Secured Creditors Claims Can Be Impaired by a Scheme of Arrangement under the Companies (Amendment) Act, 1990

In the case of Re McInerney Homes Ltd & Ors [2011] IEHC 4 the High Court has confirmed that a secured creditor’s claim can be impaired by a scheme of arrangement under the Companies (Amendment) 1990 (“1990 Act”) provided that all other provisions of the 1990 Act have been met. However, the High Court (in a decision approved by the Supreme Court) ultimately refused to confirm the scheme of arrangement proposed by the examiner on the basis it would be unfairly prejudicial to the secured creditors.

A syndicate of banks including Bank of Ireland, IBRC (formerly Anglo) and KBC, together were owed in the region of €110million by McInerney Homes. The examiner’s scheme proposed to reduce their claim to €25 million. At the hearing to confirm the scheme of arrangement the banks made an application to the court objecting to the impairment of their claim. They argued that the 1990 Act does not allow impairment of secured creditors and, that the reduction of their claim would be unfairly prejudicial when compared to their projected realisation of the secured assets under a long term receivership.

In relation to the former the Court reviewed UK case law on their equivalent of Section 201 of the Companies Act 1963 (governing schemes of arrangement). The Courts in UK viewed the status of the secured creditor as being primarily that of creditor although with the benefit of the relevant security. The Court then reasoned that all creditors were required to take pain in cases where a scheme of arrangement under the 1990 Act is approved and that there seemed to be no reason why the terms of the 1990 Act couldn’t apply equally to secured creditors and unsecured creditors.

The banks argued that the 1990 Act would require an express provision to allow a scheme of arrangement to write down against secured creditors. However, the Court disagreed and held that to interpret the 1990 Act as requiring an express provision to allow the write down of the claims of secured creditors under a scheme of arrangement would be to impose an inappropriate restriction on the generality of the language used in the 1990 Act. The Court was satisfied that the court had jurisdiction to approve a scheme of arrangement that has the effect of reducing the amount due to secured creditors provided that scheme otherwise complies with the provisions of the 1990 Act.

In relation to the banks argued that the write down of their claims would be unfairly prejudicial the Court held that it would require exceptional circumstances before it could approve a scheme of arrangement where secured creditors could be shown to be worse off under the scheme than under the alternative methods by which the value of their security could be realised. The 1990 Act provides that a Court cannot confirm proposals that are unfairly prejudicial.

The Court considered that the banks had produced credible evidence that a long-term receivership would realise nearer €75 million as opposed to €25 million under the proposed scheme of arrangement. The court held that to approve the proposed scheme of arrangement in those circumstances would amount to unfair prejudice on the banks’ claim against McInerney Homes and the confirmation of the scheme of arrangement was refused.