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Judgment Title: Kilashee Schools Company Ltd & ors & Companies Acts Neutral Citation: [2014] IEHC 275 High Court Record Number: 2014/225 COS 2014/226 COS 2014/227 COS 2014/228 COS Date of Delivery: 09/05/2014 Court: High Court Composition of Court: Judgment by: Charleton J. Status of Judgment: Approved |
Neutral Citation: [2014] IEHC 275 The High Court Commercial Record numbers: 2014/225 COS 2014/226 COS 2014/227 COS 2014/228 COS In the Matter of
the Companies (Amendment) Act 1990 as amended And in the Matter of Kilashee Schools Company Limited Faxhill Homes Limited Craigfort Taverns Limited Marchford Limited Judgment of Mr Justice Peter Charleton delivered on the 9th day of May 2014 These are applications under the Companies (Amendment) Act 1990 to appoint an examiner to these four related companies, Kilashee, Faxhill, Craigfort and Marchford. The Revenue Commissioners have appeared and offered no opposition in respect of any company. National Assets Loan Management Limited opposes the appointment of an examiner to Faxhill. An interim examiner is already in place for Craigfort and Marchford but not for Faxhill or Kilashee; though there is no opposition to appointing an examiner to Kilashee. Under the Act of 1990, creditors and members are entitled to oppose the appointment of an examiner. Here the interest of the opponent comes from it managing a loan to Faxhill originally made by AIB Bank plc which was taken over by the National Assets Management Agency following the banking crisis of 2008. The dimensions of the loan are disputed but the probability is that it is in the sum of €77 million. It was made directly to Faxhill. This is a property development company. It also owns the shares in the other companies, directly or through intermediary companies. Kilashee, Craigfort and Marchford guarantee these loans. In addition these companies may have mortgage obligations, though these do not require analysis in this judgment. There has been some discussion as to whether the objector has behaved reasonably in managing the loan and guarantee obligations. This has been brought into the case by way of argument as to the discretion of the Court should a case for the survival of some or all of the companies be made out. In so far as it is necessary to express a view on the limited evidence before the Court, the debt obligations appear to have been managed reasonably by the objector. Issues as to planning permission, unauthorised expenditure of funds and proper communication by the borrower Faxhill with the objector have also been debated. It is clear, however, that any issue as to discretion is minor compared to the difficult issue as whether an examiner should be appointed to any of the companies but particularly to Faxhill. The central question is the extent to which a company may bring down another in a group through debts or be saved through having an examiner appointed to a related company. Here the company most challenged by debt is Faxhill. In that company’s case there is no chance of any write down, but the corporate guarantees of Kilashee, Craigfort and Marchford may potentially be the subject of a scheme of arrangement. Often, guarantees of a company’s debts are by directors and authorising a scheme of arrangement following on examination of a company has no effect on those personal obligations. This may be different because the guarantors are corporate. But, that is for another day. A brief explanation of how these companies interact is called for. Faxhill has two directors and shareholders. Kilashee, Craigfort or Marchford share the same directors. There are no shareholders in those companies save for Faxhill or its corporate nominees. Faxhill also employs a chief financial officer who oversees the companies as a group and the management structures of Faxhill are claimed to be supplied to the other companies from it; this despite the directors of all the companies being the same two people. There are valuable assets in the various companies. Faxhill holds a property portfolio and part of that portfolio is shares in the other companies and their assets. Central to all of this is the Kilashee House Hotel and Spa. This hotel is in a beautiful location between Kilcullen and Naas in County Kildare. In Naas town there is a related establishment called Lawlor’s Hotel, an urban hotel controlled by Marchford. The landowning of the Kilashee hotel and surrounding grounds is complex. This map assists in understanding it: The Kilashee hotel is on land owned by Craigfort and this amounts to about 15 acres; deep blue. Craigfort also runs the hotel and employs about 182 staff in that regard. Close by are lands used by the hotel to draw water from wells and for car parking and for quiet walks by guests and this is in the ownership of Kilashee and the area here is about 25 acres; light blue. So 40 acres in all are in use by the hotel through Craigfort and Kilashee. Contiguous and to the East are 223 acres of agricultural land which has planning permission for a golf course, about 90 acres, and the rest housing developments and this is in the ownership of Faxhill; white colour. In addition and completely seperatly, Faxhill holds two further sites and three residences in its property portfolio: a site at Dublin Road in Naas; 3.5 acres near Newbridge in County Kildare; a nice mews house at Morehampton Lane in Donnybrook; a partially completed residence in Athgarvan in County Kildare; and a 4 bedroom dwelling on Dublin Road in Naas. There has been an expression of interest dated 28th April 2014 in this portfolio but with no figures crystallising at this point. Finally, to complete the employment picture, Lawlor’s Hotel in Naas employs just over 60 people who take their contracts from Marchford and Faxhill employs the group managing director and the group financial officer; just 2 people. Appointment of an examiner
(a) a company is or is likely to be unable to pay its debts, and (b) no notice of a resolution for the winding-up of the company has been given under section 252 of the Principal Act more than 7 days before the application hereinafter referred to, 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. Prior to the Companies (Amendment)(No 2) Act 1999, the task of the courts in deciding whether a company had a prospect of survival was a difficult one, dependant as the courts solely were on the candour of petitioning affidavits, usually from directors or investors. Key provisions were then introduced into the Act of 1990 whereby section 3 was amended by the introduction of two additional subsections 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.
