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Examinership and the Court’s discretion: Exploring two recent cases

  • Ireland
  • Restructuring and insolvency

05-05-2021

Two recent cases of the High Court have examined the nature and extent of the Court’s discretion to refuse to appoint an examiner to a company that is, or is likely to be, unable to pay its debts. In this article we will examine some of the factors considered by the High Court in exercising this discretion.

In Re New Look Retailers (Ireland) Limited1, the petition was presented on the basis that the companies were not insolvent at the time of the application, but were likely to become insolvent in the short to medium term. In exercising the Court’s discretion to dismiss the petition, Mr Justice McDonald held that, in the circumstances, it was “entirely premature to consider the appointment of an examiner” and said that the company should first explore less drastic options such as negotiations with landlords before bringing an application for Examinership.

In Re Ina’s Kitchen Desserts Limited2, the petition was presented by the holder of 10.45% of the company’s shares. Mr Justice Quinn exercised the Court’s discretion to dismiss the petition in circumstances where one of the company’s main creditors, Starkane Limited (“Starkane”), had strenuously opposed the petition and where the petition had been brought without the prior knowledge of the company’s board of directors or the company itself.  

Section 509 of the Companies Act, 2014 (the “Act”)

An examinership petition is brought pursuant to section 509 of the Act, which provides that for an examiner to be appointed to a company it must be, or likely to be, unable to pay its debts. Section 509 also provides that an examiner shall not be appointed unless the Court is satisfied that there is a reasonable prospect of the survival of the company and the whole or any part of its undertaking as a going concern.

In New Look, McDonald J stated that it is clear from section 509(1)(a) that:

the court’s power to appoint an examiner is triggered both where a company is currently unable to pay its debts and where it is likely to be unable to pay its debts at some point in the future”. 

In that case, while there was some considerable disagreement between the parties’ independent experts, McDonald J was satisfied that New Look Ireland was likely to be unable to pay its debts at some stage in the first half of 2021, some six months after the hearing of the petition. He was satisfied, on this finding, that it was “likely to be unable to pay its debts” within the meaning of section 509(1)(a).

In considering that same section in Ina’s, Quinn J referred to the decision of McDonald J in New Look, finding that the window before such a test would be met in the case of Ina’s was much shorter than the 6 months identified in New Look and therefore had “no doubt” that the company met the jurisdictional requirements of section 509(1)(a).

The solvency of the company was a matter of significant dispute in Ina’s. In 2017, Starkane had advanced a sum of €3.2 million to the company by subscribing for cumulative convertible redeemable preference shares (“CCRPS”). There were conflicting opinions from the independent experts on both sides as to whether the CCRPS should be categorised as a form of equity or debt - the determination of which being of central importance to the question as to whether the company was balance sheet insolvent within the meaning of section 509(3)(b) of the Act. Section 509(3) of the Act sets out three different tests by which to establish whether a company is unable to pay its debts. Section 509(3)(b) is a balance sheet solvency test, providing that a company will be unable to pay its debts “if the value of its assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities”.

The Company and Starkane argued that although the CCPRS were categorised as a debt for statutory accounting purposes, the CCRPS had many equity characteristics (eg a right to appoint directors to the board, certain pre-emption rights and the right to attend and vote at general meetings) and therefore the board and the majority shareholder viewed them to be equity in nature.

Ultimately, Quinn J determined that the CCRPS were, at a minimum, contingent liabilities which must be taken into account under section 509(3)(b). The Court concluded that if the Company were itself to have brought the petition and presented the balance sheet in a manner consistent with the statutory filings and at recent board meetings, they could be relied upon to demonstrate that the company was balance sheet insolvent within the meaning of section 509(3)(b).

Exercise of the Court’s Discretion

In both cases, therefore, the relevant companies were found to have met the requirements of section 509(1). It was also determined in both cases that the relevant companies had a reasonable prospect of survival. However, in both New Look and Ina’s, the High Court exercised its discretion to refuse the petition before it.

In New Look McDonald J focussed on the serious consequences of the appointment of an examiner and the effect of such an appointment on creditors and others, stating:

“In the context of the court’s discretion, it must be borne in mind that appointment of an examiner is a very serious step… the appointment must be seen in the light of the substantial curtailment of creditors’ rights which flows from section 520(4) of the 2014 Act for the duration of the protection period. Section 520(4) prevents creditors from taking enforcement action against a Company. No winding up proceedings can be taken. No receiver can be appointed. No process of execution can be put into force against the property of the Company. Secured creditors are not entitled to exercise their rights to realise security. No steps may be taken to repossess goods in the Company’s possession under a hire purchase agreement. No proceedings of any sort may be commenced against a guarantor. Proceedings can only be commenced against the Company itself with the leave of the court.”

In a passage which was relied upon by Quinn J in Ina’s, McDonald J continued: 

 “…it seems to me that, if the Company is to persuade the court to exercise its discretion in favour of the appointment of an examiner, it should be in a position to demonstrate that there is a real necessity to appoint an examiner at this point. Having regard to the impact of the appointment on creditors, this seems to me to be essential in the particular circumstances of this case.”

McDonald J concluded that the New Look petition was premature, placing significant weight on the failure on the part of the petitioner to engage sufficiently with its landlords before availing of the process of examinership. 

In Ina’s, having determined that the statutory tests under section 509(1) had been met, Quinn J stated that the “more difficult question” was whether it is appropriate to exercise his discretion to impose examinership on the company on the petition of one shareholder holding 10.45% of the shares, who is also a director and subordinated creditor (together with other family members). In exercising his discretion to dismiss the petition, Quinn J relied upon the following factors:

  • the significant impact upon creditors of the company if the petition succeeded;
  • no creditor supported the petition;
  • no creditor had threatened any action to recover any debt due – there was no need to provide protection from the unilateral act of a secured creditor;
  • the company’s largest stakeholder Starkane opposed the petition and confirmed its support of the company; and
  • the failure of the petitioner to give his fellow directors and shareholders an opportunity to join with him in the making of the petition.

During the hearing of the petition, it had become apparent that the petitioner in Ina’s held strenuous objections to the terms of the Starkane investment agreements. Quinn J, commenting upon this, found that the intervention the petitioner sought by the appointment of an examiner was not the appropriate remedy for such objections.

Conclusion

These cases demonstrate the broad nature of the Court’s discretion to refuse a petition notwithstanding the statutory tests for insolvency set out in section 509 of the Act. What appears to have emerged to be of central importance is the ability to show to the Court clear evidence that the petition is “necessary” at that point in time (or, if opposing, that it is not in fact necessary for the survival of the company at that time).  

Eversheds Sutherland advised Ina’s Kitchen Desserts Limited and Starkane Limited in Re Ina’s Kitchen Desserts Limited.


1. [2020] IEHC 514

2. [2020] IEHC 644

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