Examinership application refused in order to uphold outcome of separate High Court proceedings

About this case:

• Judgment:
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JJ Red Holdings Limited, which has been operating the Dublin Citi Hotel since 2006, sought the protection of the Court after it was unable to satisfy the terms of a settlement agreement it had entered with its landlord.

An interim examiner had been appointed to JJ Red by order of Justice Costello in August 2016, and the present application to the High Court was brought by JJ Red to confirm the appointment of the examiner. The petition was supported by all of the employees and by the trade creditors.

Henciti Limited – a limited liability company owning the landlord’s interests in the occupational lease under which JJ Red Holdings occupies the hotel and bar premises – opposed this application.

Background

Justice Baker explained that JJ Red “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 €0.25m and “the quantum of losses increased up to 2010 and declined thereafter.” JJ Red returned to profit in 2013, and in 2015 showed a before tax profit of nearly €0.5m

Profits of €312k were shown for the first six months of 2016, therefore JJ Red argued that it had a profitable and very strong core business, and this argument was supported by the report of an independent expert.

Henciti purchased the premises in August 2015, and at this time the arrears of rent were in the region of €1m. Having taken the benefit of these arrears by separate assignment, a settlement agreement was entered into in July 2016 which involved an immediate payment of €365k.

JJ Red defaulted on their payment, and under the terms of the settlement agreement in the High Court, Henciti sought to obtain an order for possession and a declaration that the lease was validly forfeited on the happening of the default.

At the time of the petition, it was common case that JJ Red Holdings was insolvent, with an up-to-date balance sheet showing creditors standing at €836k, in addition to €1.1 m owed to the landlord for rent.

The law

Justice Baker considered the Supreme Court decision in In re Gallium Limited IESC 8, to be the starting point for the jurisdiction of the court to appoint an examiner to an insolvent company.

In Gallium it was held that a petitioner must show that the company has a reasonable prospect of survival if examinership is to be granted, however Justice Fennelly stated “…a petitioner does not, by getting over that threshold, acquire a right to have an order made. I still think it is fair to say that the section confers a “wide discretion” on the court, or alternatively, that the court should take account of all the circumstances. The establishment of a reasonable prospect of the survival merely triggers the power, which remains discretionary.

The evidence in JJ Red’s case was that any scheme of rescue would require substantial funding, either by investors or commercial lenders.

Justice Baker stated that the “standard of proof may be said to be relatively low, and all that is required is evidence of a reasonable prospect of survival, not a probability that a company will exit the protection with some or all of its undertaking intact”. As per Claremorris Tourism Limited IEHC 796, in which it was stated that “the test is whether a reasonable prospect of success of the company is shown, not whether all factors that might lead to that success have been established”.

Justice Baker also reflected upon the principles discussed in In re Vantive Holdings 2 IR 198, here it was hwld that “the legislation has the effect that a scheme devised by an examiner may radically alter the structure and ownership of a company, and the future interest not merely of those persons but also of distant creditors”.

Justice Baker emphasised that the “confirmation of the appointment of the examiner engages the exercise of discretion” and that if the result of the process intended to be, or is likely to be, a variation of the settlement agreement” it was necessary to consider whether it can be said that the petition is presented for a collateral and improper purpose.

Furthermore, the judgment in Vantive made it clear that it was considered wrong in principle that the protection of the court could be “artificially obtained”.

It was also necessary to place significant importance on the finality of litigation, as per Henderson v. Henderson 3 Hare 100.

Conclusion

Justice Baker recognised that the majority of examinership cases, especially in the context of the banking and property price collapse, are where a company has historic unsustainable liabilities that are required to be met if the company is to continue as a going concern and that “the mere fact that a debt or liability is recent does not of itself mean that the protection of the court may not be given”.

Justice Baker’s ultimate concern was that the effect of examinership in this case would be that “a very recent settlement of contentious litigation” would be avoided or varied, and that the true purpose of the petition was “to avoid the onerous terms of that settlement”.

Justice Baker held that the petition was an attempt to buy time, but that time had run out for JJ Red – accordingly, she dismissed the petition, finding that it was not presented in good faith.