Permanent TSB Group Holdings Plc v McManus

• Jurisdiction: Ireland
• Judge: Mr Justice Max Barrett
• Judgment Date: 28 July 2015
• Neutral Citation: [2015] IEHC 500
• Date: 28 July 2015
• Court: High Court
• Docket Number: [2015/224COS] [2015/60/COM]

IN THE MATTER OF PERMANENT TSB GROUP HOLDINGS PLC

AND

IN THE MATTER OF THE PROPOSED CAPITAL REDUCTION PURSUANT TO SECTIONS 72 AND 74 OF THE COMPANIES ACT 1963

AND

IN THE MATTER OF THE COMPANIES ACT 1963–2013

BETWEEN/

PERMANENT TSB GROUP HOLDINGS PLC

Petitioner

AND

PADRAIG McMANUS, GERARD DOWLING AND PIOTR SKOCZYLAS

Notice Parties

[2015] IEHC 500

[2015/224COS]

[2015/60/COM]

THE HIGH COURT

Company – The Companies Act 1963-2014 – Change in legislation – Reduction of share premium – Failure to comply with s.85(2) of the The Companies Act of 2014 – Equality of treatment.

Facts: The petitioner, pursuant to s.72 of the Companies Act, 1963 sought an order confirming the cancellation and reduction of the amount standing to the credit of the Company's share premium account. In the meantime ss. 72 and 73 were replaced, effective 1st June, 2015, by ss.84 and 85 of the Companies Act of 2014. The Notice Parties contended that the Company had failed to comply with s.85(2) of the Act of 2014 and therefore confirmation cannot be issued in the proceedings. The question arose as to the validity of the petition with regard to the change in legislation.

Mr Justice Max Barrett held that the petition for an order seeking confirmation of the cancellation and reduction of the amount standing to the credit of the Company's share premium account would be granted. The Court observed that the reliance by the Notice Parties on s. 85(2) of the Act of 2014 would be misplaced. The obligation to comply with Act of 2014 would not exist prior to June 1, 2015. The Court observed that based on the evidence the Company acted in a considered manner and there would not be any oversight or miscarriage in the reduction of the share capital. The Court held that the request for an order striking out the Notice Parties' motion for discovery would be granted. The Court observed that the basis for discovery arises in case of a factual dispute between the parties.

JUDGMENT of Mr Justice Max Barrett delivered on 28th July, 2015.

CONTENTS

PARA.

PART I INTRODUCTION 1

PART II BACKGROUND FACTS 2

PART III SOME APPLICABLE LEGISLATION 8

i. The Companies Act, 1963. 8

PART IV AN ASIDE ON SOME PROCEDURAL ISSUES 21

i. Introduction. 21

PART V THE NATURE AND EXERCISE OF THE COURT'S DISCRETION 38

i. Existence of discretion. 38

PART VI FACTOR 1: THAT THE COMPANY IS AUTHORISED

PARA.

PART VII FACTOR 2: THAT THE COMPANY DULY RESOLVED

BY SPECIAL RESOLUTION TO REDUCE ITS SHARE CAPITAL 46

PART VIII FACTOR 3: THAT THE REDUCTION PROPOSALS

WERE PROPERLY EXPLAINED TO THE SHAREHOLDERS SO THAT THEY COULD EXERCISE AN INFORMED JUDGMENT 63

PART IX FACTOR 4: THAT THE REDUCTION OF THE SHARE

CAPITAL IS FOR A DISCERNIBLE PURPOSE 67

PART X FACTOR 5: THAT ALL SHAREHOLDERS ARE TREATED

EQUITABLY 83

PART XI FACTOR 6: THAT THE CREDITORS OF THE COMPANY ARE SAFEGUARDED 111

PART XII THE COMPANY ACCOUNTS 112

PART XIII ALLEGED ABUSE OF PROCESS 115

PART XIV SUGGESTED SET-ASIDE OF €364 MILLION 116

PART XV THE MOTIONS FOR DISCOVERY 119

i. Overview. 119

PART XVI CONCLUSION 126

PART I

INTRODUCTION

1 By petition dated 29th May, 2015, Permanent TSB Group Holdings plc (the 'Company') sought an order of the High Court confirming a cancellation and reduction of the amount of €1,490m standing to the credit of the Company's share premium account. The application was heard last Wednesday. The court indicated at the end of that hearing that it considered the legal criteria for the issuance of the confirmation were satisfied and made the requisite orders. It indicated too that it would give written reasons for its conclusions at a later stage. These are set out below.

PART II

BACKGROUND FACTS

2 As mentioned, the Company came to court seeking an order confirming the cancellation and reduction of the amount standing to the credit of the Company's share premium account. The application was brought pursuant to s.72 of the Companies Act, 1963. A change in legislation meant that the orders made last Wednesday fell to be issued under s.85 of the Companies Act, 2014.

