JJ Red Holdings Ltd & Companies Act 2014

• Jurisdiction: Ireland
• Judge: Ms. Justice Baker
• Judgment Date: 15 September 2016
• Neutral Citation: [2016] IEHC 524
• Court: High Court
• Docket Number: [2016 No. 313 COS]
• Date: 15 September 2016

[2016] IEHC 524

THE HIGH COURT

Baker J.

[2016 No. 313 COS]

IN THE MATTER OF JJ RED HOLDINGS LIMITED

AND IN THE MATTER OF SECTION 509 OF THE COMPANIES ACT, 2014

Company – S. 509 of the Companies Act, 2014 – Appointment of examiner – Availability of funds – Avoidance of the obligations of settlement agreement – Abuse of process – Good faith.

Facts: The petitioner/company had filed the present application to confirm the appointment of an examiner, which was opposed by a substantial creditor/landlord. The petitioner argued that it had a very strong core business, which was now in profit. The landlord contended that the presentation of the petition was an abuse of process in that it was an attempt by the company and/or its directors to avoid the obligations arising under the settlement entered into only three weeks prior to the presentation of the petition.

Ms. Justice Baker dismissed the petition of the company on the ground that the petition was not made in good faith. The Court held that the threshold test to be met by a petitioner under the Companies Act, 2014 was that a company had a reasonable prospect of survival following the approval of a rescue plan. The Court found that the evidence in the present case was that the funding was not in place and no reasonable prospect existed of the company as a going concern. The Court found that the effect of the appointment of an examiner in the present case was to avoid the onerous terms of the settlement entered into between the company and the landlord.

JUDGMENT of Ms. Justice Baker delivered on the 15th day of September, 2016.

1 This judgment is given in an application to confirm the appointment of an examiner to the petitioning company, which is opposed by a substantial creditor.

2 Tom Murray was appointed interim examiner of JJ Red Holdings Limited (‘the Company’) by order of Costello J. on 18th August, 2016. The application to confirm his appointment as examiner is opposed by Henciti Limited, a limited liability company which owns the landlord's interests in the occupational lease under which the Company occupies the hotel and bar premises from which it conducts the entire of its business. I will refer to the creditor who opposes the petition as ‘the landlord’. The petition is supported by all of the employees who have signalled their approval in writing, and by the trade creditors. Revenue is neutral.

3 The petitioner argues that it has a very strong core business, which is now in profit and this argument is supported by the report of the independent expert, and his supplemental report in response to a report adduced by the landlord.

The Company

4 The Company was incorporated on 28th April, 2006 for the purpose inter alia of the management of a hotel and ancillary hospitality services. The directors and shareholders of the Company are two brothers, Emmet McDermott and Donie McDermott, both of whom reside in Ireland. The Company is the trading operator of a hotel named Dublin Citi Hotel and Bar, trading from premises at 46 to 49 Dame Street, Dublin 2, a 27 bedroom hotel with licensed bar, a dance area and restaurant. The Company occupies the hotel premises on foot of a lease made on 31st December, 2006 with the predecessors in title of the landlord for the term of 35 years from 1st January, 2007 at a rent subject to five-year rent reviews. The Company has 54 employees of whom 40 are full time. In addition, the directors and the child of one of the directors are also employees of the Company.

5 It is fair to say that the Company entered the hospitality sector at what was possibly the worst time to commence such a business, and during the recession that began soon after the business opened, the Company made losses for a number of years. In the first year the losses were a quarter of a million euro and the quantum of losses increased up to 2010 and declined thereafter. The Company returned to profit, albeit a small profit, in 2013, and in 2015 showed a before tax profit of €403,000. It anticipates a greater profit for the calendar year 2016, as profits of €312,000 are shown for the first six months of this year.

6 In the course of the recession the directors made substantial loans to the Company inter alia, to discharge staff wages, and during that the time the directors themselves took no remuneration as directors. Some of these loans have been repaid.

The current balance sheet shows net shareholder total liabilities of €1,836,435, of which €387,195 represents directors' loans. The statement of affairs contained in the IER shows that the Company has a surplus of liabilities over assets in the sum of €1,451,385. A statement of affairs prepared on a winding up basis shows a deficit of €1,744,605.

