Ina's Kitchen Desserts Ltd v The companies Act 2014

• Jurisdiction: Ireland
• Judge: Mr. Justice Quinn
• Judgment Date: 09 December 2020
• Neutral Citation: [2020] IEHC 644
• Docket Number: 2020/344 COS
• Court: High Court
• Date: 09 December 2020

IN THE MATTER OF INA'S KITCHEN DESSERTS LIMITED

AND

IN THE MATTER OF THE COMPANIES ACT 2014

[2020] IEHC 644

Quinn

2020/344 COS

THE HIGH COURT

Petition – Appointment of examiner – Remedy – Petitioner seeking the appointment of an examiner to the Company – Whether the appointment of an examiner was an appropriate remedy

Facts: Ina’s Kitchen Desserts Ltd (the Company) was established by Mrs Broderick and her husband, Mr M Broderick, in 1994. In February 2019, the shareholding of the Broderick family was reduced from 100% to 25%. The petitioner, Mr B Broderick, as the holder of 10.45% of the ordinary shares in the Company, presented a petition for the appointment of an examiner to the Company on 30 October, 2020. The petition was opposed by the Company and its majority shareholder Starkane Ltd, which held 75% of the ordinary shares and was its largest creditor. The remaining 14.55% of the ordinary shares were held by the petitioner’s brother and parents. The petitioner said that they supported the petition. The Company and Starkane oppose the petition for the following reasons: (1) the Company is not insolvent because it is able to meet its debts as they fall due; (2) the Company is not in default of any of its payment terms with creditors and there is no “emergency insolvency event such as would trigger the appointment of an examiner to protect the Company from threatened liquidation or other enforcement”; (3) insofar as it can be argued that the Company is balance sheet insolvent, this is only because of the recorded liabilities to Starkane; (4) there is no basis for concluding that the Company would be “likely” to be unable to pay its debts in the near future; (5) the petition does not serve to protect the interests of employees and unsecured trade creditors; (6) the petition is motivated by the personal disputes between the petitioner on the one hand and the majority shareholder and other directors.

Held by the High Court (Quinn J) that the appointment of an examiner was not an appropriate remedy for the matters described in the petition. On the evidence presented Quinn J was not persuaded that the Company was at risk of enforcement actions by creditors such as would justify the intervention of the court by the imposition of the appointment of an examiner.

Quinn J held that the petition would be dismissed.

Petition dismissed.

JUDGMENT of Mr. Justice Quinn delivered on the 9th day of December, 2020

1 Ina Broderick made chocolate desserts in her kitchen. She built a successful business producing and selling chocolate products. In 1994 Ina's Kitchen Desserts Limited (“the Company”) was established by Ina and her husband, Michael Broderick. Over the following 26 years, the business of the Company developed and expanded. Its turnover for the year ended 31 December, 2019, exceeded €12 million and the Company employed over 100 persons.

2 The Company's customer list includes airlines and retail chains such as Aldi, Insomnia, Starbucks, Circle K and Musgraves. Its products are exported to over 20 countries.

3 In February 2019, the shareholding of the Broderick family was reduced from 100% to 25% in circumstances which were and remain contentious. The petitioner Barry Broderick, as the holder of 10.45% of the ordinary shares in the Company, presented a petition for the appointment of an examiner to the Company on 30 October, 2020. The petition was opposed by the Company and its majority shareholder Starkane Limited (“Starkane”), which holds 75% of the ordinary shares and is its largest creditor. The remaining 14.55% of the ordinary shares are held by the petitioner's brother and parents. The petitioner says that they support the petition.

4 I have concluded that the appointment of an examiner is not an appropriate remedy for the matters described in the petition, and accordingly that the petition should be dismissed.

The background

5 The Company traded initially from the Broderick's family home. In or about 1998 it moved to a factory located at Walkinstown, and in 2016 to a new location in Tallaght.

6 In 1994, the petitioner joined the business and in 2002 his brother Bernard joined.

7 In 2008, the Company was in need of more space and the Broderick family acquired and rented to the Company a second building at Walkinstown.

8 By 2015, the Company had continued to grow its pipeline of orders and its turnover, and had a history of profitable trading. The growth resulting from its success caused more capacity issues. The Company identified the need, in order to expand its business, to move to a new production facility. The family also recognised the need to introduce additional retail expertise to grow the business and to identify and pursue new retail channels. By this time, the Company had developed a longstanding relationship with Enterprise Ireland (“EI”).