Related company Here, the companies are related but the biggest debt rests with Faxhill but without any substantial prospect of being dealt with so as to enable that company to survive. As regards the other there, the corporate cross guarantees seem to hold out at least some prospect of a debt write down being considered. Re Tivway Limited [2010] 3 IR 49, makes it clear that an examiner may be appointed to a mere holding company. But, in that case the Supreme Court made it clear that the circumstances whereby a holding company came under examination may be adjudged to have a reasonable prospect of survival must be dependant on a precise factual examination of the circumstances as to the survival of the holding company as a trading entity and its interrelationship with the other companies to which it is related. Thus, it is appropriate to quote paragraphs 60-64:
61. The Court was provided with a diagram of the Fleming Group, which showed the position of the three companies within the group. In this case and similar situations it is necessary to consider the three companies and not a holding company in isolation. I am satisfied that the Court has jurisdiction to admit a holding company, a related company, to examinership, to enable companies in a group obtain the protection of the court - if they comply with the Act of 1990. However, the position of a holding company is dependent upon whether the Court is satisfied that there is a reasonable prospect of survival of the related companies as a going concern. Thus in this case the issue is whether the Court is satisfied that under the proposed Schemes of Arrangement that there is a reasonable prospect of the survival of Construction and/or Tivway as a going concern. If there is, then Holdings may also proceed in examinership. 62. The position in which Construction would be left has been described earlier in this judgment. The engine of the company is to be sold. The dormant property aspect of the company is to remain. 63. Tivway owns the shell Sentinel Building and two thirds of the Aldi site. The Court was referred to a letter of the 16th December, 2009, issued while this appeal was at hearing. Reference was made to the letter earlier in this judgment. Stress was laid on the fact that it showed the support of Anglo Irish Bank for the scheme. However, when one considers what the letter proposes, it may be seen that capital of €361,943 was approved by the bank. But what for? It was to fund site security, insurances and overheads. These are clearly costs relating to the maintaining of a site. They do not relate to any build out - or any operational work - or any evidence of the company operating as a going concern. The sum sought in relation to planning consultant fees, while approved in principle, requires detailed submissions (when the need for funds arises) in respect of each planning permission intended to be sought. This letter illustrates a holding situation - maintaining a site - with an aspiration or dream of future business - not a company operating as a going concern. 64. It was contended on behalf of the examiner that under examinership, and the protection from its creditors which that would provide, the companies in question would survive as a going concern insofar as they would over a period of two years or so benefit from the sale of completed units, continue to receive rental income and be engaged in the maintenance and care of existing properties. Such business activity, it was submitted, was sufficient to constitute ‘a going concern’ within the meaning of the Act of 1990. However, sales over a limited period would be of minimal value in relation to the liabilities and activities of the companies and any rental income must be applied towards outstanding interest. Thus the so called business activity of the companies would be essentially passive; they would remain insolvent but protected by the examinership. The low level business activity referred to would not alter the fundamental character of the proposed schemes of arrangement as providing no more than a holding position over a long period pending the resurgence of the property market when and if that occurs. Accordingly the very limited and passive business activity in which it is claimed that the companies could engage during an examinership would not alter its fundamental characteristics which I have described so as to mean that it was surviving as a going concern. 65. The Schemes of Arrangement in this case envisage a holding plan, the continued survival of the companies, who would continue insolvent. As ACC submitted, correctly in my view, the companies would be effectively dormant. Also, any future business in Tivway and Construction would be entirely dependent on future decisions of the banks.
