MAC Interiors Ltd v Companies Act 2014

JurisdictionIreland
JudgeMr. Justice Michael Quinn
Judgment Date09 October 2023
Neutral Citation[2023] IEHC 549
CourtHigh Court
Docket NumberRecord No. 2023 90 COS
In the Matter of MAC – Interiors Limited

and

In the Matter of Part 10 of the Companies Act 2014

[2023] IEHC 549

Record No. 2023 90 COS

THE HIGH COURT

Scheme of arrangement – Classification of creditors – Companies Act 2014 s. 541 – Examiner of the company seeking an order confirming his proposals for a scheme of arrangement between the company and its members and creditors – Whether the formation of the class of retained project creditors breached the principles governing the classification of creditors for the purpose of considering and voting on proposals for a scheme of arrangement

Facts: The Examiner of Mac Interiors Ltd (the Company) applied to the High Court for an order pursuant to s. 541 of the Companies Act 2014 confirming his proposals for a scheme of arrangement between the Company and its members and creditors. Section 541 identifies the conditions which must be met before the court can confirm such proposals. The first condition is that at least one class of creditors whose interests or claims would be impaired by implementation of the proposals has accepted the proposals. Proposals are deemed accepted by a meeting of creditors when a majority in number representing a majority in value of the claims represented at the meeting have voted in favour (s. 540). In this case, only one class of impaired creditors had approved the proposals, a class referred to in the proposals as the Retained Project Creditors. The Revenue Commissioners who were owed a total debt of €14.36m objected to confirmation of the proposals. They submitted that the formation of the class of Retained Project Creditors breached the established principles governing the classification of creditors for the purpose of considering and voting on proposals for a scheme of arrangement. They submitted that the members of that class ought to have been included in the class of Unsecured Creditors, which did not accept the proposals, and therefore that the requirement that at least one class of impaired creditors, validly formed and convened, has voted to accept the proposals had not been met, and that the court had no jurisdiction to confirm the proposals.

Held by Quinn J that, having concluded that Sovereign Life Assurance Company v Dodd [1892] 2 QB 573 applies to Part 10 of the 2014 Act, it can only be in exceptional circumstances that different non-rights based interests can be invoked to subdivide a class whose rights are identical. Quinn J held that those circumstances must at least engage differences which: (a) are not extraneous to the business of the meeting, namely the consideration on its merits of the proposed scheme of arrangement and voting thereon; (b) are based on verifiable criteria which are not vague, tenuous or speculative; and (c) are clearly identified and defined by the examiner in his proposals. Quinn J found that the distinction relied on to form the Retained Project Creditors class in this case did not meet those criteria. Quinn J held that the policy for traditional schemes of favouring fewer classes is informed by the danger of class manipulation and of conferring an unwarranted veto on particular groups; where the threshold of class acceptance is only one impaired class the necessity to avoid manipulation of classes even unintentionally is heightened. Quinn J found that there was no suggestion that the Examiner in this case was engaged in class manipulation but any lack of precision in the definition of the class increases the danger that this jurisdictional requirement can be bypassed. Quinn J held that the absence of a definition in the proposals themselves contributed to what Revenue had fairly described as the “nebulous” basis for forming the class.

Quinn J held that no meeting of a validly formed class of impaired creditors had accepted the proposals, the requirement contained in s. 541(3A)(a) and s. 541(4)(a) had not been met and the court had no jurisdiction to confirm the proposals.

Application refused.

Judgment of Mr. Justice Michael Quinn delivered the 9th day of October 2023

1

. The Examiner of Mac Interiors Limited (“the Company”) has applied for an order pursuant to Section 541 of the Companies Act 2014 (“the Act”) confirming his proposals for a scheme of arrangement between the Company and its members and creditors.

2

. Section 541 identifies the conditions which must be met before the court can confirm such proposals. The first condition, which is central to the issue in this case is that at least one class of creditors whose interests or claims would be impaired by implementation of the proposals has accepted the proposals.

3

. Proposals are deemed accepted by a meeting of creditors when a majority in number representing a majority in value of the claims represented at the meeting have voted in favour (s.540). In this case, only one class of impaired creditors has approved the proposals, a class referred to in the proposals as the Retained Project Creditors.