9 In 2016, the Company identified a potential new property located in Tallaght, and eventually moved to that location, with the benefit of significant new funding arrangements entered into in February 2017.

10 The February 2017 funding arrangements comprised the following: -

(1) EI support totalling €800,000 being €450,000 in cash, €150,000 of a capital grant for the building, and a further €200,000 in employment grants, to be paid over time.

(2) Ulster Bank agreed to lend the Company €2.4 million comprising an overdraft, a term loan and a second term loan to clear the Company's existing debt with AIB. The term loan was secured by way of first legal charge over the property at Tallaght.

(3) Starkane advanced a sum of €3.2 million by subscription for cumulative convertible redeemable preference shares. Starkane is a special purpose vehicle established by BDO Capital Development Fund (“the Fund”).

Starkane

11 The Company was introduced to the Fund in late 2015. The Fund was interested in providing development and growth capital support to small and medium enterprises having growth opportunities, particularly those with export markets, which required funding to expand their businesses.

12 In February 2017, the Company and Starkane entered into an Investment Agreement. Pursuant to this agreement, Starkane agreed to subscribe the sum of €3.2 million for the issue of cumulative convertible redeemable preference shares (“CCRPS”). The CCRPS carried an annual dividend of 4% and the agreement provided for an internal rate of return (“IRR”) of 8% where revenue growth was less than 100% and escalating to 10% and ultimately 12% if higher growth was achieved.

13 The agreement conferred on Starkane the right to nominate two persons as directors of the Company and the right to participate in general meetings and voting in the Company on an “as converted” basis.

14 On 27 February, 2017, Andrew Bourg, a director of Starkane (and of the Fund), was appointed a director.

15 In December 2017, the Company encountered additional funding requirements and two further significant funding arrangements were entered into.

16 Ulster Bank agreed to restructure its existing term loans, deferring the recommencement of payments to January, 2020.

17 Starkane agreed to advance an additional €2 million to the Company.

5% redeemable convertible secured loan notes (“The Loan Notes”)

18 On 22 December, 2017, new agreements were entered into between the Company and Starkane. The principal feature of these agreements was the issue of redeemable, convertible secured loan notes. Starkane committed to and provided a sum of €1.75 million in December 2017, and an additional €250,000 in April 2018.

19 The Loan Notes carried an interest rate of 5% per annum and conferred on Starkane the right to convert the notes for ordinary shares in the Company in accordance with a pricing formula set out in the agreement.

20 At the same time, revised shareholder agreements were entered into whereby the Broderick family members agreed to subordinate their loans to those of Starkane.

21 Pursuant to these arrangements an additional director, Peter O'Donoghue, (introduced by Ulster Bank), was appointed to the board of directors and Michael Broderick retired as a director.

22 Following the entry into these arrangements, the board of directors comprised Ina Broderick, Bernard Broderick, the petitioner Barry Broderick, Andrew Bourg, Tony Proudfoot (introduced by EI) and Peter O'Donoghue.

23 The Company continued in 2018 to experience cash flow pressures and these continued into early 2019. During this time, the relationship between the Broderick family members and Starkane came under strain.

24 On 8 February, 2019, Starkane served a Conversion Notice on the Company informing it that it intended to convert €250,000 of its existing loan notes into fully paid ordinary shares in the Company. The legal effect of such a conversion would have been to reduce the Broderick family shareholding to 3% of the ordinary shares in Company.

25 Following service of the Conversion Notice, the parties engaged and an agreement was made on 12 February, 2019, whereby the following would occur: -

(1) Starkane agreed to limit its allotment of shares to 75% of the ordinary share capital;

(2) The Broderick shareholders agreed to invest €250,000;

(3) The Broderick family agreed that directors nominated by them would resign, such that only one director would be nominated by them remaining on the board;

(4) The Broderick family shareholders would retain the right, subject to certain conditions, to increase their shareholding back to 35%.

(5) Starkane agreed to advance a further loan of €250,000.

26 The February 2019 arrangements included a letter of undertaking by the Broderick shareholders in favour of Starkane. This letter included a commitment subordinate the loans of the Broderick's to the entitlements of Starkane. It also included a covenant that the subordinated creditors (namely the Broderick family members) would not “ without the prior consent of...