Judgment Title: In the Matter of Gallium Limited Trading as First Equitity Group and in the matter of the Companies (Amendment) Act 1990
Composition of Court: Geoghegan J., Fennelly J., Kearns J.
Judgment by: Fennelly J.
Status of Judgment: Approved
Notes on Memo: Reasons stated for decision of 20/01 allowing appeal
THE SUPREME COURT
Appeal No. 007/2009Geoghegan J.
In the matter of Gallium Limited Trading as First Equity Group and in the matter of the Companies (Amendment) Act 1990
An appeal by Gallium Limited
Appellant/PetitionerJUDGMENT of Mr. Justice Fennelly delivered the 3rd day of February, 2009.
1. On 13th January 2009, McGovern J, in the High Court, gave an ex tempore judgment refusing the petition of the above-named Gallium Limited (“the company”) for the appointment of an examiner pursuant to section 2 of the Companies (Amendment) Act, 1990 (“the Act of 1990”) as amended.
2. An interim examiner had been appointed by the High Court (Gilligan J) on 23rd December 2008. It was then ordered that the petition be heard on 12th January. A number of orders have been made staying the effect of the order of McGovern J pending the hearing of this appeal.
3. The appeal was heard on 20th January 2009. The Court decided to set aside the order of McGovern J and to appoint the interim examiner as examiner to the company.
4. New evidence was placed before this Court on appeal, which had the effect of placing an entirely different complexion on matters as they had appeared before the High Court. The Court allowed the appeal and made an order appointing an examiner.
5. This judgment gives the reasons for the decision of the Court to appoint an examiner.
6. The Act of 1990 made it possible to rescue troubled companies. It provides for a protection period, a temporary breathing space, provided that the court can be persuaded, on presentation of the petition, that there is a prospect of survival.
7. Section 2 of the Act, as amended, provides, so far as relevant, as follows:
(1) Subject to subsection (2), where it appears to the court that—
( a ) a company is or is likely to be unable to pay its debts, and
( c ) no order has been made for the winding-up of the company,
it may, on application by petition presented, appoint an examiner to the company for the purpose of examining the state of the company's affairs and performing such duties in relation to the company as may be imposed by or under this Act.
(2) The court shall not make an order under this section unless it 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.
8. Subsections (3) and (4) deal with proof of a company’s insolvency, a matter which is not in issue in the present case.
9. Section 3 provides that a petition may be presented, inter alia, by the company. The court may appoint an interim examiner (section 3(7)).
10. The Companies (Amendment) (No 2) Act, 1999 made provision for an independent accountant’s report to assist the court in deciding the key question, set out in section 2(2), as to whether the company has “a reasonable prospect of……survival.”
11. That Act introduced two new sub-sections into section 3 as follows:
(3B) The report of the independent accountant shall comprise the following:
(a) the names and permanent addresses of the officers of the company and, in so far as the independent accountant can establish, any person in accordance with whose directions or instructions the directors of the company are accustomed to act,
(b) the names of any other bodies corporate of which the directors of the company are also directors,
(c) a statement as to the affairs of the company, showing in so far as it is reasonably possible to do so, particulars of the company's assets and liabilities (including contingent and prospective liabilities) as at the latest practicable date, the names and addresses of its creditors, the securities held by them respectively and the dates when the securities were respectively given,
(d) whether in the opinion of the independent accountant any deficiency between the assets and liabilities of the company has been satisfactorily accounted for or, if not, whether there is evidence of a substantial disappearance of property that is not adequately accounted for,
(e) his opinion as to whether the company, and the whole or any part of its undertaking, would have a reasonable prospect of survival as a going concern and a statement of the conditions which he considers are essential to ensure such survival, whether as regards the internal management and controls of the company or otherwise,
(f) his opinion as to whether the formulation, acceptance and confirmation of proposals for a compromise or scheme of arrangement would offer a reasonable prospect of the survival of the company, and the whole or any part of its undertaking, as a going concern,
(g) his opinion as to whether an attempt to continue the whole or any part of the undertaking would be likely to be more advantageous to the members as a whole and the creditors as a whole than a winding-up of the company,
(h) recommendations as to the course he thinks should be taken in relation to the company including, if warranted, draft proposals for a compromise or scheme of arrangement,
(i) his opinion as to whether the facts disclosed would warrant further inquiries with a view to proceedings under section 297 or 297A of the Principal Act,
(j) details of the extent of the funding required to enable the company to continue trading during the period of protection and the sources of that funding,
(k) his recommendations as to which liabilities incurred before the presentation of the petition should be paid,
(l) his opinion as to whether the work of the examiner would be assisted by a direction of the court in relation to the role or membership of any creditor's committee referred to in section 21, and
(m) such other matters as he thinks relevant.”.
