|Liam Carney||Robin McDonnell|
On July 22 2011, the Irish Supreme Court delivered its judgment in what has been described as one of the hardest fought examinerships in recent times. By majority decision, the Supreme Court upheld the decision of the High Court, refusing to confirm the proposed scheme of arrangement of the examiner appointed to the McInerney group on the basis that it was unfairly prejudicial to the lenders to the McInerney group.
The McInerney group comprised several companies engaged in construction and property development in Ireland, the United Kingdom, Spain and Portugal. The collapse in the property market in Ireland caused the companies to apply to the High Court for protection from their creditors with a view to having their debt restructured by a court approved examiner's scheme of arrangement.
The High Court was satisfied that the McInerney group companies had a "reasonable prospect of survival" and an examiner was appointed. It is noteworthy that the High Court was made aware that there was an interested investor with whom the companies were negotiating.
Ultimately, the High Court refused to confirm the examiner's proposals in circumstances where the companies' lenders put forward a "credible" case that they would be worse off under the proposals than if they were to realise their security over time under a receivership-controlled workout.
The Supreme Court considered the test for determining unfair prejudice in the context of examinership.
Under the examinership legislation (the Companies (Amendment) Act, 1990), any creditor whose claim will be impaired by a proposed scheme of arrangement may object to it on grounds including that it unfairly prejudices the interests of that creditor, and the Court cannot confirm a scheme of arrangement that is unfairly prejudicial in this way.
The Supreme Court noted that creditors may be prejudiced by necessary write downs and restructuring in an examiner's proposals, but held that prejudice which by its nature is "unfair" will be fatal to the proposed scheme of arrangement.
The Supreme Court endorsed the High Court's view that unfair prejudice should be tested by comparing the return to an interested class of creditors under the proposals as against the likely return to that same class on the liquidation or receivership of the company.
The Supreme Court also acknowledged the High Court Judge's statement that to confirm proposals, in spite of the application of the test suggesting that a class of creditors will be unfairly prejudiced, should only be countenanced if there is "weighty justification".
Onus of proof
The companies argued that having objected to confirmation of the proposals, the companies' lenders should prove unfair prejudice. The Supreme Court rejected this argument and confirmed that the burden of proving that no interested party is unfairly prejudiced by the proposals lies with the examiner.
The companies' lenders put forward a "credible" case that they would achieve more through an extended receivership workout than under the proposals. The High Court and Supreme Court questioned aspects of their case but ultimately gave decisions on the basis that the lenders' calculations were "plausible".
The case suggests that where the receivership workout model of realising assets over time is a viable option for an impaired secured creditor, the Irish Courts will not deny that secured creditor an opportunity to take advantage of security by pursuing that option if that secured creditor makes a credible argument that the security option will produce better financial results for that secured creditor than the proposed scheme.
It will likely be difficult for an examiner to prove definitively that a long term receivership cannot produce the results that a secured creditor claims for it, particularly where those claims are supported by expert evidence.
Liam Carney and Robin McDonnell