56. On the facts of this application, in addition to holding shares in the subsidiary, there is a debt in the holding company to the Bank and the only potential source of income in Merrow for its discharge is the payment by The Belohn of what is described as a “management charge” and the prospect of a dividend if The Belohn were to become profitable. However this does not appear to me to change the approach indicated by the Supreme Court in Re Tivway Ltd. 57. For the purposes of s. 4(2) the court must be satisfied that there is a reasonable prospect of the survival of the Merrow as the holding company of The Belohn as a going concern. I am so satisfied because I am satisfied that there is a reasonable prospect of survival of the subsidiary company, The Belohn, as a going concern. I also consider that the appointment of Mr O’Keefe as examiner to Merrow is likely to facilitate the survival of The Belohn. The introduction of a new investor for the purposes of a scheme of arrangement in The Belohn may require changes to shareholdings. Further the relationship between The Belohn, Merrow and their liabilities to the Bank are so intertwined that it is desirable, in seeking to propose a scheme of arrangement in The Belohn acceptable to the Bank, that Mr O’Keefe be in a position to examine the affairs of both companies. General considerations In considering the appointment of an examiner, the court is exercising the same test as ultimately will determine whether a scheme of arrangement is to be sanctioned; which is the last stage of the examination process under the Act of 1990. At that ultimate stage, however, the addition of fairness to creditors following on the statutory meeting and approval, in part at least, of the scheme comes into play. The difference, however, can be stark since at this early stage of considering the appointment of an examiner, the court is considering a somewhat less wide ranging test in the context only of what information an independent accountant can supply, together with any affidavit in support of the petition, and sometimes perhaps a report from an interim examiner if appointed, as to the potential viability of a company in whole or in part. That test for appointing an examiner is dependant on the same criterion set out in section 2, as for later approval of a scheme of arrangement, and carries the self-same discretion, but the decision to continue the protection of the court automatic on the valid presentation of a petition through the appointment of an examiner also enables a genuine scrutiny to be conducted over the company and of its prospects for survival. This remains so notwithstanding that the introduction of the requirement of an independent accountant’s report in 1999 brought more information to bear on the task of the court. It therefore means that an informed decision can be reached at this stage and not only, as some of the pre-1999 decisions put it, only when the examiner had been in place for some weeks; see the judgment of the Supreme Court in In the matter of Tuskar Resources plc [2001] 1 IR 668 While the court has to be satisfied as to the prospects of survival, this statutory imperative is not a requirement to show that a company will probably survive as to the whole or any part of its undertaking. As McCracken J put the issue in Tuskar Resources at page 676:
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. These companies What is immediately clear, however, is that this branch of the National Assets Management Agency has supported the hotel enterprise and cooperated with the management in a way that has preserved employment and which, on the figures presented, has resulted in slight but definite upturn in turnover from the market falls apparent from 2009. The relevant figures for Craigfort show turnover in this rural hotel of €13.1 million in 2008, €10.2 million in 2009, €8.2 million in 2010, €8.1 million in 2011, €8.8 million in 2012 and €9.6 million in 2013. The case law does not preclude the court from reaching a preliminary decision that reasonable prospects for survival have been shown in relation to Craigfort and Kilashee. Further, with the appointment of an examiner, or in the case of Kilashee the continuation of the interim examiner, more will be known. What matters is that at this stage there are shown to be reasonable grounds for deducing that these companies can survive to the benefit of the community and of employment as a going concern. Any question as to restructuring can only be considered at a later stage. The Court also has the comfort that the involvement of the National Assets Management Agency. This yields the likely result that the figures presented in the independent accountant’s reports for these companies are based on management figures that are not likely to be anything other than objective. In the case of Marchford, the operating accounts of Lawlor’s Hotel has thrown up a similar pattern of figures in terms of turnover to that of Craigfort and of Kilashee; a massive fall that has been succeeded by a good start at recovery. But, again, the problems are the same, centring on the guarantee in respect of the massive debt of Faxhill. But as a trading enterprise the Lawlor’s Hotel in Naas is shown to be doing well. In part, this may be due to spill-over business from the related hotel in Killashee or it may be due to its proximity to Dublin. Again, the management accounts are likely to have been similarly scrutinised. The projections based upon current trends again show a slight upward curve following falls in turnover over four years. The relevant figures show turnover for this urban hotel of €3.8 million in 2008, €3 million in 2009, €2.6 million in 2010, €2.3 million in 2011, €2.7 million in 2012 and €3.2 million in 2013. Of themselves the figures are becoming increasingly healthy, but the wider issue remains that of