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Objection to examiner's proposals on basis of creditor classification upheld

The High Court examinership of Mac Interiors Limited has given rise to a second important judgment (see our update dated 14 July 2023 in relation to the first such judgment here). In a judgment delivered on 9 October 2023, Mr Justice Quinn held that the court had no jurisdiction to confirm the examiner's proposals for a scheme of arrangement on the basis that there was a material irregularity in relation to the meetings at which the proposals were considered by the creditors (contrary to section 541 of the Companies Act 2014).

The irregularity in question was the creation of a class of creditors described as the "Retained Project Creditors" class (which was the requisite impaired and "in the money" class of creditors that voted in favour of the proposals), which the Court concluded was an improperly constituted class.  Although it was proposed that the Retained Project Creditors would receive the same dividend under the proposals as the ordinary unsecured creditors' class, the examiner contended that it was appropriate to constitute a separate class for the Retained Project Creditors on the basis that the creditors in that class had claims that arose from projects that had not been terminated by the company or by the relevant creditors. Mr Justice Quinn, in by far the most detailed judicial analysis of class composition since the inception of examinership, concluded that:

  1. the test applicable to class composition with regard to schemes of arrangement under Part 9 of the Companies Act 2014 (based on the decision of the Court of Appeal of England and Wales in Sovereign Life Assurance Company v Dodd [1892] 2 QB 573) also applied to class composition with regard to examinership schemes of arrangement (ie that each class should be confined to persons "whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest");
  2. the court was required to focus primarily on the class constituent creditors' rights;
  3. lack of commonality of interest may be taken into account in exceptional circumstances provided the different interests of the proposed class are (a) not extraneous to the merits of the proposals and voting on the proposals, (b) based on verifiable criteria that are not vague, tenuous or speculative and (c) clearly identified by the examiner in the proposals; and
  4.  the difference between the interests of the Retained Project Creditors class from those of the ordinary Unsecured Creditors class (namely the Retained Project Creditors' shared expectation of continued trading relationships) in this case was not sufficient for these purposes.

As a result, the court concluded that the members of the Retained Project Creditors class should have been included in the class of Unsecured Creditors. As the class of Unsecured Creditors had not accepted the examiner's proposals, the requirement under s541(3A)(a) and s541(4)(a) of the Companies Act 2014 that at least one class of (validly constituted) impaired creditors had voted to accept the proposals had not been met. Accordingly, the court had no jurisdiction to confirm the proposals.

The detailed scrutiny by the court of the issue of class composition is particularly significant against the backdrop of the new requirement (arising from the European Union (Preventive Restructuring) Regulations 2022) to procure the approval of an impaired "in the money" class of creditors (under s541(3B)(a)(ii) of the Companies Act 2014). This means that it is no longer possible for a court to approve a scheme of arrangement solely in relation to the vote of an impaired "out of the money" class of creditors (ie a class of creditors that, upon a valuation of the company as a going concern, would not reasonably be presumed to receive any payment or retain any interest if the liquidation order of priorities was applied).

If you would like to discuss this in more detail please contact Commercial Litigation Partners, Tony O'Grady, Julie Murphy-O'Connor, Brendan Colgan or Kevin Gahan or your usual contact at Matheson.