12. The company presented a petition to the High Court seeking the appointment of an examiner on 23rd December 2008, grounded on an affidavit of Mr Tom Dowling, one of the company’s two directors and shareholders. This was supported by the report of an independent accountant. Gilligan J made an order on that date appointing Kieran Wallace, Chartered Accountant, of KPMG, as Interim Examiner of the company until 12th January. He ordered the advertisement of the petition and fixed Monday 12th January 2009 for the hearing of the petition.
13. The petition came on accordingly for hearing before McGovern J. Two creditors, represented by counsel, opposed the petition, relying on an affidavit sworn by one of them, Mr Barry Lyons. For present purposes, it will suffice if I refer to the single aspect of that affidavit which caused concern to McGovern J. Mr Lyons deposed that information furnished by Mr Tom Dowling, on behalf of the company, in January 2008 regarding the financial state and prospects of the company had turned out to be “incorrect and inaccurate.” In particular, Mr Lyons claimed that Mr Dowling said in an e-mail of 21st January that the company had made a pre-tax profit of €4.5 million in 2007 and that he could anticipate a profit of Stg£10 million in 2008. He also complained generally about the quality and extent of information provided by the company
14. McGovern J dismissed the petition in an ex tempore judgment on 13th January 2009. He stated that he was “most unhappy with the quality of the evidence” regarding the prospects of the company, which he described as “vague and nebulous, particularly having regard to the nature of the business of the company.” He referred especially to the information given to the two creditors mentioned above, “which presented a picture which was totally at variance with the profit and loss account for the year ended 31st December 2007.”
15. The company has appealed to this Court against the judgment of the High Court. In its notice of appeal, it complains that the learned trial judge erred in reaching his conclusion regarding the prospects of survival of the company, and, in particular, in having regard to and attaching excessive weight to the views of two creditors as expressed in the affidavit of Mr Barry Lyons.
16. It is both appropriate and convenient to address this last matter immediately. The company has placed material before this Court to explain any gaps or discrepancies in the information provided to the two creditors. Mr Alan Barry, the other director and shareholder of the company, explains the adjustment of the profit figure of €4.5 million as arising from the need to reclassify an unrealised gain of €2.5 million, taking it out of the profit-and-loss account and that this was duly recorded in a note to the 2007 accounts. He says that the prediction of Stg£10 million profits for 2008 should have been expressed in euros, but more importantly that it was made before the drastic reduction in asset values which took place following the banking crisis of 2008.
17. The company has provided these and other explanations in a detailed e-mail to the two creditors. Crucially, those creditors have consequently withdrawn their opposition to the examinership and are now supporting it. Counsel for the company acknowledged that the new information had not been before McGovern J and that it might have been better to have had the hearing of the petition adjourned before the High Court and to have furnished the evidence at that stage.
18. At any event, it is clear that an issue of principal concern to the learned trial judge has now been resolved to the satisfaction of the objecting creditors and that the petition should be considered on its broader merits.
19. In addition, Mr Kieran Wallace, the interim examiner, in an affidavit sworn on 12th January expressed the view that the company had a reasonable prospect of survival and that the protection of the court should enable him to seek investors and formulate a Scheme of Arrangement. In a further affidavit sworn on the day before the hearing of the appeal, said that he had received six separate expressions of interest in relation to investment in the company. He had received a communication from the two creditors who had objected in the High Court accepting that the company has a reasonable prospect of survival. Mr Wallace concluded that there had been no developments such as would change his own conclusion to the same effect.
20. A short history of the company and its business should precede consideration of the report of the independent accountant. The company was incorporated on 9th January 2004. It trades as First Equity Group (as successor to First Equity Investments Limited incorporated in 1994) in both Dublin and London. It has 1,000 issued ordinary shares of €1 each. The shares are held by Mr Dowling (650 shares) and Mr Barry (350shares), who are the sole directors. The company employs ten people.
