The objection made by the Revenue Commissioners was on foot of Section 543(a) of the Companies Act, 2014 (the Act) that the class of "Retained Project Creditors" was improperly formed. The Revenue Commissioners asserted that this grouping of creditors should not be an individual class, but rather included in the general classification of "Unsecured Creditors".
Where the Retained Project Creditors was the only impaired group to vote in favour of the Scheme, the question then arose as to whether any validly formed class of impaired creditors had approved the Scheme. In circumstances where the general unsecured class of creditors, including Revenue whose debt was many multiples of the next largest debt due by the Company, had voted to reject the Scheme.
The Court was satisfied that all of the other requirements to confirm the proposals had been met, that is to say (i) the best interests of creditors test, (ii) that creditors with common interests in the same class were treated equally, (iii) that the proposals are fair and equitable and not unfairly prejudicial to the interests of any interested party and (iv) that there was a reasonable prospect of facilitating the survival of the Company.
The technical questions put to the Court were:
- Whether the composition of classes for an examiner’s scheme of arrangement is governed by the same principles which govern class composition in schemes of arrangement outside examinership, regulated by Part 9 of the Act; and
- Whether the formation in this case of the class of Retained Project Creditors was valid having regard to the applicable principles for class composition.
The Court's Assessment
The Court's assessment focused on the difference between "rights" and "interests" in the classification of creditors. The Court had particular regard to the established case law by reference to schemes of arrangement and the judgment in the case of Sovereign Life Assurance Company v. Dodd, which was relied upon by the Revenue Commissioners in their submissions.
The Sovereign decision (accepted in this jurisdiction in In Re Millstream Recycling Ltd) established a “rights based” test, where the starting point is to class creditors by reference to their existing legal rights (including their rank in a liquidation) and by reference to the treatment of their rights in the proposed scheme.
The Court concluded that the differences between Part 9 of the Act (Schemes of Arrangement) and Part 10 of the Act (Examinership) and the amendments to Part 10 by the European Union (Preventive Restructuring) Regulations, 2022 do not warrant a departure from the Sovereign Life principles, save in exceptional circumstances which:
- are not extraneous to the business of the meeting, namely the consideration on its merits of the proposed scheme of arrangement and voting thereon;
- are based on verifiable criteria which are not vague, tenuous or speculative; and
- are clearly identified and defined by the examiner in his proposals.
The Court found that differential treatment amongst trade creditors as to a possible future business relationship with the Company, not grounded in or associated in any way with legal rights, did not meet this criteria and was not sufficient to fracture a class whose rights both past and present are otherwise identical.
The Court concluded that it can only be in exceptional circumstances that different non-rights based interests can be invoked to subdivide a class whose rights are otherwise identical and held that:
"to permit such a tenuous distinction to ground the formation of a class, particularly where the acceptance by only one class is critical to the court’s jurisdiction, presents the real danger that doing so becomes an instrument, not to veto the rights of other classes, but to overcome the voting threshold requirement on the basis of the most tenuous of distinctions."
Having regard to the foregoing, the Court found that no meeting of a validly formed class of impaired creditors had accepted the Scheme. Accordingly, the requirement contained in Section 541(3A)(a) and Section 541(4)(a) of the Act had not been met and therefore the Court had no jurisdiction to confirm the Proposals.
This examinership had the potential to open the floodgates as regards the very significant volume of "warehoused" tax which has by the passage of time, become unsecured debt. Had the Scheme been approved many companies with high levels of unsecured Revenue debt could have been motivated to seek the protection of the Court to prepare a scheme of arrangement to write down unpaid tax.
The effect of the decision is that it narrows the discretion available to Examiners when classifying creditors in formulating proposals for a Scheme of Arrangement. When included in the general pool of unsecured creditors, it is most likely that the Revenue Commissioners will have the largest vote in whether or not to approve a Scheme.
This most important judgment has effectively protected the future of billions of Revenue warehoused debt.
Written by Mark Woodcock and Ciara Gilroy
  2 QB
  IEHC 571
 Pp. 157
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