressions of interest in relation to investment in the company. He had received a communication

from the two creditors who had objected in the High Court accepting that the company has a reasonable prospect of

survival. Mr Wallace concluded that there had been no developments such as would change his own conclusion to the same

effect.

20. A short history of the company and its business should precede consideration of the report of the independent

accountant. The company was incorporated on 9th January 2004. It trades as First Equity Group (as successor to First

Equity Investments Limited incorporated in 1994) in both Dublin and London. It has 1,000 issued ordinary shares of €1

each. The shares are held by Mr Dowling (650 shares) and Mr Barry (350shares), who are the sole directors. The company

employs ten people.

21. Its object is essentially to carry on business as an investment and trust company. Its principal activity is the introduction

of real estate and other investment finance opportunities to high-net-worth individuals and institutions. It offers investors

investment opportunities to participate in short-term, high yielding real estate financing transactions with the aim of a clear

exit strategy from the outset. It specialises in sourcing and placing equity and mezzanine finance for asset-backed

investments. These projects include property development, planning plays, corporate recovery opportunities, short-term

liquidity positions and direct equity investment in trading companies.

22. At present over 20 projects are being managed by the company with a combined gross development value in excess of

€1 billion. The bulk of the company’s creditors invest by way of loan notes to the company, which, at its sole discretion,

can invest in appropriate projects. The company’s own income comes from placement/arrangement and asset-management

fees. For the years ended 31st December 2004, 2005 and 2006 the company earned very substantial profits (though subject

to the €2.5 million adjustment of the 2006 figures mentioned above).

23. The company says that the reason for its present insolvency is the general downturn in the worldwide economy. It

suffered net losses in 2007 and currently is experiencing a very significant depreciation of asset values.

24. A particular problem has arisen from the financial difficulties being experienced by a number of builders and developers

with which the company is doing business and the inability of certain investors to meet capital commitments in relation to

existing transactions. As a result, the company itself advanced bridging finance in a number of cases. Thus, it has substantial

funds tied up in ongoing developments which it had expected to be paid by now. These sums are described as “loans

advanced to deals.” There are also cases of contracts for sale where the purchasers are now unable or unwilling to complete.

The company is considering the issue of or has already issued legal proceedings in a number of these cases.

25. According to the petition the company cannot meet its debts as they fall due because, although it currently has an excess

of assets over liabilities, it is encountering difficulty in recovering sums due to it. Some loan-note holders are demanding

payment. A petition for winding up has been issued by one creditor.

26. The company says that, based on the report of the independent accountant, it will have sufficient funds to trade during

the protection period, provided an examiner is appointed. It relies on the following expected sources of funds: asset-

management fees in respect of transactions which it manages; refunds of value-added tax from the Revenue Commissioners

and from the Inland Revenue in the United Kingdom; promised equity investment (subject to some doubt, as explained

later). The company also expresses confidence in the likelihood of payment of the loans it advanced to deals on the basis

that the builders or developers have a greater financial interest in the transactions proceeding than the value of the amounts

outstanding.

27. In summary, the petitioner claims that, with the receipt of the asset-management fees, value-added tax refunds, and new

investment and with the protection of examinership, the company can continue to be viable as a going concern.

28. Thus the company is insolvent. Its business has been severely hit by the current worldwide downturn. Its creditors are

pressing.

29. In these circumstances, it is vital to see whether the report of the independent accountant can satisfy the court that the

company has a reasonable prospect of survival.

30. The report is from Mr Paul McCann of Grant Thornton, Chartered Accountants. Grant Thornton are the auditors to the

company. Section 3(3A) of the Act of 1990 as amended allows the report to come from the company’s own auditors. The

report has been prepared in a very short time frame. The report provides the factual information required by section 3(3B).

Crucially, the independent accountant expresses the opinion envisaged by section 3(3B) that, subject to a number of

conditions, to which I will return, “the company, and the whole or any part of its undertaking, would have a reasonable

prospect of survival as a going concern.”

