CityJet DAC: Clarifying the Best Interests of Creditors Test, Valuation Timing, and Examiner’s Onus in Examinership Confirmations

CityJet DAC: Clarifying the Best Interests of Creditors Test, Valuation Timing, and Examiner’s Onus in Examinership Confirmations

Introduction

In CityJet Designated Activity Company [2025] IEHC 562, Quinn J confirmed a scheme of arrangement under Part 10 of the Companies Act 2014, as amended by the European Union (Preventive Restructuring) Regulations 2022 (SI 380/2022). The case is significant for crystallising how Irish courts will apply the newly codified “best interests of creditors test” drawn from Directive (EU) 2019/1023, for clarifying the temporal point at which the test is assessed, and for re-affirming the court’s approach to the “reasonable prospect of survival” inquiry at the confirmation stage.

The examinership was promoted by the directors of CityJet DAC (“the Company”). The joint examiners, Kieran Wallace and Andrew O’Leary, sought confirmation of proposals that cancelled the existing shareholding of the sole member (SARA) and provided a 2% dividend to unsecured creditors, backed by fresh investment and significant operational supports. The application was supported by the Company, Export Development Canada (EDC), SAS (the Company’s principal customer), and CCS Maintenance APS. It was opposed by the sole shareholder Strategic Alliance of Regional Airlines Limited (“SARA”) and four SARA-affiliated creditors.

Two issues dominated: (1) whether the proposals unfairly prejudiced dissenting creditors and failed the “best interests of creditors test,” primarily through dispute about the liquidation dividend; and (2) whether there was a reasonable prospect of survival under section 541(4A).

Summary of the Judgment

  • The Court confirmed the scheme under section 541, finding that:
    • The proposals met all statutory gating conditions in section 541(3A), including the “best interests of creditors test.”
    • The comparative analysis showed unsecured creditors would receive 2% under the scheme versus an estimated 0.99%–1.74% in a liquidation (even on many of SARA’s figures), thereby satisfying the test.
    • There was a reasonable prospect of survival of the Company and its undertaking, and the proposals would facilitate that survival (section 541(4A)).
    • New financing was necessary and not unfairly prejudicial.
  • Key valuation findings:
    • The Court fixed the comparison as of the date of the proposals, while accepting the relevance of later evidence to inform that assessment.
    • The Court preferred the aviation inventory appraisal of AAMI (OLV €545,646) over GECI’s desktop valuation (€1.76m) due to credentials, methodology, and evidential form.
    • Trade receivables were limited by insolvency set-off vis-à-vis SAS/Lufthansa; recoverables from other debtors and foreign VAT were included on a conservative basis.
  • On survival:
    • Modest equity (€750k) was complemented by a €2.45m working capital facility and committed operational/price supports aggregating c. €30m over 3.25 years and one-off working capital supports of €11.8m.
    • SAS confirmed a three-aircraft expansion (to 15), an additional contract value of c. €80m, pricing uplifts (c. €14.79m over 3.25 years), and immediate supports (€1.5m). EDC and Lufthansa also provided supports.
    • Substantial cost savings were evidenced through replacement of SARA-group maintenance/services, staff restructuring, and supply chain arrangements.
  • Employment: the Court leaned in favour of confirmation given the preservation of a substantial proportion of jobs (Re Traffic Group Ltd).

Key Holdings and Doctrinal Clarifications

  • Best interests of creditors test:
    • Substantive onus: It is for the examiner to persuade the court that the test is satisfied (reaffirming Re McInerney Homes; Re Arctic Aviation Assets DAC).
    • Temporal anchor: The test is assessed as of the date of the proposals, though courts can have regard to later evidence adduced under section 543(1B)–(1C).
    • Practical focus: In the absence of “next best alternative” evidence, the comparison may focus on liquidation dividends, but parties should ideally address going-concern sale or alternative scenarios envisaged by the Directive.
  • Valuation under section 543(1A):
    • Although the statute speaks to valuing the “Company’s business,” the Court acknowledged the evidence focused on assets/liabilities; it nonetheless decided the valuation dispute on that narrower basis.
    • Expert evidence will be weighed on credentials, methodology, transparency, and evidential form (affidavit adoption matters).
  • Reasonable prospect of survival (section 541(4A)):
    • The 2022 Regulations did not dilute the Tivway/Tony Gray principle: the court must be satisfied both that survival is reasonably likely and that the proposals will facilitate it.