4

. The Revenue Commissioners who are owed a total debt of €14.36m object to confirmation of the proposals. They submit that the formation of the class of Retained Project Creditors breached the established principles governing the classification of creditors for the purpose of considering and voting on proposals for a scheme of arrangement. They submit that the members of that class ought to have been included in the class of Unsecured Creditors, which did not accept the proposals, and therefore that the requirement that at least one class of impaired creditors, validly formed and convened, has voted to accept the proposals has not been met, and that the court has no jurisdiction to confirm the proposals.

The Company and the examinership
5

. The business of the Company is that of specialist interior fitout of commercial facilities and general construction in Ireland, the UK and elsewhere.

6

. Before petitioning for examinership the Company employed 41 persons directly and was engaged in projects in Ireland alone worth €72 million. At the time of this application the Company still retained 31 direct employees.

7

. On 30 May 2023, the Company petitioned for the appointment of an examiner pursuant to Part 10 of the Act. Mr. Kieran Wallace, of Interpath Ireland Limited was appointed interim examiner pending the hearing of the petition.

8

. On 14 June 2023, the petition was heard. The petition was not contested, and the court appointed Mr. Wallace examiner.

9

. The Company was incorporated in Northern Ireland. It was therefore not a company within the meaning of that term as defined in s. 2 (1) of the Act. Nonetheless, the court was satisfied that the company had its centre of main interests in the State and therefore that it had jurisdiction to make the appointment pursuant to Article 3.1 of the European Insolvency Regulation Recast 2015/848 (“the EIRR”). A full description of the reasons for the court's decision and the appointment of the Examiner is contained in the judgment of the court delivered on 11 July 2023 ( [2023] IEHC 395) (the “First Judgment”).

10

. As required by s. 534 of the Act, on 17 August 2023, the Examiner formulated proposals for a scheme of arrangement in relation to the Company. He convened and held meetings of members and creditors for the purpose of considering and voting on the proposals.

11

. One class of creditors having voted in to accept the proposals, the Examiner issued this application for confirmation of the proposals.

12

. The application is grounded on an affidavit sworn by the Examiner on 1 September 2023. In that affidavit he exhibited his report as required by s. 534 of the Act which includes the proposals, an explanatory memorandum, his report on the outcome of the meetings of members and creditors, a statement of the assets and liabilities of the Company, and his recommendation that the proposals be confirmed.

The Proposals
13

. The proposals were based on the Company securing an investment from Quartz Holdco Limited, a company said to have significant expertise in the construction sector, which would make the following investments:-

(a) a subscription for 55% of the ultimate shareholding in the Company;

(b) a shareholder loan of €2.25 million, non – interest bearing and subordinated to the Company's other debt;

(c) a working capital facility of €1.5 million available to the Company for drawdown at any time after the effective date of the proposals.

14

. The investor would also acquire the shares in two subsidiary companies Mac Contracts and Mac Belgium.

15

. The subscription for shareholding by the investor required the investment to be notified to the Competition and Consumer Protection Commission under Part 3 of the Competition Act 2002 (as amended). The court has been informed that the required clearance of the CCPC has been obtained.

16

. The only proposed change in the management of the Company was the addition to the board of Mr. Damien Treanor, representing the investor. Mr. Paul McKenna, the managing director of the Company, would continue in office.

17

. The proposals as originally presented identified eight classes of creditors. I shall refer to these classes below and describe the intended dividend intended under the proposals:-

(i) Senior Secured Creditor — dividend: 100% of its pre – petition debt;

(ii) Preferential Creditors – dividend: 100% of its debt;

(iii) Revenue Non – Preferential – dividend: 1.5%

(iv) Retained Project Creditors – dividend: 1.5%

(v) Unsecured Creditors – dividend: 1.5%

(vi) Contingent Guarantee Creditors – dividend: 1.5%

(vii) Guaranteed Creditors – dividend: 1.5%

(viii) Contingent Litigation Creditors – dividend: 1.5%.

18

. The proposals provided for payment to be made within 30 days of the date on which the proposals became effective, or in the case of unagreed creditors, 30 days of the determination of the amount of their claims in accordance with the expert...

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