Re McInerney Homes Ltd

• Jurisdiction: Ireland
• Judge: O'Donnell J.
• Judgment Date: 22 July 2011
• Neutral Citation: [2011] IESC 31
• Docket Number: 77 & 81/11
• Court: Supreme Court
• Date: 22 July 2011

IN THE MATTER OF MCINERNEY HOMES LIMITED

AND IN THE MATTER OF MCINERNEY HOLDINGS PUBLIC LIMITED COMPANY, MCINERNEY CONSTRUCTION (HOLDINGS) LIMITED,

MCINERNEY CONTRACTING LIMITED,

MCINERNEY CONTRACTING DUBLIN LIMITED,

(EACH A RELATED COMPANY),

AND IN THE MATTER OF THE COMPANIES (AMENDMENT) ACT 1990 (AS AMENDED)

MCINERNEY HOMES LIMITED, MCINERNEY HOLDINGS PUBLIC LIMITED COMPANY

AND

MCINERNEY CONTRACTING LIMITED

APPLICANTS

[2011] IESC 31

O'Donnell J.

Fennelly J.

Macken J.

Finnegan J.

O'Donnell J.

McKechnie J.

77 & 81/11

THE SUPREME COURT

Companies – Insolvency – Examiner ship – Scheme proposed by examiner brought before High Court – High Court refusing to approve scheme – Appeal & cross-appeal against decision of the High Court – Companies (Amendment) Act 1990

Facts: The applicant companies were part of the McInerney construction group. The group had suffered considerably as part of the economic down turn, and in 2010 had been informed by their bankers that working capital would be advanced. This led to the application for an appointment of an examiner. A scheme of arrangement was proposed, and put before the High Court for approval under the Companies (Amendment) Act 1990. The relevant banks strongly contested the application, and the High Court found that the scheme was unfairly prejudicial to their interests. A number of subsequent hearings took place, and the initial ruling was confirmed. The applicants now sought to appeal that ruling, and the banks sought to cross-appeal a number of points.

An injunction was granted in July 2011 prevented the defendants from taking certain steps which would weaken the plaintiff’s security. The plaintiff contended the terms of this order had not been complied with and accordingly sought the committal of three defendants (“the respondents”) for contempt of court.

Held by O’Donnell J, giving the majority’s judgment that a number of issues were to be determined. O’Donnell J stated firstly that the Courts would not approve any proposals for a scheme of arrangement unless the proposals were not unfairly prejudicial to any interested party. The Court was satisfied that the judge at first instance had correctly applied the test for determining whether the prejudice was unfair. The Court considered that the onus of proof under the legislation lay on the party seeking to argue the scheme proposed was not unfairly prejudicial. On that basis, the Court considered the submissions of the parties.

Condemning the costly, protracted and unclear manner in which the case was argued by the parties, the Court found that the trial judge’s ruling that the scheme had not been shown to be fair to the banks was correct, and would be upheld. The appeal and cross-appeal were both dismissed.

Judgment delivered by O'Donnell J. on the 22nd day of July, 2011.

Index

Background … … … … … … … … … … … … … … … page 2

The Test for Unfair Prejudice … … … … … … … … … … page 24

Onus of Proof page… … … … … … … … … … … … … … … 29

The First Confirmation Hearing … … … … … … … … … page 31

The Work in Progress (‘W.I.P.’) Issue … … … … … … page 34

The Valuation of the Security … … … … … … … … … page 49

The Third Judgment (21st January, 2011) … … … … … … page 59

The Reopened Judgment (17th February, 2011) … … … … … … page 60

The Increased Offer (21st February, 2011) … … … … … … page 67

Employment and Other Issues … … … … … … … … … … … page 72

Background

1 On the 26th August, 2010, Mr. William O'Riordan was appointed interim examiner to the companies named in the title hereof which were then the companies comprising the McInerney group. For reasons which are not relevant to this appeal, the third and fifth named companies were removed from the examinership and the winding up by order of the 24th November, 2010. I will refer to the remaining companies herein as either ‘the McInerney group’, ‘the group’ or ‘the companies’. This is in essence an appeal by those companies against the refusal by the High Court of an application made by the companies and the examiner pursuant to s.24 of the Companies (Amendment) Act 1990 (hereinafter referred to as ‘the Act of 1990’), for the approval by that Court of the scheme proposed by the examiner. In order to understand the issues raised by this appeal, and indeed the cross-appeal by the banking syndicate, it is necessary to set out the somewhat complex history of this vigorously contested litigation.

