Ireland has a temporary insolvency process known as “court protection” and commonly called examinership. This provides a breathing space within which a court will determine whether parts of the business can survive after restructuring. This may entail existing leases being disclaimed. The recent case of Bestseller Retail Ireland Limited gives an interesting example of how the court will exercise its discretion in considering an application to disclaim a lease.
The company was a subsidiary of Bestseller A/S, the Danish clothing business. It had 36 shops in Ireland and was insolvent. Part of the court protection process is the production of an independent accountant’s report. That expert recommended that 14 shops should be closed. He also pointed out that further investigation might require that further shops be shut. The examiner recommended that a further 3 be closed. In some cases the repudiation of the leases was achieved by agreement with the relevant landlords. However 4 landlords rejected the proposal and the examiner asked the court to rule. Judge McGovern decided the matter in favour of the landlords.
The Supreme Court had clarified last year in the case of Re Linen Supply of Ireland Ltd that a lease could be repudiated under the relevant statutory provisions during an examinership but that the ultimate decision was one for the discretion of the court. The landlords who were objecting to the Bestseller repudiation pointed out that all 6 stores where the parent had guaranteed the tenant’s obligations were to remain open under these proposals. The examiner argued that the matter had to be looked at as a whole and the possible loss of jobs should be taken into account. However the Judge was not convinced. He adopted the comments previously made by Judge Clarke in the Re Traffic Group Limited case that the court protection process:
“is not designed to help shareholders whose investment proved to be unsuccessful. It is to seek to save the enterprise and the jobs”.
Judge McGovern noted that in the Linen Supply case a parent company was making a further investment as part of the workout arrangement. In contrast he decided that in the Bestseller case a predominant factor in picking which leases would be repudiated seemed to be whether or not these were guaranteed by the parent company. The judge also decided that the landlords had not been given sufficient information about the matter and had not been given information in a timely manner.
With regard to the possible impact of his decision on the overall result of the examinership process, the Judge found that his decision was merely an interim one which would result in the examiner reconsidering the matter. Perhaps the parties might reach a compromise.
If a tenant is placed under the protection of the court then an application to repudiate a lease may be part of the restructuring proposals. However just as the landlord does not have an absolute right to insist that the lease continues, the examiner does not have the right to insist that the lease be terminated. An examiner must provide sufficient information in a timely manner and presumably must also give the landlord an opportunity to reply. If the company has some leases which are guaranteed and some which are not ,then the Court will need to be convinced as to why (if that is the examiner’s proposal) the leases without the guarantee are to be repudiated and guaranteed leases are to remain in place.