Mc Inerney Homes & Ors v Companies Acts

Factual and Procedural Background

The case concerns multiple companies ("the Companies") undergoing examinership under the Companies (Amendment) Act 1990 ("the 1990 Act"). The Companies successfully applied for the appointment of an examiner despite opposition from a banking syndicate comprising three banks ("the Banking Syndicate"). The examiner produced a report proposing a scheme of arrangement, which the Banking Syndicate opposed. A hearing was held to determine whether the court should confirm, confirm subject to modifications, or refuse to confirm the proposed scheme. The Revenue Commissioners also opposed one aspect of the scheme, but their objection was not material to the core issues. The examinership of some companies named in the proceedings had been terminated prior to the hearing, so the proposals under consideration related solely to two companies ("Company A" and "Company B"). The central issue was whether the Banking Syndicate's objection was sufficient to refuse confirmation of the scheme.

Legal Issues Presented

1. Whether the court has jurisdiction under the 1990 Act to approve a scheme of arrangement that imposes a reduction on the amount due to secured creditors.
2. If such jurisdiction exists, whether the proposed scheme is unfairly prejudicial to the Banking Syndicate.
3. What criteria should be applied to determine unfair prejudice to secured creditors under a scheme of arrangement.
4. How the court should approach conflicting expert evidence presented on affidavit without cross-examination in assessing prejudice.
5. Whether, on the facts, the scheme is unfairly prejudicial to the Banking Syndicate.

Arguments of the Parties

Banking Syndicate's Arguments

• Contended that the court lacks jurisdiction under the 1990 Act to approve a scheme that reduces the amount owed to secured creditors.
• Argued that even if jurisdiction exists, the proposed scheme is unfairly prejudicial to them as secured creditors.
• Presented expert evidence projecting that under a receivership model, the Banking Syndicate could expect to receive a significantly higher return (equivalent to approximately €50,000,000) compared to the €25,000,000 proposed under the scheme.
• Asserted that the scheme’s significant write-down of debt is unjustified given the potential returns under receivership.
• Maintained that discounts on sales prices by receivership would be minimal due to the intended involvement of a special purpose vehicle providing typical warranties and assurances to purchasers.
• Included a cash flow figure of approximately €22,000,000 described as "release of work in progress" in their projections, which they argued was appropriately included.
• Contended that the risk of de-zoning and planning difficulties was adequately accounted for in their expert valuations.

Company A and Company B's Arguments

• Argued that the court does have jurisdiction under the 1990 Act to approve schemes that reduce amounts owed to secured creditors.
• Contended that the scheme is not unfairly prejudicial to the Banking Syndicate.
• Challenged the Banking Syndicate’s projections on several grounds, including:
• Expected sales prices under receivership would be lower due to purchasers’ reluctance to buy from receivers, justifying a discount of 5-10%.
• Construction costs under receivership would be higher than projected by the Banking Syndicate’s experts.
• The inclusion of the €22,000,000 work in progress figure was exaggerated and not supported by the independent valuation chart.
• Risk of de-zoning and planning difficulties would be more severe than accounted for by the Banking Syndicate.
• Argued that the discount rate used by the Banking Syndicate to value future income streams was too low, and a more appropriate rate would reduce the present value of the receivership model to below the scheme offer.
• Highlighted the lack of cross-examination of expert witnesses, undermining the reliability of the Banking Syndicate’s projections.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Re McInerney Homes Limited & Ors [2010] IEHC 340	Appointment of examiner despite opposition from secured creditors.	Referenced as prior decision authorizing examinership despite opposition.
Re Colonia Insurance (Ireland) Ltd [2005] 1 IR 497	Fairness and equity considerations in court approval of schemes under s. 201.	Used to illustrate the court’s approach to fairness in schemes affecting secured creditors.
In Re Empire Mining Co [1890] 44 Ch. D. 402	Secured creditors can be bound by a majority vote in schemes under s. 201.	Supported the proposition that secured creditors are creditors for scheme purposes.
In Re Alabama, New Orleans, Texas and Pacific Junction Railway Co [1891] 1 Ch. 213	Similar to Empire Mining; secured creditors may be bound by scheme.	Reinforced interpretation of secured creditor status in schemes.
In Re Madras Irrigation Company [1891] 1 Ch. 228	Further support for binding secured creditors under schemes.	Confirmed secured creditor status as creditor with security.
Re P&N Ltd & Ors and the Insolvency Act [2004] EWHC 2361 (Ch)	Application of jurisprudence on binding secured creditors in schemes.	Demonstrated continuing relevance of historic case law in modern insolvency context.
Re Lehman Brothers International (Europe) (In administration) (No.2) [2009] EWCA Civ 1161	Secured creditors are creditors for scheme jurisdiction purposes.	Confirmed principle that secured creditor status does not exclude them from scheme jurisdiction.
In Re Atlantic Magnetics Ltd [1993] 2 I.R. 561	Legislative intent protecting company from control by large creditors.	Supported interpretation of 1990 Act allowing court to protect interests beyond secured creditors.
In Re Holidair Ltd [1994] ILRM 481	Approval of comments in Atlantic Magnetics regarding creditor protection.	Endorsed legislative purpose of examinership process.
Boliden Tara Mines v. Cosgrove [2010] IESC 62	Requirement for cross-examination where evidence is presented on affidavit.	Applied to highlight evidentiary limitations in assessing conflicting expert evidence.
In Re Laragan Developments Ltd [2009] IEHC 390	Consideration of creditor benefit from liquidation versus scheme.	Used as an analogy for assessing prospects of creditor advantage in insolvency scenarios.

