Neutral Citation:  IEHC 544
THE HIGH COURT
Record No. 2014. NO. 427 COS.
IN THE MATTER OF THE COMPANIES (AMENDMENT) ACT, 1990 (AS AMENDED)
AND IN THE MATTER OF
JP TRANSPEED EXPRESS PORTLAOISE LIMITED (In Examinership)
Judgment of Mr. Justice Max Barrett delivered on 24th November, 2014
Key issue arising
3. Under s.18(1) of the Companies (Amendment) Act 1990, an examiner must "as soon as practicable after he is appointed, formulate proposals for a compromise or scheme of arrangement in relation to the company concerned'. Under s.18(2) of that Act:
Objection of Revenue Commissioners.
Section 4A of the Act of 1990.
(a) has failed to disclose any information available to him which is material to the exercise by the court of its powers under this Act, or
(b) has in any other way failed to exercise utmost good faith."
8. The Revenue Commissioners have contended that if a petitioner fails to put objectively material information before the court when seeking the appointment of an examiner, this is a breach of the petitioner's obligations under s.4A of the Act of 1990 and has the consequence that (a) the protection which the court has granted is effectively tainted by illegality and (b) the court's jurisdiction to make further orders in the examinership is undermined. It appears to the court that there is no basis for these contentions in the wording of s.4A itself. That provision expressly confers a discretionary power on the court to decide whether or not to hear or continue with the hearing of a petition to appoint an examiner, even in the face of a failure by a petitioner or independent accountant to exercise the "utmost good faith". Clearly, if the court has a statutorily-conferred discretion to so proceed, there can be no question that when it does so proceed any resulting examinership is tainted by illegality and/or the court's jurisdiction to make further orders in the examinership is undermined. Such a reading would in practice render nugatory the discretionary power that the Oireachtas has seen fit to endow upon the court by way of s.4A.
Acting in the "utmost good faith"
The decision in Re O'Flvnn Construction Co.
11. It is true, as the Revenue Commissioners observe, that Irvine J., at para. 113 of her judgment in Re O'Flynn, notes that:
The decision in Re Belohn Limited
23. Furthermore the directors believe that an additional sum of money may be due and owing to the Revenue Commissioners. Over the course of the last number of years a small number of full time employees were incorrectly recorded as self employed contractors. As is referred to above work to input transactions for 2013 and 2014 into the new accounts management system is ongoing and as part of this process the total sum due to the Revenue Commissioners has yet to be quantified. The directors estimate that a further sum of approximately £100,000 will be due to the Revenue Commissioners. All of these staff have now been correctly registered on the payroll. These figures will obviously require further investigation during the protection period if granted.
24. The directors fully acknowledge that the buildup of this level of Revenue debt is completely unacceptable. The directors unreservedly apologize for this failure on their part.
25. A revenue audit began on the Company on 17 September 2014."
15. Nature of discretion arising under s.3A. Section 3A allows for the swift grant of court protection in the absence of an independent accountant's report. Thus it provides, inter alia, that:
(a) that by reason of exceptional circumstances outside the control of the petitioner, the report of the independent accountant is not available in time to accompany the petition, and
(b) that the petitioner could not reasonably have anticipated the circumstances referred to in paragraph (a), and, accordingly, the court is unable to consider the making of an order under that section, the court may make an order under this section placing the company concerned under the protection of the court for such period as the court thinks appropriate in order to allow for the submission of the independent accountant's report ..."
Employment as an issue in examinerships
• In a winding up scenario, these employees will inevitably lose their jobs and based on the employment profile of Portlaoise, they are likely to find it difficult to source new employment in the short term.
• The directors of the Company have advised me that in many cases, their employees are the sole income providers for their respective families. The loss of these jobs would therefore have a much greater, more far-reaching consequences over and above the 15 employees referenced in the Independent Accountant's Report...
• Moreover in the event of a winding up, the Company will not be in a position to support statutory redundancy or minimum notice payments ...
13. Similarly, I say and believe that the position for the unsecured creditors would be worse of in a winding up situation ..."
I am, of course, extremely mindful of the position of the employees. From what I was told they are employed for the most part, if not entirely so, under contracts of employment that are terminable on a short period of notice. Nonetheless they do have jobs and I am anxious to ensure, as far as I can, that they will not be jeopardised I believe that my refusal to appoint an examiner will not in the circumstances give rise to any greater jeopardy to their jobs than would be the case if an examiner were to be appointed."