31. The key elements of the report are as follows:

1. The independent accountant provides a Statement of Affairs as required by section 3(3B). It compares the financial

situation of the company, firstly, in the event of its continuing as a going concern, and, secondly, on liquidation and winding

up. On the former basis, the statement of affairs shows a surplus of €2,184,109 of assets over liabilities. In the event of

winding up, there would be a deficit of €24,116,023. It is unlikely that there would be any dividend for unsecured creditors.

2. The report describes the business, as set out above. It says that the investor base consists of over 400 high net worth

individuals and institutions, principally professional and experienced investors, based in Ireland, with some in the UK and the

US. Investments are collateralised by property whose value can be subject to adverse change. The company has

accumulated trading losses of €1,367,061.

3. The company is insolvent. It is unable to pay its debts as they fall due. A principal issue is that a small number of loan-

note holders are demanding payment.

4. The opinion of the independent accountant that the company, and the whole or any part of its undertaking, would have a

reasonable prospect of survival as a going concern is subject to being afforded the protection of the court is subject to the

following additional conditions:

a. The partial write-down of the existing creditors in the balance sheet by way of a Scheme of Arrangement;

b. The submission and approval of an appropriate Scheme of Arrangement and its approval by the High Court;

c. Securing the return of loans advanced to deals;

d. The collection of outstanding fees;

e. Equity investment in the company;

f. The receipt of VAT refunds due to the company;

g. The sale of contracted properties in the UK, either to those parties with whom the company has entered into contracts or

on the open market.

5. In the event of liquidation, there would be a significant excess of liabilities over assets. An attempt to continue the

undertaking in whole or in part would be more advantageous to the members as a whole and the creditors than a winding

up.

6. For these reasons, the independent accountant recommends that the company seek the protection of the court and the

formulation of proposals for a Scheme of Arrangement. The protection of the court would allow the company to devote

sufficient time to the management of its projects in the present challenging financial environment. The removal of the threat

from creditors would increase the possibility of raising finance in the form of debt or equity to finance projects.

7. The independent accountant also recommends that the company change its business model so that it charges its

management and other fees, with all proprietary trading risk being held in special purpose vehicles (probably subsidiary

companies), where the associated debt would be raised.

8. The independent accountant attaches to his report a projected cash flow statement prepared by the directors of the

company. He says that the cash flow shows that the company would have adequate funds from existing resources to

continue trading during the protection period.

32. Mr Dowling, in his affidavits, expresses confidence that, in the event of an examiner being appointed, the loans

advanced to deals will be repaid. There will be greater incentive to pay if an examiner is appointed.

33. Mr Lyndon McCann, Senior Counsel, appeared for the petitioner on hearing of the appeal. He explained how the

difficulty perceived by the learned trial judge had been resolved. He accepted that, on the basis of the authorities, 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. He emphasised that the independent accountant, Mr Paul McCann, is both a well-known and experienced

insolvency practitioner and the auditor of the company with a high level of knowledge of the affairs of the company. He

submitted that it would not be usual for the Court to interpose its own view in place of the considered views of persons

experienced in commercial matters. He accepted, nonetheless, that the Court was entitled to take its own view of the

evidence in arriving at the conclusion required by the section.

34. Mr Michael Cush, Senior Counsel, appeared for the interim examiner. While he did not argue for any particular outcome

to the appeal, he made some observations, in response to questions from the court, concerning the uncertain state of the

expressions of interest from individual proposed or possible investors. He said that it was not at all unusual that investors

should express themselves in very general terms at the stage of the possible commencement of the examinership. In effect,

all would ultimately depend on the terms of the Scheme of Arrangement, if one were ultimately approved by the court.

35. Representatives of the principal secured creditors (principally Bank of Scotland Ireland, by far the largest creditor, and

AIB Bank plc) and of the Revenue Commissioners informed the Court that they were taking a neutral stand as to whether

an examiner should be appointed. Several other creditors, in particular unsecured creditors, expressed their support. No

creditor, secured or unsecured, opposed the petition.

