Repudiating Contracts
Cases
Re O’Briens Irish Sandwich Bars Ltd
[2009] IEHC 465
Ryan J.
“1. Does s. 20 of the 1993 Act, permit repudiation of the leases in these cases?]
2. If so, should the court exercise its discretion in all the circumstances to approve the proposed repudiations?
3. If so, can the provisions of sub-sections (2) and (3) of the Act be complied with in a manner that respects fair procedures?
As to the first question, although, as I have mentioned above, the section does not make any particular provision for a lease nor even mention such a contract, neither does it exclude a lease. Sub-section (1) is the relevant provision. It seems to me that the primary purpose of this is to deal with a situation where the company in protection and another contracting party have contractual obligations that do not involve the payment of money. The company may repudiate a contract where “some element of performance other than payment remains to be rendered, both by the company and the other contracting party or parties”. The primary purpose of the section is to deal with those obligations that are due by and to the company in protection and the words “other than payment” are key to the understanding of the statutory purpose. If the matter is one of payment, a sum that is owed by the company is dealt with in the normal way, with the creditor receiving such payment as may result from the scheme that is formulated. But, where a person is contractually engaged with an insolvent company and there are residual performance obligations, other than money payments, the section provides a mechanism whereby the person is, in effect, put in the same position as a money creditor, if the balance of the obligations is in the creditor’s favour. In other words, if the obligations of performance due by the company are greater than the reciprocal duties, the contracting party is in credit, but that performance has to be valued. That is provided for by sub-sections (2) and (3). In order to facilitate the formulation of a scheme of arrangement, for example, under sub-section (3), the court may hold a hearing and make an order determining the amount of the loss or damage and such sum is then due by the company to the creditor as a judgment debt.
There may well be circumstances where non-pecuniary obligations under a lease remain to be performed by an insolvent company, and the loss or damage resulting from repudiation can be determined by a court under sub-section (3) of section 20. However, I do not think that s. 20 permits the repudiation of entire contracts with all elements of performance, including money payments, because that would, in my view, be to ignore the restriction that is contained in sub-section (1) to residual performance elements other than payment. In the present cases, I do not think that the section can be read as permitting the wholesale repudiation of these more than forty leases, including all their performance elements, including payment. It seems to me, in the circumstances, that the applications to repudiate all these leases do not come within the terms of section 20(1).
If my interpretation of the section is not correct and it is permissible in law to repudiate the leases in these cases, I do not think that as a matter of discretion, approval should be granted for the wholesale repudiation of all obligations under more than forty leases, in circumstances of great uncertainty as to the legal consequences that would ensue; where the company would continue to have contractual obligations under its subleases, unless they are going to wither away, which is another matter on which I am wholly unclear; where it has not been possible to consider in detail individual circumstances, and where the time for all of the respondents to consider the implications of repudiation on their own situations has been so very short.
Finally, the business exigencies of the application make it impossible for the court to comply with its obligations under sub-section (3) and the constitutional requirements of fair procedures in determining the amount of loss or damage suffered by parties by reason of the repudiation.
For all these reasons, I refused the applications made in the motions.”
Re Linen Supply Ireland Ltd
[2010] IEHC 28
McGovern J.
What is the nature of the landlords’ claim for future rent?
14. Section 3 of the Act sets out a list of bodies or persons who may present a petition under section 2. Among those who can present a petition are:
“(c) A creditor, or contingent or prospective creditor (including an employee) of the company. .”
While petitions by creditors are somewhat unusual in the examinership process, it is clear that the Act had regard to different types of creditors who might make such application. Such creditors are entitled to be heard by virtue of s. 3(b) of the Act.