21. A related issue that arises, though not one arising for consideration in the instant application is that creditors too may have employees and as part of its considerations, for example under s.24 of the Act of 1990, a court may be placed in the challenging predicament of having to weigh in balance the job prospects of employees in a company in examinership against the job prospects of an affected creditor's employees. No issue as to employment in creditor companies has been raised before the court in the instant proceedings. All that is required of the court in this application is that, in its consideration as to whether or not to grant the extension of time that has been sought by the examiner, it consider the employment prospects of Transpeed's employees. Case-law, including the decision in Re Traffic Group, suggests this to be appropriate. Statute is also of relevance in this context; as mentioned above, there is in s.4A of the Act of 1990 an express recognition by the Oireachtas that there may be instances in which, for example, a petitioner and/or independent accountant, fails to exercise the "utmost good faith", yet in which the court would be justified in allowing an examinership to commence or continue. In determining how to exercise its discretion in this regard it seems to the court that any issues raised as to employment are highly relevant, and may be critical. In the present case, even if Transpeed had acted in breach of its duty of "utmost good faith", and the court has found on the facts available to it at this time that it did not, the employment prospects of Transpeed's employees, as detailed to the court by the examiner, greatly strengthen the case that the present application for an extension of time should succeed.
The decision in Re Tivway Limited
Protim Abrasives Limited (in liquidation)
24. The Protim Liquidator's affidavit can perhaps be summarised as follows. First, he has from the outset of the examinership harboured serious concerns as to whether the application for examinership was done in good faith; he considers that his concerns have been substantiated by the information disclosed since Transpeed's examiner was appointed. Second, the Protim Liquidator considers that the sole motivation behind Transpeed's filing for examinership was a "blatant attempt" to 'cram down' existing creditors of the company in order to enhance Transpeed's financial position and to secure a credit facility. The term 'cram down' is a colloquial one and refers to the involuntary imposition by a court of a reorganisation plan over the objection of some classes of creditors. Third, the Protim Liquidator does "not believe that there was any imminent threat to Transpeed's survival which required court protection". Fourth, the Protim Liquidator considers that upon notification from the Revenue Commissioners that it was due to be audited and "in the knowledge of its under-declaration of tax and illegal categorisation of employees as self employed contractors" Transpeed made a decision to go into examinership so as to enable it to continue trading notwithstanding what the Protim Liquidator alleges was its tax avoidance. Fifth, the Protim Liquidator has commenced litigation against Transpeed concerning its alleged wrongful exercise of a lien over certain goods of Protim, which it has since been claimed by Transpeed were stolen during the period that they were detained by it pursuant to its purported lien. As the Protim Liquidator notes in his affidavit, Transpeed made reference to this pending litigation in its petition for examinership and expressed the view that the Protim Liquidator might be successful in same. The Protim Liquidator also notes in this regard that Transpeed's insurers have declined to provide cover against his claim. Sixth, the Protim Liquidator expresses various concerns as to the accuracy and reliability of the independent accountant's report and urges on the court that it is "very telling" that the accountant who authored that report included a caveat in same to the effect that "I recognise ...that this report has been prepared within a short time scale and it may be that the Examiner may become aware of other factors, which may require to be brought to the attention of the Court." Seventh, the Protim Liquidator refers to the fact that Transpeed has apparently found a lender that is satisfied to enter into an invoice discounting facility with Transpeed but requires as a pre-condition to same that a scheme of arrangement be entered into between Transpeed and its creditors and suggests that the examinership process is being utilised inappropriately to reach this end. Eighth, the Protim Liquidator contends that it would have been more appropriate for Transpeed to seek a third party investor, rather than embark upon what he alleges is a contrived examinership, the end-result of which is to place Transpeed in a position where it can satisfy the requirements of the proposed lending facility. Ninth, the Protim Liquidator makes various contentions regarding Transpeed's directors and shareholders and voices a concern that existing management might continue to retain control of the company and that existing shareholders might escape with little or no consequence to them. The court now turns to consider each of the various averments/contentions made by the Protim Liquidator.
25. (1) Concerns as to whether the application for examinership was done in good faith. The issue of "utmost good faith" has been considered elsewhere above. Suffice it to note at this point that the court does not accept that a party that under-estimates its tax liabilities is necessarily guilty of bad faith. Something more by way of evidence would be required for the court to conclude that such an under-estimation went beyond mere error and constituted a breach of the duty of "utmost good faith"; that 'something more' does not present on the facts of this case as outlined to the court.
