The High Court and the Supreme Court recently confirmed a Scheme of Arrangement for SIAC Construction Limited (SCL) and certain related companies despite objections from a number of creditors. The creditors claimed that the exclusion of claims for penalties, interest and, in particular, damages not awarded by a certain date and the imposed waiver of subrogated claims was unfairly prejudicial.
Initial Confirmation Hearing
At the initial confirmation hearing before the High Court, submissions were made on behalf of two Polish creditors of SCL – Karmar S.A. and Cemex S.A. - which were involved in the A4 road project in Poland with SCL. Each creditor was seeking to maintain claims in the examinership against SCL for invoiced fees for work done together with claims for damages. The damages claims included claims for liquidated damages specified in the underlying contracts for certain breaches, including the premature termination of the contracts. In the case of Karmar S.A., legal proceedings in which these claims were being pursued had been issued in Poland against SCL prior to the appointment of the examiner.
The Scheme sought to deal with outstanding unagreed claims in two ways. First, if the parties could not agree a settlement of an outstanding claim, it would be referred to an independent expert for final determination. Secondly, any amount which the expert determined was due by SCL to the creditor would be crammed down by the Scheme to the same dividend payable to creditors of the same class (i.e. 5%).
The Scheme further provided that no interest, penalties or damages (save in personal injury cases) were payable unless they had been awarded by a Court prior to a fixed date, as specified in the Scheme. This had the effect of excluding claims by the Polish creditors (and other “Unagreed Unsecured Creditors”) for damages which had not been determined by a court prior to that date.
The two Polish creditors submitted at the confirmation hearing in the High Court that that the exclusion of claims for unawarded, but otherwise ascertainable, damages was unfairly prejudicial. Kelly J., determined that there was no unfair prejudice to these creditors. In doing so, the Judge noted that (1) no additional investment would be provided by the proposed investors to meet these claims and accordingly the only alternative to the Scheme was the receivership or liquidation of the companies, (2) the unsecured creditors would receive no dividend at all on a receivership or liquidation and (3) all the creditors in each class were being treated equally.
The Polish road authority GDDKiA submitted that the Scheme was unfairly prejudicial to its position because (1) claims for unawarded damages were being excluded and (2) the Scheme precludes it from recovering its subrogated claims.
GDDKiA’s claims against SCL arose, first, from a counter claim which it had raised against SCL in ongoing proceedings in Poland in which SCL was pursuing an initial claim for €30m against GIDDKiA. Secondly, GDDKiA was seeking to pursue certain subrogated claims against SCL under Polish law in respect of payments made by GDDKiA to subcontractors on the A4 road project.
Kelly J. rejected the first objection regarding unawarded damages in the same terms as he had dealt with the objections of the other Polish creditors and rejected the second objection on the basis that GDDKiA was being treated in the same away as all effected creditors. Kelly J. confirmed the Scheme.
The Supreme Court
GDDKiA appealed the decision to the Supreme Court on the grounds of unfair prejudice. Fennelly J., delivering the judgment of the Supreme Court, rejected the appeal. He held that the notion of “unfair prejudice” had two elements
- Was the objector unfairly treated compared to how he would fare in a liquidation/receivership
- How was the objector being treated vis-à-vis other creditors.
In this instance the Court was satisfied that despite the express terms of the Scheme, it did not prevent and could not prevent GDDKiA from maintaining in full its claim for damages or its subrogated claims by way of set-off, defence or counterclaim in the Polish proceedings. As such this was found to sharply distinguish GDDKiA from the position of other creditors who were only entitled to recover 5% of their claims and accordingly GDDKiA was not unfairly prejudiced by the Scheme.
The case is a useful illustration of the elements the Court will consider when faced with an argument of unfair prejudice on the confirmation of a scheme of arrangement. It is clear that equal treatment of creditor within a class and the comparative outcome between the examinership and a liquidation/receivership are key considerations for the Court. However, the Court will also consider other matters and the fact that a creditor’s claim may remain of benefit to it – possibly in the defence, counterclaim or set off of a claim by the company in examinership – was a key feature in this case.