3 At the time of the swearing of the grounding affidavit, the share premium stood at €1,817,163,780. It had been €1,491,688,408 at the date of the passing resolution to which the petition relates. The proposed capital reduction, as approved by the court, created reserves that can be used to reduce the negative reserve on the Company's balance sheet, as set out in the Company's most recent audited financial statements as at 31st December, 2014 (the 'Audited Balance Sheet Date'). As at the Audited Balance Sheet Date, the Company's audited balance sheet indicated a negative reserve in the amount of €1,622m. The unaudited balance sheet prepared as of 31st March last included a negative reserve in the same amount. The confirmation of the proposed capital reduction by the court has the result that there will now remain a negative balance sheet reserve of approximately €132m.

4 The Company is a holding company for Permanent TSB plc (the 'Bank') and its subsidiaries (together the 'Group'). The Company sought confirmation of the proposed capital reduction in the context of the Group's Capital Raise programme which has been undertaken to meet various regulatory requirements. The additional capital was required by the Group as a result of "stress testing" undertaken by the European Central Bank ('ECB') as part of the Single Supervisory Mechanism Comprehensive Assessment ('SSMCA') and also in the context of the capital plans submitted by the Group to the ECB (the 'Capital Plan'), and a restructuring plan for the Group which was submitted by the Department of Finance to, and approved by, the European Commission (the 'Restructuring Plan').

5 The reduction of the Company's negative reserves is seen by the Company and its financial advisors as a fundamental element of the Capital Package. In addition, the proposed capital reduction and the consequent reduction of the Company's negative reserve is viewed as being of central importance by investors under the Capital Package following the passing by those shareholders of the special resolution to which the petition before the court related (the 'Reduction Resolution'), as passed at the Company's most recent AGM on 8th April last.

6 The key features of the proposed capital reduction were as follows. First, the Company is not a trading company and has no trade creditors. Its total liabilities were only €3m as at the Audited Balance Sheet Date, all of which was owed to the Bank. Second, in essence, the Company sought confirmation of the proposed capital reduction to reorganise its balance sheet by way of a reduction of its share premium account which has had the effect of reducing, but not eliminating, accumulated negative reserves arising in the Company due to impairments in the books and accounts of the Company of the carrying value of the Bank. These impairments arose due to historical trading losses of the bank brought about as a result of the negative impact of the recent financial crises on banks in Ireland. Third, the proposed capital reduction was therefore an adjustment of accounting entries within the Company to reflect historic losses at the Bank. Fourth, at the AGM 99.95% of the Company's ordinary shares which were voted were voted in favour of the Reduction Resolution, with only 0.05% of the votes voting against. Fifth, the proposed capital reduction, as confirmed, has been in no way prejudicial to any shareholder. On the contrary, by reducing the company's negative reserves, the Company is seeking, to the maximum extent possible, to allow all shareholders, new and existing, to participate in future profits generated after a €402m placing and open offer which completed in May 2015 (the 'May Equity Raise') and also to minimise the restrictions on the distribution of those future profits due to historic losses that arose before the May Equity Raise.

7 The Notice Parties objected, unsuccessfully, to the proposed capital reduction for the reasons identified hereafter. They were joined in their objections by Mr Keohane and Mr Neugebauer who adopted the Notice Parties' arguments and also sought various reliefs akin to those sought by the Notice Parties and adjudicated upon by the court in respect of the Notice Parties in its judgment in Permanent TSB Group Holdings plc v McManus and ors (Unreported, High Court, (Barrett J.) 13th July, 2015).

PART III

SOME APPLICABLE LEGISLATION

i. The Companies Act, 1963.

8 Making something of a last farewell in the within proceedings are certain provisions of the Act of 1963. They are relevant because the within petition was commenced before the new Companies Act, 2014, came into force.

9 Section 72 of the Act of 1963, before its recent repeal, provided as follows:

'(1) Except in so far as this Act expressly permits, it shall not be lawful for a company limited by shares or a company limited by guarantee and having a share capital...to reduce its share capital in any way.

(2) Subject to confirmation by the court, a company limited by shares or a company limited by guarantee and having a share capital, may, if so authorised by its articles by special resolution reduce its share capital in any way and, in particular, without prejudice to the generality of the foregoing power, may –

(a) extinguish or reduce the liability on any of its shares in respect of share capital not paid up; or

(b) either with or without extinguishing or reducing liability on any of its shares, cancel any paid up share capital which is lost or unrepresented by available assets; or

(c) either with or without extinguishing or reducing liability on any of its shares, pay off any paid up share capital which is in excess of the wants of the company;

and may, if and so far as...