26. (2) Sole motivation behind examinership is a "blatant attempt" to 'cram down' existing creditors of Transpeed in order to enhance its financial position and secure a credit facility. As mentioned above, the term 'cram down' is a colloquial one and refers to the involuntary imposition by a court of a reorganisation plan over the objection of some classes of creditors. The court does not understand the Protim Liquidator to be objecting to 'cram downs' per se. If he is, his objections come 24 years too late: s.24 of the Act of 1990 clearly contemplates that 'cram downs' ultimately may be sanctioned by the court provided the various criteria referred to in that provision are satisfied; the relevant scheme must also be fair and reasonable. All this is the fruit of a policy decision by the Oireachtas that, despite the losses which individual creditors may sometimes have to suffer as a result of an examinership, it is better for society as a whole that, when possible, and subject to all the legislative constraints and checks arising, ailing companies be nursed to recovery by way of examinership. That a company in difficulty would enter into examinership to enhance its financial position is to be expected. That it might, as part of its pre-examinership considerations, have consulted with a lender who would be willing to lend if there was some level of debt write-down is hardly earth-shattering; certainly it need not lead necessarily to the conclusion that its petition for examinership is tainted by a breach of the duty of "utmost good faith". As the court indicates hereafter, it considers that Transpeed had and has genuine motivations for seeking examinership.
27. (3) No "imminent threat to Transpeed's survival which required court protection". The Protim Liquidator does "not believe that there was any imminent threat to Transpeed's survival which required court protection". However, Transpeed has identified various and, in the court's view, persuasive reasons for seeking protection by way of examinership. It has pointed in its petition to: weak financial control/management; competitive pressures from legitimate and, it is alleged, non-legitimate competitors; a general tightening of the credit market; cash-flow issues; and the non-payment of creditors, including the Revenue Commissioners. In passing, the court notes that the power of the court under s.2 of the Act of 1990 is a discretionary one. Under s.2(1) the court "may", subject to the satisfaction of certain criteria, appoint an examiner, i.e. the placing of a company into examinership is never "required” as a matter of law.
28. (4) Given a pending tax audit, Transpeed entered into examinership so as to enable it to continue trading notwithstanding alleged previous tax avoidance. As mentioned above, the court considers that Transpeed, in its references to its tax position in its petition for examinership, was entirely transparent as to its tax position as it then knew it to be. It does not appear to the court that there is anything before it which adds to the facts as outlined by Transpeed on that date, beyond the fact that its outstanding tax liabilities are greater than originally anticipated. The Protim Liquidator refers in this context to Transpeed's "significant and illegal tax avoidance". He is entitled to his view as to Transpeed's actions but it appears to the court that it is early days yet to reach any conclusion as to whether Transpeed engaged in tax avoidance. At this time all that is known is that Transpeed did not pay its taxes in full and underestimated the fullness of its tax liabilities, no more.
29. (5) Litigation concerning alleged wrongful exercise of lien and related thefi and insurance issues. The fact that the hearing of Protim's claim against Transpeed is imminent was disclosed by Transpeed in its petition for examinership and thus was known, and made known by Transpeed, to the court when the petition for examinership was made. No doubt many companies that enter into, and proceed through, examinership will be engaged in litigation of some sort. No doubt too, many companies confronted by a potential bad debtor may purport to exercise a lien over goods in order to recover payment of a debt, as Transpeed appears to claim happened here. The exercise of this purported lien seems to the court to be part of the 'rough and tumble' of commercial life; if it did not rightly fall to be exercised or was improperly exercised, that can and will be resolved in court. As to the absence of insurance coverage, having considered the relevant correspondence put before the court, it appears that all that has happened in this regard is that Transpeed's insurer has denied coverage in circumstances that it considers not to come within the terms of the applicable policy. That an insurer would deny coverage on this basis is hardly unusual. Neither in the honest exercise by a company of a purported lien, nor in the denial to that company of insurance coverage on what is a fairly standard basis, does the court consider that there is anything that would require that such company, or indeed its directors, ought necessarily to be treated as fully qualified candidates for admission to Dante's eighth circle. As to the validity of the particular (contested) lien that Transpeed sought to exercise against Protim's property and any related issues arising, these are issues for the pending litigation between those parties and the court makes no finding or comment in this regard, nor should this judgment be construed as so doing. As to the purported theft of the goods over which the lien was exercised, this is an odd and potentially troubling episode, though one in which it appears from a letter of 9th March, 2011, issued by An Garda Síochána to the Protim Liquidator, that there is no longer any criminal investigation of any nature. Be that as it may, the court is not in a position to reach any conclusion as to what happened in this regard.