Analysis

Statutory Framework Post-Directive

The decision is a practical roadmap for the amended examinership regime following SI 380/2022, which transposed Directive (EU) 2019/1023:

  • Section 539: Content requirements for proposals, including a statement explaining why they “provide a reasonable prospect of facilitating survival” (s.539(1)(ea)) and an estimated liquidation outcome for each class (s.539(3)).
  • Section 541: Confirmation criteria, notably s.541(3A)(e)’s “best interests of creditors test” and s.541(4A)’s survival threshold.
  • Section 543: Objection grounds and the court’s duty to take a “decision on valuation” when unfair prejudice or best-interests objections are raised.

Quinn J methodically applied these provisions, while integrating pre-existing jurisprudence to ensure continuity in principles such as onus, fairness, and the survival inquiry.

Precedents Cited and Their Influence

  • Re McInerney Homes Ltd [2011] IEHC 4; [2011] IESC 31 and Re SIAC Construction Ltd [2014] IESC 25:
    • Traditionally anchored the unfair prejudice analysis in a liquidation comparison. The Court acknowledged that the Regulations refine this via the best-interests test, but the liquidation comparison remains central absent competing “next best alternative” evidence.
  • Re Tivway Ltd [2010] IESC 11 and Re Tony Gray & Sons Ltd [2009] IEHC 557:
    • Confirmed that courts should only approve where there is a reasonable prospect of survival and the scheme will facilitate it. CityJet affirms this approach post-Directive.
  • Re Arctic Aviation Assets DAC [2021] IEHC 272:
    • Supports the proposition that the proponent must satisfy the court on the confirmation tests, including fairness/best interests.
  • Re Traffic Group Ltd [2008] 3 IR 253:
    • Emphasises the public-interest dimension of preserving viable enterprises and jobs; applied here to weigh preservation of employment in the discretionary balance.
  • RAS Medical Ltd v Royal College of Surgeons in Ireland [2019] IESC 4:
    • Admissibility guidance for expert materials. While the Court noted concerns about the form of a report (GECI), the urgency and the parties’ engagement with its contents led the Court to consider it, but accorded it less weight than the AAMI report adopted on affidavit.

Legal Reasoning: Best Interests, Valuation, and Onus

The “best interests of creditors test” is defined (by reference to the Directive) to ensure that no dissenting creditor is worse off under the plan than in liquidation or the “next best alternative.” All evidence and submissions in CityJet coalesced around a liquidation comparison.

The Court:

  • Reaffirmed the onus on the examiner to demonstrate compliance with s.541(3A)(e), rejecting a view that the objector must prove failure merely because s.543 lists the grounds of objection.
  • Fixed the appropriate assessment date at the date of the proposals, while allowing later expert evidence (under s.543) to inform the earlier estimate.
  • Made a valuation decision under s.543(1A) notwithstanding the statutory reference to the “Company’s business,” on the basis that the parties’ evidential focus was on asset/liability values and comparative dividends.

On the core quantitative dispute, the Court preferred AAMI’s inventory valuation (OLV c. €545,646; FLV c. €363,478) over GECI’s €1.76m, citing:

  • Credentials and professional standards of AAMI’s appraiser (affidavit evidence).
  • Transparent methodology (market/sales comparison approach; sector data; OLV/FLV distinctions).
  • Lack of substantiated critique or cross-examination undermining AAMI.
  • Implausibility of GECI’s valuation exceeding net book value in a liquidation scenario.

The Court accepted limited recoveries for trade receivables due to insolvency set-off with SAS/Lufthansa and included conservative amounts for other debtors/foreign VAT. Even taking many of SARA’s other figures (lower unsecured total of c. €68m; original examinership/liquidation costs), the Court found the liquidation dividend topped out at c. 1.74%—below the scheme’s 2%. The test was therefore met.

Reasonable Prospect of Survival

CityJet’s survival case did not rely on headline equity (which was modest) but on a package of:

  • Investment and liquidity: €750k equity plus a €2.45m working capital facility; escrowed funds as evidence of commitment.
  • Operational/price supports and cost relief:
    • SAS: increased fleet to 15 aircraft; pricing uplift over 3.25 years (€14.79m); immediate €1.5m support; expanded contract value of c. €80m.
    • EIC (Minority Investor)/Regional One: engine rental reductions (€8.125m over 3.25 years), spares support (€3.25m over 3.25 years).
    • EDC and Lufthansa: one-off working capital supports (EDC €7m; Lufthansa €0.8m).
    • Replacement of SARA-group maintenance/services with contracted third parties, priced per-event, alongside in-house efficiencies and workforce restructuring.
  • Revenue visibility: SAS contract credibility, verified by SAS affidavit and correspondence; per-aircraft profitability explained; annual revenue projections (e.g., c. €128m in 2026) consistent with business plan cash flows.

Applying Tivway/Tony Gray, the Court was satisfied that survival was reasonably likely and that the proposals would facilitate it. The Court also considered employment preservation, favouring confirmation.