36. I turn next to consider the authorities.

37. The central issue is the interpretation of the expression, reasonable prospect of…survival. Section 2(2) of the Act of

1990, introduced by amendment by the Act of 1999, prohibits the court from appointing an examiner unless it is satisfied

that the company and the whole or part of its undertaking has a reasonable prospect of the survival. In the present case, the

case presented related to the company rather than any part. The survival of part only need not be considered.

38. Such confusion as has existed in the cases has arisen from the amendment of section 2. The original, 1990, version

postulated that the making of an order “would be likely to facilitate the survival of the company…” It did not speak of

“reasonable prospect.”

39. Nonetheless, Lardner J, in the High Court, in his judgment In re Atlantic Magnetics [1993] 2 I.R. 561, considered the

standard required by the section as it was then worded. Part of his unreported judgment is quoted at page 572 and 573 of

the judgment of Finlay C.J. in the Supreme Court in the same case. He said:

“Its seems to me that the standard is this; does the evidence lead to the conclusion that in all the

circumstances herein it seems worthwhile to order an investigation by the examiner into the Company’s

affairs and see can it survive, there being some reasonable prospect of survival?”

40. Finlay C.J., in the course of his judgment on appeal approved that “statement of the standard to be applied to the

question in a case which was not clear-cut…… subject to the minor qualification that [he] would consider it more in

accordance with [his] view of the true standard if the last line of this quotation were to read: "there being some prospect

of survival."” This Court’s correction of Lardner J, described by Finlay C.J. as a “minor qualification” thus proposed an

alternative formulation: “some prospect of survival,” omitting the adjective, “reasonable.”

41. The amendment of 1999 constitutes a legislative preference for the Lardner J version. It reinstated the word,

“reasonable.”

42. McCracken J traced this history in some detail in his judgment in In the matter of Tuskar Resources plc [2001] 1 I.R.

668. He referred both to this change and to the introduction, by the Act of 1999, of the independent accountant, he

concluded:

“The amendments introduced by the Act of 1999 are much more in keeping with the decision of Lardner J. in

re Atlantic Magnetics… than with the decision of the Supreme Court, and further, by introducing the

independent accountant’s report at the preliminary stage, the legislature clearly disagrees with the view that

McCarthy J. that no real decision can be reached until the examiner has been in place for some weeks. The

requirement for an independent accountant’s report clearly means that the decision must be made at the initial

stage of the application.”

43. Having regard to this history, it is useful to recall the rest of what Lardner J had to say in In re Atlantic Magnetics. He

preceded the passage quoted above by the following:

“In some cases the evidence may make it clear that survival of the Company is not a practical possibility and

the order is likely to be refused. In other cases the evidence may give a strong possibility of requisite

adjustment. With requisite adjustment the Company will survive and prosper therein. Here, it may be clearly

possible to make an order appointing the examiner. In other cases such as the present, the evidence may not

lead to a clear cut conclusion. There may, as here, be a conflict of evidence on matters concerning the

Company’s affairs – in such a case by what standards should the Court make its decision?”

44. It has to be recalled that, at the time of that judgment, the court did not have the benefit of the independent accountant’s

report, upon which it is now natural, depending on the standing and expertise of its author, for the court to place particular

reliance.

45. I return then to the analysis by McCracken J, in his judgment in In the matter of Tuskar Resources plc. He continued, at

page 676 of his judgment as follows:

“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.”

46. 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.

47. 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.

48. 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.

49. The present case is different from all of the cases cited in argument. There is now no opposition from anyone with an

interest in the affairs of the company to the making of the order.

50. The evidence suggests that there is a reasonable prospect of survival. The test does not require probability of survival to

be established. Investment markets are hazardous markets at present. The company is in an extremely risky business.

However, the comparative figures set out in the statement of affairs strongly suggest that liquidation is an even more

hazardous alternative than the attempt at rescue by means of the appointment of an examiner. The presence of the

combined elements of extremely adverse prospects, especially for unsecured creditors, on liquidation and the absence of any

argument of prejudice to creditors or others from examinership persuade me that the order should be made. I am satisfied

that the appointment of an examiner is warranted.