30. (6) Independent accountant's report. The court does not consider that it has been misled or ill-served by the independent accountant's report. As to the inclusion of the caveat in the independent accountant's report being "very telling", the court considers that all this caveat tells is that the independent accountant in this case is a serious and competent professional who wishes expressly to draw the court's attention to the fact that the report has been prepared within a short timeframe and thus may, for example, be based upon and/or express erroneous representations, statements or understandings of facts. It could perhaps be contended that it would have been remiss of the independent accountant not to draw the court's attention to this fact. Whether or not this last contention is accepted, the court suspects that the weakness to which the independent accountant in these proceedings refers is a weakness that may attach to a greater or lesser extent to many reports of independent accountants, given the short timeframes within which they can be required to be prepared. That is not to say that optimal accuracy in an independent accountant's report is not always to be strived for. Rather, it is merely an acknowledgement that in the possibly hurried circumstances of a particular case it may not always be attainable. That it is not attained in a particular case need not necessarily give rise to any negative conclusion as regards the relevant petitioner or independent accountant. When an independent accountant considers that there is a particular risk of inaccuracy arising it would seem prudent for him or her to state this fact, if only so that the independent accountant can avoid later embarrassment or criticism. However, even if he or she does not include such a caveat, the court will likely never approach an independent accountant's report on the basis that it is in every detail and conclusion completely and unfailingly accurate. That is a standard which, as the case-reports of appeals cases show, not even the judges of the High Court have managed historically to attain, and it is not a standard that the court can reasonably or rightly demand or expect of independent accountants in the discharge of their professional responsibilities.
31. (7) Write-down requirements of proposed lender. As mentioned above, the court considers it unsurprising that, as part of its pre-examinership considerations, Transpeed would have consulted with a lender, or that this lender would have indicated a willingness to lend if there was some level of debt write-down by Transpeed's existing creditors. That Transpeed did so need not lead necessarily to the conclusion that its petition for examinership is tainted by bad faith. For the reasons stated elsewhere above, this Court considers that Transpeed had and has genuine motivations for seeking examinership.
32. (8) Third-party investor. The Protim Liquidator contends that it would have been more appropriate for Transpeed to seek a third party investor, rather than embark upon what he alleges is a contrived examinership. He is of course entitled to this view. However, Transpeed is entitled to take an entirely different view on exactly the same facts and has clearly concluded that examinership represents the best option for it to take. As mentioned above, the court considers the various reasons offered by Transpeed for seeking protection by way of examinership to be valid and persuasive.
33. (9) Management, director and shareholder concerns. The Protim Liquidator expresses concerns that, for example, existing management might continue to retain control of Transpeed and that existing shareholders might escape with little or no consequence to them. It was made clear to the court at the hearings of the application that Transpeed's existing management accept that they will not have a future role in the executive operation of the company. This may to some extent allay the Protim Liquidator's concerns as to the management and direction of Transpeed. It is not clear to the court why it would be considered that the shareholders in a private company that enters into examinership should necessarily be exposed to any additional risks or responsibilities beyond those that typically attach to shareholders in private companies. However, the court notes that the examiner has averred in his most recent affidavit to the court that there will likely be a dilution of existing shareholder holdings in Transpeed. This too may allay the relevant concerns of the Protim Liquidator.
35. For the avoidance of doubt, the court notes that the conclusions reached by it in this judgment are not intended to, and do not, qualify the protections enjoyed by the Revenue Commissioners and other creditors of Transpeed under s.24 of the Act of 1990. Section 24 effectively requires that such proposals as are eventually settled upon by an examiner must ultimately be approved by the court before they can become operative. Section 24(2) provides that the court "cannot" confirm any such proposals, inter alia, where "the sole or primary purpose of the proposals is the avoidance of payment of tax due" and also "unless the court is satisfied that ...the proposals are not unfairly prejudicial to the interests of any interested party". There is nothing to prevent the Revenue Commissioners or any other interested party from contending, when and if the proposals of Transpeed's examiner eventually come before the court for approval pursuant to s.24, that "the sole or primary purpose of the proposals is the avoidance of payment of tax due" and/or that such proposals are "unfairly prejudicial" to the interests of the Revenue Commissioners or such other party. The court does not consider that the decisions reached by it on the facts as presented to it at this time would prevent it, if appropriate, from favouring any such future application as might be made by the Revenue Commissioners or any other interested party in the context of s.24, whether on the facts as they pertain at that time and/or as they might then be realised, on the basis of such further or other evidence as might then be furnished, to have pertained at an earlier time.