Unfair Prejudice and Shareholder Complaints

SARA’s shareholder unfair prejudice complaint (arising from cancellation of its equity) was not ultimately pursued. The Court nonetheless noted the Company’s insolvency, the normality of equity wipe-out in restructurings, and the absence of SAS as an investor (undercutting allegations of a “hostile takeover”). Connected-creditor treatment (extinguishment of CityJet AS debt) was openly disclosed and consented.

Procedural and Evidential Points of Practice

  • Appendix 4 must be robust. The Court noted that a simple percentage of NBV for inventory was inadequate and ultimately replaced by expert valuation evidence.
  • Expert reports should be put in proper evidential form (adopted on affidavit; credentials disclosed). AAMI’s formal affidavit carried weight; GECI’s attachment did not.
  • The Court will consider later evidence under s.543, but the comparison is anchored to the proposal date to avoid a “moving target.”
  • Where “best interests” or “unfair prejudice” are raised, parties should, where feasible, provide evidence of:
    • Liquidation dividend estimate (assets, liabilities, costs);
    • Going-concern sale outcomes and any “next best alternative”; and
    • Value of the “business” (not just assets/liabilities) to better align with the statutory language in s.543(1A).

Impact and Implications

CityJet provides much-needed clarity for post-Directive examinership confirmations:

  • Best interests test:
    • Onus lies with the examiner; objectors need not prove failure.
    • Assessment date is the date of proposals; later evidence can inform the analysis but does not shift the temporal anchor.
    • Liquidation comparison alone may suffice where no cogent “next best alternative” is advanced—but parties should expect courts to welcome such evidence.
  • Valuation practice:
    • Courts will prefer transparent, credentialed, and affidavit-backed expert valuations.
    • Net book value is a ceiling, not a floor, in liquidation contexts; claims of realisations above NBV require compelling market evidence.
  • Survival analysis:
    • Modest equity can suffice if accompanied by credible operating supports, customer commitments, and verified cost savings.
    • Customer endorsements (here, SAS) are probative where they translate into revenue visibility and cash support.
  • Procedural discipline:
    • Examiners should ensure s.539 materials are not skeletal—especially the s.539(1)(ea) “statement of reasons” on survival.
    • Appendix 4 should be evidence-based from the outset; where possible, deploy expert valuations early and anticipate set-off effects on receivables.

For creditors, the decision underscores that a small scheme dividend can still pass the test if supported by realistic liquidation modelling. For shareholders in insolvent companies, CityJet reiterates that equity cancellation is not unfair where necessary to attract rescue capital and where creditors benefit overall.

Complex Concepts Simplified

  • Examinership: A court-supervised rescue process enabling an insolvent but potentially viable company to restructure debts and attract investment while protected from creditor enforcement.
  • Best interests of creditors test: No dissenting creditor should be worse off under the scheme than in a liquidation or next best alternative (e.g., going-concern sale). Practically, this often means comparing expected dividends.
  • Unfair prejudice: A scheme must not treat a creditor or member in a way that is unjust or disproportionate, having regard to the statutory priorities and the alternative outcomes.
  • OLV/FLV:
    • Orderly Liquidation Value (OLV): What assets might fetch in a reasoned sale over a longer window (e.g., 12 months), often higher than a forced sale.
    • Forced Liquidation Value (FLV): What assets might fetch in a rapid sale (e.g., 6 months), typically lower.
  • Insolvency set-off: In liquidation, mutual debts between the company and a creditor are netted off automatically, reducing gross receivable balances that can be collected.
  • ACMI/wet lease: A contract where an airline provides aircraft, crew, maintenance, and insurance, while the customer airline manages fuel and operational charges.

Conclusion

CityJet DAC is a foundational confirmation decision in the post-Directive era of Irish examinership. It clarifies that:

  • The examiner bears the onus of proving the “best interests of creditors test.”
  • The comparative assessment is anchored to the date of the proposals, even though courts may consider later expert evidence under section 543.
  • Valuation disputes will be resolved on the strength of credentials, methodology, and evidential robustness; courts are sceptical of liquidation realisations exceeding net book value absent compelling proof.
  • The traditional survival inquiry persists notwithstanding section 541(4A), and credible customer commitments and cost restructurings can carry the day even with modest equity.

Doctrinally, the judgment retools established unfair prejudice principles to the Directive’s “best interests” lexicon, provides practical guidance on valuation timing and methodology, and reinforces the centrality of realistic, evidence-based modelling. Practically, it signals that where a scheme offers even a marginally better return than liquidation—supported by credible valuations and a plausible survival pathway—confirmation will follow, particularly where jobs are preserved and key counterparties, like SAS here, anchor the business case.

Case Details

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