Court's Reasoning and Analysis

The court first addressed the jurisdictional question under the 1990 Act and concluded that the court does have jurisdiction to approve a scheme of arrangement that reduces the amount owed to secured creditors, provided the scheme complies with statutory requirements including fairness and absence of unfair prejudice. The court drew analogies with s. 201 of the Companies Act 1963 and related English case law, which established that secured creditors remain creditors for the purposes of schemes and may be bound by such schemes if fair.

The court emphasized that secured creditor status must be considered in assessing fairness and prejudice, but it does not negate the court’s jurisdiction to approve a scheme reducing secured debt. The court rejected the argument that an express provision was required to permit such reduction, finding that the absence of an express exclusion implied jurisdiction.

On the criteria for unfair prejudice, the court noted the statutory requirements that proposals be fair and equitable and not unfairly prejudicial to any interested party. The court recognized the importance of comparing the position of the creditor under the scheme to the likely position under alternative insolvency processes, such as receivership or liquidation. Significant disparity disadvantaging a creditor under the scheme compared to alternatives may constitute unfair prejudice.

The court then analyzed the competing expert evidence on the expected returns to the Banking Syndicate under the scheme versus a receivership model. The Banking Syndicate projected a significantly higher return under receivership. The Companies disputed these projections on grounds including sales price discounts, construction costs, inclusion of work in progress, and risks of de-zoning.

The court highlighted the evidentiary difficulty arising from conflicting expert affidavits without cross-examination, referencing the Supreme Court’s decision in Boliden Tara Mines v. Cosgrove which underscores the limitations of affidavit evidence alone in resolving factual disputes. The court acknowledged that while it could rely on uncontradicted evidence, it could not definitively resolve conflicts without cross-examination.

Despite these evidentiary limitations, the court found that the Banking Syndicate had established a credible basis for its projections and that the criticisms raised by the Companies could not be conclusively accepted. The court also considered the discount rate applied to future income streams, noting significant disagreement among experts and concluding that the Banking Syndicate’s approach was credible but not definitively correct.

Overall, the court concluded that the Banking Syndicate had a realistic prospect of achieving a better outcome under the receivership model than under the proposed scheme. This credible prospect of better recovery, absent countervailing factors, led the court to find the scheme unfairly prejudicial to the Banking Syndicate.

The court also noted the significant reduction in the amount offered to the Banking Syndicate compared to earlier negotiations, which while not determinative, underscored the disparity in outcomes. The court declined to address the Revenue Commissioners’ objection on principle, as it was moot given the refusal to confirm the scheme.

Holding and Implications

The court’s final decision was to REFUSE TO CONFIRM the proposed scheme of arrangement.

This refusal means that the scheme cannot proceed as proposed and that the Banking Syndicate will not be bound by the reduced payment arrangement. The decision directly affects the parties by maintaining the status quo pending further proceedings or alternative resolutions. The court did not establish new precedent but applied existing principles regarding the jurisdiction to bind secured creditors and the assessment of unfair prejudice in schemes under the 1990 Act.