2 Until recently the McInerney group had been a long established and successful property development company with interests in this country and indeed in the United Kingdom, Spain and Portugal. During its period of recent success it had received the support of its bankers, principally Bank of Ireland plc., Anglo Irish Bank Corporation Ltd. and KBC Bank Ireland plc. (hereinafter referred to collectively as ‘the banks’, or ‘the banking syndicate’). The mutual congratulation which no doubt was a feature of their relationship has now turned to bitter recrimination as they have battled to force each other to consume some very unpalatable fare: a receivership and effective termination of their business for the companies; and in the case of the banks, a dramatic write-down and forced realisation of their €110 million indebtedness, which was secured upon the assets of the group. The result has been, in the words of the trial judge, Clarke J., one of the most hard fought examinerships in recent times which has generated five judgments of the High Court over a relatively short period. In the end the Court did not approve the scheme proposed by the examiner. Against that outcome the companies appealed. The banks have also cross-appealed.

3 This case has resulted in the somewhat surreal scenario that over a three day period this Court was occupied by teams of lawyers, accountants and assorted experts engaged in a bitter struggle to gain control of an Irish property development company, united only in the apparent belief that the development of property in Ireland over the next decade would be a lucrative business. Furthermore, each side confidently outlined their expectations as to the performance of the market over that period and invited the Court to decide this case by accepting one or other view of the likely profitability of a receiver controlled work out of the existing McInerney group land bank. It might be observed that the prediction of the future development of the property market in Ireland is something that defeated policy makers and experienced developers and lending institutions over the past decade and brought the latter two groups to financial ruin, and the companies to their present difficult and unhappy state.

4 The McInerney group was, it was said, a very successful development company with a long history of development in Ireland, specialising in traditional suburban homes in established residential areas. It was also said that it did not become involved in developments in Ireland of a more speculative nature, such as apartments in remote suburbs or large housing estates in more rural towns. Even so, the pace of the market downturn, when it arrived, surprised the McInerney group, as it did others. The value of the group's assets dropped precipitously until it was clear that it was effectively insolvent. The McInerney group identified both the need to seek outside investment and a reduction in its debt to the banking syndicate which, by mid 2010, stood at something slightly in excess of €110 million. It retained Goldman Sachs to seek an investor and entered into discussions with the banks. Eventually a U.S. firm specialising in investments in distressed assets, Oaktree Capital Management L.P. (hereinafter referred to as ‘Oaktree’), emerged as a potential investor if the group's banking arrangements could be restructured. The McInerney group entered discussions with its bankers and proposed a work out model and the banking syndicate appointed IBI as its advisor in discussions of the companies' work out model. These developments represented a commendable degree of pragmatism on both sides. There was a high degree of mutual interest in at least progressing those discussions between the banking syndicate, Oaktree and the companies. For Oaktree the investment would only become viable if the bank debt could be reduced and, importantly, the more that debt could be reduced, the more viable and valuable Oaktree's investment would then become. On the other hand, the banks had an interest in ensuring as significant an investment from Oaktree as possible so as to make the business viable and thus ensure the likely payment of the interest on the written-down debt and the ultimate repayment of the debt. This involved a significant degree of engagement by the banks' advisors (IBI) with the companies and Oaktree in respect of the companies' business plan. The familiarity of all the parties with the recovery prospects of the companies, and the manner in which that could be calculated, becomes relevant to an issue that occupied much of this appeal.

5 However, difficulties emerged in the early part of August, 2010. Two of the members of the banking syndicate, Bank of Ireland and Anglo Irish Bank, are so-called ‘NAMA banks’ in that they are participants in the NAMA scheme. On the 5th August, 2010, McInerney group representatives were invited to attend a meeting at the Bank of Ireland and were informed that, arising from certain procedures and requirements which the participating institutions were obliged to follow and to comply with under the National Asset Management Agency Act 2009, and following, it appears, consultation with and instruction from NAMA, the banking syndicate would not advance €0.5 million as standby working capital to the McInerney group, had cancelled its overdraft facility, and had implemented what was described as a 100% cash sweep. A cash sweep means that...