The Court of Appeal decision in Re KH Kitty Hall Holdings laid down that a debt settlement agreement to discharge debts of a number of companies was not a bar to the appointment of an examiner to those companies.
This was despite the fact that the application for the appointment of an examiner went against the obligations imposed on the companies under the restructuring agreement and the secured creditor objected to the application for examinership.
In that case, the Court of Appeal confirmed the appointment of an examiner to seven group companies in the Edward Capital Group (the "Edward Group"). The Edward Group was controlled by local Galway businessman Gerry Barrett.
Mr. Justice O’Connor in the High Court initially appointed an interim examiner to the Edward Group following a petition by the Edward Group. Prior to that, Deutsche Bank had appointed a receiver over the assets of five of the companies. Deutsche Bank (owed approx. €680 million) opposed the application for examinership. Deutsche Bank claimed that the examinership petition was (i) an abuse of process and (ii) an attempt by the Edward Group to renege on an agreement entered into in December 2016 to restructure and discharge its debts.
The High Court refused to confirm the appointment of the examiner to four of the seven companies on the basis that the primary motivation behind the application was Mr Barrett's attempt to retain control of the firms despite the failure to comply with the debt settlement agreement. This has to date been a valid reason for refusing an examinership. Mr Justice O'Connor only confirmed the appointment of an examiner to three of the companies, the Meyrick Hotel companies, on the basis of protection of the hotel's customers and employees.
The Edward Group appealed the decision to refuse to appoint an examiner to the remaining companies, and Deutsche Bank cross-appealed that the examinership should not be confirmed in respect of any of the companies.
Mr. Justice Hogan in the Court of Appeal overturned the High Court decision and confirmed the examiner's appointment to all seven companies. The Judge made the following observations:
- The presentation of the petition by the companies who are parties to the debt settlement agreement was not an abuse of process.
- The existence of the debt settlement agreement between the secured creditor and the companies is a “relevant matter” to take into consideration in considering whether or not to appoint an examiner.
- The entire examinership system is premised on the assumption that pre-existing commercial contracts will be overridden, varied, negated and dishonoured in the wider public interest of rescuing an otherwise potentially viable company.
- The mere fact that examinership was inconsistent with the terms of the debt settlement agreement could not in and of itself justify a refusal to appoint an examiner.
This decision undoubtedly widens the scope for examinership, as companies that are seeking to renege on existing debt settlement agreements or other obligations could nonetheless seek to apply to Court for examinership and be granted the protection of the Court.
This decision will likely give secured lenders pause for thought before concluding debt settlement arrangements, given the apparent scope for creditors to now seek to use the examinership process to renege on debt settlement obligations.