21. Its object is essentially to carry on business as an investment and trust company. Its principal activity is the introduction of real estate and other investment finance opportunities to high-net-worth individuals and institutions. It offers investors investment opportunities to participate in short-term, high yielding real estate financing transactions with the aim of a clear exit strategy from the outset. It specialises in sourcing and placing equity and mezzanine finance for asset-backed investments. These projects include property development, planning plays, corporate recovery opportunities, short-term liquidity positions and direct equity investment in trading companies.
22. At present over 20 projects are being managed by the company with a combined gross development value in excess of €1 billion. The bulk of the company’s creditors invest by way of loan notes to the company, which, at its sole discretion, can invest in appropriate projects. The company’s own income comes from placement/arrangement and asset-management fees. For the years ended 31st December 2004, 2005 and 2006 the company earned very substantial profits (though subject to the €2.5 million adjustment of the 2006 figures mentioned above).
23. The company says that the reason for its present insolvency is the general downturn in the worldwide economy. It suffered net losses in 2007 and currently is experiencing a very significant depreciation of asset values.
24. A particular problem has arisen from the financial difficulties being experienced by a number of builders and developers with which the company is doing business and the inability of certain investors to meet capital commitments in relation to existing transactions. As a result, the company itself advanced bridging finance in a number of cases. Thus, it has substantial funds tied up in ongoing developments which it had expected to be paid by now. These sums are described as “loans advanced to deals.” There are also cases of contracts for sale where the purchasers are now unable or unwilling to complete. The company is considering the issue of or has already issued legal proceedings in a number of these cases.
25. According to the petition the company cannot meet its debts as they fall due because, although it currently has an excess of assets over liabilities, it is encountering difficulty in recovering sums due to it. Some loan-note holders are demanding payment. A petition for winding up has been issued by one creditor.
26. The company says that, based on the report of the independent accountant, it will have sufficient funds to trade during the protection period, provided an examiner is appointed. It relies on the following expected sources of funds: asset-management fees in respect of transactions which it manages; refunds of value-added tax from the Revenue Commissioners and from the Inland Revenue in the United Kingdom; promised equity investment (subject to some doubt, as explained later). The company also expresses confidence in the likelihood of payment of the loans it advanced to deals on the basis that the builders or developers have a greater financial interest in the transactions proceeding than the value of the amounts outstanding.
27. In summary, the petitioner claims that, with the receipt of the asset-management fees, value-added tax refunds, and new investment and with the protection of examinership, the company can continue to be viable as a going concern.
28. Thus the company is insolvent. Its business has been severely hit by the current worldwide downturn. Its creditors are pressing.
29. In these circumstances, it is vital to see whether the report of the independent accountant can satisfy the court that the company has a reasonable prospect of survival.
30. The report is from Mr Paul McCann of Grant Thornton, Chartered Accountants. Grant Thornton are the auditors to the company. Section 3(3A) of the Act of 1990 as amended allows the report to come from the company’s own auditors. The report has been prepared in a very short time frame. The report provides the factual information required by section 3(3B). Crucially, the independent accountant expresses the opinion envisaged by section 3(3B) that, subject to a number of conditions, to which I will return, “the company, and the whole or any part of its undertaking, would have a reasonable prospect of survival as a going concern.”
31. The key elements of the report are as follows:
1. The independent accountant provides a Statement of Affairs as required by section 3(3B). It compares the financial situation of the company, firstly, in the event of its continuing as a going concern, and, secondly, on liquidation and winding up. On the former basis, the statement of affairs shows a surplus of €2,184,109 of assets over liabilities. In the event of winding up, there would be a deficit of €24,116,023. It is unlikely that there would be any dividend for unsecured creditors.
33. Mr Lyndon McCann, Senior Counsel, appeared for the petitioner on hearing of the appeal. He explained how the difficulty perceived by the learned trial judge had been resolved. He accepted that, on the basis of the authorities, the Court may not make an order appointing an examiner unless it is satisfied that there is a reasonable prospect of the survival of the company. He emphasised that the independent accountant, Mr Paul McCann, is both a well-known and experienced insolvency practitioner and the auditor of the company with a high level of knowledge of the affairs of the company. He submitted that it would not be usual for the Court to interpose its own view in place of the considered views of persons experienced in commercial matters. He accepted, nonetheless, that the Court was entitled to take its own view of the evidence in arriving at the conclusion required by the section.