7 The up-to-date balance sheet shows creditors standing at €836,435, in addition to €1.1 m owed to the landlord for rent, full particulars of which will appear below.

8 It is not disputed that the Company is insolvent.

The landlord

9 The landlord is a limited liability company incorporated in Ireland, owned by Paul Hennebry and his brother, Denis Hennebry, who identify themselves as having upwards of 25 years experience in owning and operating hotels and licensed premises. The primary basis on which the landlord opposes the petition is that the examinership process is said to be ‘designed to frustrate and evade’ a settlement entered into between the landlord and the Company three weeks before the petition was presented.

10 The landlord purchased the reversionary interest from a receiver appointed by Bank of Ireland by agreement made on 31st August, 2015 which was closed on 1st October, 2015. The arrears of rent were said then to be in the region of €1m, and the landlord took the benefit of these arrears by separate assignment. The landlord has frankly said on affidavit that it was anticipated at the time of purchase that it would rely on the forfeiture clause in the lease to take possession of the premises from which it was intended to continue the hospitality business.

11 The purchase of the premises was funded by a loan from a US/Irish hedge fund, and the landlord's indebtedness is in the region of 111% of the purchase price, the landlord having borrowed an additional €500,000 for the purposes of providing it with working capital in anticipation of taking over the business.

12 Almost immediately after closing the sale, and after correspondence with the solicitors then acting for the Company had failed to achieve an agreement regarding the arrears, the landlord served a forfeiture notice on 21st October, 2015, in reliance on the arrears of rent, and sought to re-enter the premises on foot of the notice. The Company then commenced proceedings seeking declaratory and injunctive relief on the pleaded grounds that the Company had a bona fide belief that the landlord, and later the receiver appointed to the landlord, had agreed a permanent reduction in rent, (from €520,000 to €260,000 per annum) and that, as the reduced rent was not in arrears, forfeiture did not lie. The Company obtained an ex parte injunction restraining the landlord from taking possession on foot of the forfeiture notice, and the landlord opted to pursue the approach of seeking to bring the proceedings on for hearing through the fast track process available in the Commercial Court.

13 The proceedings came on for hearing before Barrett J. on 19th July, 2016 when the case was called on for hearing for several days. Negotiations led to a written compromise being entered into between the parties at the end of the first day.

The settlement agreement

14 The settlement agreement entered into between the parties was made on 19th July, 2016 and, insofar as it was possible to do so, the terms thereof were made an order of the court by Barrett J.

15 The agreement contained an acknowledgement by the Company that the passing rent was the annual amount of €520,000, the figure claimed by the landlord, and also provided for the payment of an agreed figure for arrears of rent totalling €850,000, an immediate payment of €115,000 by way of the balance of rent for the current quarter, €100,000 by way of security deposit and €150,000 as a contribution to the costs of the landlord.

16 The settlement agreement also contained detailed provisions for enforcement, including a provision that the landlord could immediately obtain an order for possession and a declaration that the lease was validly forfeited on the happening of any event of default. Also included was a provision that the landlord could forthwith, upon the happening of any default, enter judgment against the directors of the Company in the amount of €730,000.

17 The primary argument advanced by the landlord in opposition to the application to confirm the appointment of the examiner is that the presentation of the petition was an abuse of process in that it is an attempt by the Company and/or its directors to avoid the obligations arising under the settlement entered into only three weeks prior to presentation of the petition. The argument is that no other problem or litigation is apparent from the operation of the Company or from the matters outlined in the petition save the dispute between the Company and its landlord, and the settlement of that dispute in July, 2016. It is argued that the petition is a collateral attack on a concluded agreement and court order, and that the effect of the examinership will be a write-down of that agreement and the reduction of the liabilities of the Company and the arrears of rent agreed to be paid thereby.

18 The landlord also points to the history of the Company and to the fact that a petition was presented to wind up the Company in 2012 by a receiver appointed to the landlord in the context of substantial arrears of rent. It was only after the receiver presented a winding up petition that the...