the debt. Problems have emerged in relation to fire certificates for some of the bedrooms. This is an issue which the interim examiner must take very seriously. In the event that the bridge solution installed by the current management is found to fire compliant, every effort must be made to examine the premises from an objective point of view and to secure retention permission through honest interaction with the planning authority. The appointment of an examiner is therefore appropriate in relation to Marchford. Turning to Faxhill, the prospects for the survival of that company are very small without it being saved through the services it provides to Craigfort, Kilashee and Marchford. The crucial issue is the degree of interdependence between that company and the three others. That interdependence is not immediately apparent. There is nothing to indicate that any reasonable prospect for the survival of the Killashee House Hotel and Spa depends upon it becoming yet another golf resort. The contiguous land that belongs to Faxhill is doubtless heavily charged in relation to that company’s debts. Further, in the event that there is interest in investing in that hotel, the affidavit supporting the petition indicates that the company “has been for some time agreeable for the disposal of surplus property assets”. In the event that an investor sees prospects of returning that hotel to the turnover levels equivalent to 2008 and better only through investment in a golf course, it is apparent that there is nothing to stop the purchase of contiguous land. That case is, in any event, more than difficult to make as a probability because the plans for a golf course have been put on hold. These are not likely to be revived in the current state of oversupply for golf amateurs in the Dublin area. Even were that not to be so, the case is not convincingly made that only by having Faxhill in examinership will there be interest in investing in the nearby hotel. Then it is said that management expertise is available to Craigfort and Kilashee only through Faxhill. Again, that case is not convincingly made. The companies have co directors. The chief financial officer employed on a group basis by Faxhill has requested to leave but has stayed on and there is an issue in relation to his entitlement to an earned sum upon retirement. On this no comment is made. Faxhill only employs 2 staff, being the group managing director and the financial officer. Whereas it is claimed that this company is “inextricably linked to the management of the [other] companies and the success of the hotel business”, this is not demonstrated. Faxhill is, in reality, a property holding company. It is very difficult to make the case at any stage since the end of 2008 that a property holding and development company in Ireland is an enterprise which exists for the benefit of the economy in terms of jobs and the independent expenditure of funds to meet its needs. Its debts are huge. Its assets, even at the most optimistic valuation, account for perhaps 10% asset to debt ratio, but more likely 5%, given that inter company loans have not been shown to be supported by structures that make them preferential in any scheme of arrangement for Craigfort, Kilashee or Marchford. It is claimed that the directors of Faxhill are the face of the Kilashee House Hotel and Spa. That may be so. There is nothing, however, to stop the examiner seeking the services of any of the employees of Faxhill on the open market. Further, as directors of each of the other companies, apart from the chief financial officer who is an employee, duties of care and fidelity are owed by these directors to each of the companies which are stringent in the context of more recent amendments to the code of company law. These cast older authorities on the lackadaisical nature of directors’ duties into considerable doubt. An example of this is Re Brazilian Rubber Plantations and Estates Ltd [1911] Ch. 425 at 437, where Neville J memorably stated in a person may enter the business of a rubber company “in complete ignorance of everything connected with rubber, without incurring responsibility for the mistakes which may result from such ignorance”. That can no longer be considered to be indicative of the duties of company directors. The common directors of Faxhill, Craigfort, Marchford and Kilashee, owe to each of those companies a duty of care and fidelity. Considering Faxhill entirely independently of the other three companies is possible because, unlike in the case of Re Vantive Holdings, that exercise is possible. Furthermore, even if considered as a related company, section 4 of the Act of 1990 requires the court to consider whether Faxhill has any reasonable prospect of survival in whole or in part as a going concern. This is so were Faxhill merely to be considered as a related company and not, as here, through a separate petition. As a company, at the present time Faxhill is not developing any property but is merely holding property pending an upswing in the market which if it is like that of the years 2000-2008 will not at all be to the benefit of the Irish economy. In the medium term, there are prospects for selling some of the assets of Faxhill but those prospects cannot expect to realise anything close to the value of the loans. Nor could it genuinely be claimed that Faxhill is a company that operates in the marketplace supplying expertise in hotel management through its 2 employees. There is no doubt that these employees have a wealth of experience that would considerably benefit the two hotels in question here. Nothing in the paper suggests, however, that this expertise would not be otherwise available on the open market for a reasonable consideration or that it is so tied into Faxhill that it cannot be unlinked from it. Result |
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