34. Mr Michael Cush, Senior Counsel, appeared for the interim examiner. While he did not argue for any particular outcome to the appeal, he made some observations, in response to questions from the court, concerning the uncertain state of the expressions of interest from individual proposed or possible investors. He said that it was not at all unusual that investors should express themselves in very general terms at the stage of the possible commencement of the examinership. In effect, all would ultimately depend on the terms of the Scheme of Arrangement, if one were ultimately approved by the court.
35. Representatives of the principal secured creditors (principally Bank of Scotland Ireland, by far the largest creditor, and AIB Bank plc) and of the Revenue Commissioners informed the Court that they were taking a neutral stand as to whether an examiner should be appointed. Several other creditors, in particular unsecured creditors, expressed their support. No creditor, secured or unsecured, opposed the petition.
36. I turn next to consider the authorities.
37. The central issue is the interpretation of the expression, reasonable prospect of…survival. Section 2(2) of the Act of 1990, introduced by amendment by the Act of 1999, prohibits the court from appointing an examiner unless it is satisfied that the company and the whole or part of its undertaking has a reasonable prospect of the survival. In the present case, the case presented related to the company rather than any part. The survival of part only need not be considered.
38. Such confusion as has existed in the cases has arisen from the amendment of section 2. The original, 1990, version postulated that the making of an order “would be likely to facilitate the survival of the company…” It did not speak of “reasonable prospect.”
39. Nonetheless, Lardner J, in the High Court, in his judgment In re Atlantic Magnetics  2 I.R. 561, considered the standard required by the section as it was then worded. Part of his unreported judgment is quoted at page 572 and 573 of the judgment of Finlay C.J. in the Supreme Court in the same case. He said:
41. The amendment of 1999 constitutes a legislative preference for the Lardner J version. It reinstated the word, “reasonable.”
42. McCracken J traced this history in some detail in his judgment in In the matter of Tuskar Resources plc  1 IR 668. He referred both to this change and to the introduction, by the Act of 1999, of the independent accountant, he concluded:
44. It has to be recalled that, at the time of that judgment, the court did not have the benefit of the independent accountant’s report, upon which it is now natural, depending on the standing and expertise of its author, for the court to place particular reliance.
45. I return then to the analysis by McCracken J, in his judgment in In the matter of Tuskar Resources plc. He continued, at page 676 of his judgment as follows:
46. McCracken J was undoubtedly correct to say that there is an onus of proof on the petitioner. However, the statutory requirement is to show that “there is a reasonable prospect of the survival of the company…” A petitioner does not, by getting over that threshold, acquire a right to have an order made. I still think it is fair to say that the section confers a “wide discretion” on the court, or alternatively, that the court should take account of all the circumstances. The establishment of a reasonable prospect of the survival merely triggers the power, which remains discretionary. The view of Lardner J, as expressed In re Atlantic Magnetics could be described as pragmatic: he asked whether it “seems worthwhile to order an investigation by the examiner into the Company’s affairs.” The court has the power to appoint an examiner if satisfied that there is a reasonable prospect of survival of the company.
47. The entire purpose of examinership is to make it possible to rescue companies in difficulty. The protection period is there to facilitate examination of the prospects of rescue. However, that protection may prejudice the interests of some creditors. The court will weigh the existence and degree of any such prejudice in the balance. It will have regard to the report of the independent accountant.
48. The Court has to take account of all relevant interests. The independent accountant must consider whether examinership would be “be more advantageous to the members as a whole and the creditors as a whole than a winding-up of the company…” This does not limit the range of interests to be taken into account by the court under section 2. The interests of employees cannot be excluded. In the case of an insolvent company, it is natural that the creditors will have the greatest interest in the future, if any, of the company. The court will take a balanced approach, as suggested by the reference to the creditors as a whole.
49. The present case is different from all of the cases cited in argument. There is now no opposition from anyone with an interest in the affairs of the company to the making of the order.
50. The evidence suggests that there is a reasonable prospect of survival. The test does not require probability of survival to be established. Investment markets are hazardous markets at present. The company is in an extremely risky business. However, the comparative figures set out in the statement of affairs strongly suggest that liquidation is an even more hazardous alternative than the attempt at rescue by means of the appointment of an examiner. The presence of the combined elements of extremely adverse prospects, especially for unsecured creditors, on liquidation and the absence of any argument of prejudice to creditors or others from examinership persuade me that the order should be made. I am satisfied that the appointment of an examiner is warranted.