In the recent High Court decision of McInerney Homes Limited, the court has ruled for the first time that proposals for a scheme of arrangement (the “Scheme”) entailing payment to a secured creditor of a written down sum in full satisfaction of its debt, could be approved. However, on the facts of the case the court held that the objecting secured creditors would be unfairly prejudiced if they were required to accept the sum proposed to be paid, and, accordingly, refused to approve the Scheme.
The fact the court held that merely because the objecting secured creditors had advanced a credible case to support their view of the value of the company’s assets, the court should decide in their favour, may dissuade companies in the construction/property sector from seeking to avail of examinership as a solution in circumstances where there is resolute bank opposition.
A petition was presented on 26 August 2010 for the protection of the High Court to be afforded to McInerney Homes Limited and other companies within the McInerney group of companies (referred to collectively as “McInerney”). William O’Riordan of PricewaterhouseCoopers (the “Examiner”) was appointed interim examiner on that date. There was opposition to the appointment of an examiner from three banks (Anglo Irish Bank Corporation Limited, Bank of Ireland plc and KBC Bank plc (referred to collectively as the “Banking Syndicate”)). The liabilities of McInerney to the Banking Syndicate were well in excess of EUR110 million.
At the outset, Oaktree Capital Management LP (“Oaktree”) viewed a potentially reorganised McInerney as being a viable proposition in light of any restructured banking facilities that might be put in place. The court was satisfied at the hearing in relation to the petition that each of the companies which were the subject of the examinership application had established to its satisfaction that they had a reasonable prospect of survival (the “Petition Hearing”) and accordingly the Examiner’s appointment was confirmed.
The Scheme was ultimately formulated by the Examiner pursuant to which Oaktree proposed to invest the reduced sum of EUR30 million to fund the dividend to creditors and working capital. The write-down proposed in the Scheme to EUR25 million for the Banking Syndicate represented a much larger reduction than was anticipated at the Petition Hearing.
High Court decisions in relation to the Scheme
At the hearing in relation to the approval of the Scheme (the “Confirmation Hearing”), the Banking Syndicate fundamentally objected to the approval by the court of the Scheme and argued unsuccessfully that the court did not have jurisdiction to approve a scheme which involved imposing a reduction on the amount to which a secured creditor might become entitled. The court found by analogy with English case-law in relation to schemes of arrangement, that “secured creditors are still creditors” and accordingly, there would appear to be no reason in principle why the terms of the Companies (Amendment) Act 1990 (as amended) (which provides for the examinership process) could not apply to secured creditors. The court indicated that in assessing, as it was obliged to do, whether a scheme was or was not unfairly prejudicial that the court was required to have regard to the secured status of such creditors and the fact that their enhanced status placed those creditors in an advantageous position in any alternative scenario such as liquidation or receivership.
The Banking Syndicate suggested a long term receivership model as an alternative to the Scheme and the respective parties relied on conflicting expert evidence. On the basis of the particular facts, the court found that the Banking Syndicate had put forward a credible case for suggesting that the Banking Syndicate would do better under the receivership model proposed by it than under the Scheme. Accordingly, the Court, found the Scheme, as proposed, to be unfairly prejudicial to the Banking Syndicate, and therefore refused to confirm the Scheme.
Subsequent to the Confirmation Hearing, McInerney and the Examiner asked the court to re-consider its judgment (post delivery of the judgment and in advance of final orders being made in relation to the matter) on the basis that because two of the three banks comprising the Banking Syndicate (namely Anglo Irish Bank Corporation Limited and Bank of Ireland plc) were in the process of transferring their loans to the National Asset Management Agency (“NAMA”), the long term receivership model proposed by the Banking Syndicate was highly unlikely to be put in place. KBC Bank plc (being the third bank comprising the Banking Syndicate) is a non-NAMA bank. NAMA was neutral at the Petition Hearing and the Confirmation Hearing.
Ultimately, the court found that there was nothing new in the materials before the court which led it to change its view in the Confirmation Judgment to the effect that KBC Bank plc was unfairly prejudiced by the Scheme. On the basis, that a scheme was unfairly prejudicial where it was unfairly prejudicial to one creditor the court felt that the Scheme should not be approved.