In a recent decision of the Supreme Court in the Matter of Linen Supply of Ireland Limited (the “Company”) and the Companies (Amendment) Act 1990 (as amended), the Court finally clarified the law in relation to a company’s ability to repudiate and/or disclaim leases during the course of an examinership process. Earlier decisions of the High Court, including quite recently the O’Brien’s Sandwich Bar decision, had created uncertainty in this area.
The law in relation to the repudiation and/or disclaimer of contracts (including leases), in the context of an examinership, is governed by sections 9 and 20 of the Companies (Amendment) Act 1990 (the “1990 Act”). Section 20 provides for a direct means of repudiating certain contracts. Section 9, on the other hand, provides for a more indirect means of repudiation whereby the examiner is granted certain powers of a liquidator. However, these powers can only be given to the examiner on application to the High Court, but if granted allow the examiner to disclaim any contracts considered to be “onerous” to the relevant company, within the meaning of section 290 of the Companies Act 1963.
In the Linen Supply case, the Supreme Court had to consider an appeal by the Company against the decision of the High Court which held that it was not possible to repudiate a lease under section 20 of the 1990 Act. The High Court was of the view that a separate provision contained in section 25(b) of the 1990 Act was inconsistent with the proposition that a company could repudiate a lease under section 20 of the 1990 Act. Section 25(b) essentially prohibits a compromise or scheme of arrangement from providing for a reduction in the amount of rent or other payment due in respect of a lease of land after the scheme of arrangement is approved.
The Supreme Court held, by a four to one majority, that the Company could repudiate a lease pursuant to section 20 of the 1990 Act. In doing so, the Court accepted the Company's argument that:
- leases fall within the definition of “contract” contained within section 20;
- section 25(b) of the 1990 Act applies to situations where a scheme of arrangement has already been formulated and did not prohibit the repudiation of a lease, pursuant to section 20 of the 1990 Act, prior to the formulation of such a scheme of arrangement; and
- positive and negative covenants contained in commercial leases relating to user, repairs and quiet enjoyment etc. are sufficient to constitute the non-monetary element of performance that is required to be outstanding on behalf of both parties in order to invoke the jurisdiction of section 20.
This decision is both welcome and important as it effectively lifts the prohibition on the repudiation of leases that was up until now perceived to exist in the wake of recent High Court decisions. The ability of a company to repudiate onerous leases prior to the formulation of a scheme of arrangement could prove crucial to the success of an examinership in many instances.