Donal Dunne: Stormy weather



Donal Dunne
Donal Dunne

Donal Dunne, associate at Eugene F Collins, looks at recent decisions with implications for UK-headquartered retail businesses.

A number of recent High Court decisions in applications to restructure Irish retail businesses are of potential importance for those retail businesses whose parent company is in the UK.

The application

Two separate Irish landlords of the liquidated Monsoon retail business challenged the application of a Company Voluntary Arrangement (CVA) on Irish retail leases which was commenced in the UK. The Irish Monsoon business had gone into liquidation with the UK parent company having been placed into administration. The UK parent company, as part of the administration process, wished to restructure its retail business in the UK and Ireland through the CVA.

The CVA

A CVA under the UK Insolvency Act 1986 has no direct equivalent in Irish law.

The application of the CVA on Irish retail leases would have resulted in a significant reduction in rental payments. The CVA was passed at a creditors’ meeting by over 80 per cent in value of Monsoon creditors.

The Irish landlords made separate applications and sought a declaration of the Irish Court that the Irish leases were not affected by the CVA and remained in full force and effect.

As an alternative, the Irish landlords also sought declarations of the Court:

  • that the decision to approve the CVA was contrary to fundamental principles; and
  • that any purported modification of Irish lease obligations conflicted the constitutionally protected property rights under Article 40.3 and Article 43 of the Constitution as such purported modification was without any judicial intervention or hearing of any kind.

The CVA Process

As part of the CVA process, the landlords of Irish retail leases which were included in the CVA were invited to attend and vote at a creditors’ meeting which ultimately approved the CVA. The CVA could have been challenged by the Irish landlords before the English Courts.

The High Court also considered the application of the EU Recast Insolvency Regulation upon the enforceability of the CVA. The Courts specifically considered the application of Regulations 11(1) and 11(2) on whether the Irish Courts had sole jurisdiction to approve the termination or modification of contracts relating to an immoveable property and whether the insolvency regulation applied to leases. The Court also considered arguments under the Recast Insolvency Regulation as to whether a CVA could be considered to be a composition approved by a Court which obliged the Irish Courts to recognise and enforce a CVA.

The Decision

The Court held that in the particular circumstances of the Monsoon CVA, a recognition of the outcome of that CVA process would be manifestly contrary to the public policy of the state in that it “did not provide any mechanism to remit any necessary representations to be made by the Irish landlords and/or for an appropriate mechanism to consider those representations by all of the creditors in advance of casting their votes.” The Court held that under the EU Recast Insolvency Regulation the CVA was not entitled to be recognised or enforced in Ireland insofar as it purported to affect any variation of the Irish leases which would be manifestly contrary to public policy.

Mr Justice McDonald stressed that this conclusion relates solely to the procedure adopted in the Monsoon CVA and stated “….it seems to me that the procedural unfairness which arose in this case could have been avoided had appropriate steps been taken in the course of the CVA process to redress it appropriately. I therefore doubt that this decision will be repercussions for the future enforcement of CVAs in Ireland.”

Conclusion

This decision when taken with the recent High Court decision in New Look Retailers (Ireland) Limited and the Companies Act 2014 reinforces the importance of engagement with creditors being critical to any restructuring process. The Monsoon decision should not be taken as meaning that a CVA will not be recognised and enforced in Ireland. The Judgment clarified the following points:

  • A creditors’ meeting held as part of the CVA process could be a “Court” as defined under the EU Recast Insolvency Regulation.
  • For a CVA to be recognised and enforceable in Ireland, it is crucial that any party whose property interests would be adversely affected must be provided with sufficient opportunity to make representations and for those representations to be circulated to all creditors in advance of any creditors’ meeting under the CVA process in order to avoid procedural unfairness.
  • The right to make representations and to be heard does not necessarily require that a party who may be adversely affected by a CVA must be given an oral hearing.
  • For a CVA under the UK Insolvency Act 1986 to be enforceable in Ireland requires that any CVA which would adversely affect Irish property rights must, as part of the CVA process, take into consideration any representations made by Irish property owners.

The Court did not make any determination on the constitutional concerns which were alleged to have arisen in the proposed CVA. The basis for the Court’s decision was made solely in respect of the procedural fairness issue. However, any CVA would have to be deemed to comply with Irish public policy and the protection of property rights in order to be recognised and enforceable in Ireland.

Therefore, if appropriately structured, a CVA may be enforceable against immoveable property in Ireland.