By Orla Begley, Solicitor, Litigation Department
A question which recently faced the Irish Courts was “Can a secured creditor be made accept a discount on their loan in an examinership?” This query is of course of particular importance to the banking sector. The recent decision of Justice Clarke in McInerney Homes & Others-v- The Company Acts addressed this question.
McInerney Homes and its associated businesses were placed in examinership on the 13th of September 2010. Once placed in examinership, the company had the protection of the Court and the examiner was provided with one hundred days to formulate a compromise or “scheme of arrangement” with the company in an effort to reach an agreement with the companies' creditors.
McInerney Homes' main creditors were Anglo Irish Bank, Bank of Ireland Plc and KBC Bank which are collectively referred to as “the banking syndicate”. McInerney Homes owed approximately €113million to the banking syndicate. A rescue plan was drawn up by Pricewaterhouse Coopers and backed up by a potential investor, Oaktree Capital, which proposed offering the bank syndicate €25 million in full settlement of the loan.
At the hearing of this case, the banking syndicate rejected the proposed scheme of arrangement stating that it unfairly prejudiced their security. The banking syndicate's first argument was that the Court could not confirm a scheme that imposed a reduction on the debt of a secured creditor. This argument was quickly dismissed by Justice Clarke. However he did draw a distinction between the debt owed to a secured creditor and the security held for that debt noting that in a scheme the debt could be reduced but that the security could be left in place to secure the reduced debt.
In refusing to confirm the scheme of arrangement offered by McInerney Homes, Clarke J further confirmed that it would take exceptional circumstances for the Court to confirm a scheme of arrangement where the secured creditor would be worse off under the scheme than by realising their security.
Accordingly, in this landmark judgment Justice Clarke refused to confirm the scheme of arrangement offered by the examiner of McInerney Homes stating that it would be “unfairly prejudicial” to the banking syndicate.
McInerney Homes lodged an appeal to the Supreme Court which was heard on the 22nd July 2011. The Supreme Court affirmed the High Court's position in this case in dismissing McInerney Homes appeal stating “the High Court was correct in concluding that it could not approve the proposals”. As a result of the Supreme Court Appeal, the examinership that protected McInerney Homes from its creditors will now be terminated.
Justice Clarke's judgment (as affirmed by the Supreme Court) offers some much needed clarity to this complex area of law and also provides relief to the banking sector which were seeing an attack on their security by the examination process.
The law is now clear on and the case confirmed the following three matters:-
• A secured creditor can be made take a discount on their debt during an examinership.
• The security of the secured creditor can however remain in place to secure the reduced debt.
• Finally, this case shows that where a secured creditor can adduce evidence to show the court that the secured creditor would do better outside the scheme of arrangement, then that should be sufficient to persuade a court not to confirm the scheme, even if there is evidence to the contrary presented by the company and indeed the examiner.
For more information on examinerships please contact our Insolvency and Corporate Recovery Unit.