15. In this case, the claim by the landlords is a claim for agreed damages based on the loss of rent in the future, and taking into account dilapidations and the possibility of the landlords re-letting the properties during the currency of the term of the repudiated leases. In Re Park Air Services Services plc. [1999] 2 WLR 396, the court considered the implications of a disclaimer of a lease in a winding up under the Companies Acts. The court held that the statutory right to compensation was a right which comes into existence at the moment of the disclaimer. It is not a right to the performance of the contract disclaimed and it is not a right to the payment of future debts. It is a right to the payment of compensation coming into existence at the date of the disclaimer. While the word “creditor” does not ordinarily include a person who has a contingent or future claim against the debtor, it has to be given a certain flexibility of meaning according to the context in which it is used. It cannot be said that the claims of the landlords make them contingent creditors. In Stonegate Securities Limited v. Gregory [1980] Ch. 576, Buckley L.J. said at p. 579:
“In that context, in my opinion, the expression ‘contingent creditor’ means a creditor in respect of a debt which will only become due in an event which may or may not occur; and a ‘prospective creditor’ is a creditor in respect of a debt which will certainly become due in the future, either on some date which has already been determined, or on some date determinable by reference to future events.”
I have been referred to the 2nd Edition of ‘Applications to Wind Up Companies’ by Derek French, in which the author says, at page 461:
“It is clear, though, that there are prospective debts which are not contingent debts. For example, the liability of a lessee under an existing lease to pay rent for the remaining term of the lease was described as ‘a perfectly certain debt, a future debt, but not a contingent debt’ by Lord President Dunedin in Palace Billiard Rooms Limited and Reduced [1911] 2 S.L.T. 324 at page 326.”
16. In Oppenheimer v. British and Foreign Exchange and Investment Bank [1877] 6 Ch.D. 744, Hall V.C. said, at p. 746:
“Now, rent which will accrue under covenants which have been entered into by the company, though payable at future times, is a claim of a certain ascertained amount.”
He went on to say at p. 747:
“Rent is not payable as a debt or a claim subject to a contingency; and because there is another remedy for payment viz., by distress, its value is not made less certain.”
17. The position of the landlords at the presentation of the petition seems to me quite clear. They were prospective creditors. While the landlords argue that their claim was not a claim for unpaid rent but for damages arising on the repudiation of their leases, pursuant to s. 20 of the Act, this does not alter their status as prospective creditors. That prospective creditors are entitled to present a petition is clear (s. 3 of the Act).
18. The bankruptcy code and Companies Acts recognise the rights of creditors with debts payable in the future as well as those payable at present. In Re Cancol Limited [1996] 1 All. E.R. 37, Knox J. held that a narrow construction of “creditor” which would include only those with a present right to payment would produce anomalous results. In the that case, the issue arose as to whether a company voluntary arrangement could, as a matter of law, bind persons entitled to future contingency payable debts, or whether it could only bind persons entitled to the benefit of presently enforceable claims. The company’s landlord was listed in the Schedule of Unsecured Creditors, and applied for an order declaring that all money falling due under the lease after the creditors meeting, was payable in full, and was not affected by the voluntary arrangements. Knox J. did not accept that a liability to future rent is incapable of inclusion as a matter of law in a company voluntary arrangement. At p. 43, he stated:
“Moreover, the power of a company with the approval of a court to enter into schemes of arrangement under s. 425 of the Companies Act 1985, in my judgment, extends to schemes of arrangement which affect the rights of creditors with debts payable in the future as well as those payable at present. This was decided in relation to s. 2 of the Joint Stock Companies Arrangement Act 1870, in Re Midland Coal, Coke and Iron Company, Craig’s Claim [1895] 1 Ch. 267.”
He went on to refer to the judgment of Lindley L.J. giving the judgment of the Court of Appeal at p. 277, where he said:
“Whether the court is bound to give effect to his [that is, Mr. Craig, the original lessee] opposition is a different question, and depends on the meaning of the word ‘creditor’ in the Joint Stock Companies Arrangement Act 1870. Considering that that Act was passed in order to enlarge the powers conferred by s. 159 of the Companies Act 1862, we agree with Mr. Justice Wright in thinking that the word ‘creditor’ is used in the Act of 1870, in the widest sense, and that it includes all persons having any pecuniary claims against the company. Any other construction would render the Act practically useless.”
19. At p. 45 of the Cancol judgment, Knox J. said:
“If Mr. Schaw-Miller is right in his submission regarding the meaning of the word ‘creditor’, the directors would appear to have to exclude secured creditors on a contingency such as a debt made payable on demand, a very common case, which would be outside the scheme of the voluntary arrangement because ‘creditors’ on this hypothesis only includes those with a present right to payment and that does seem very anomalous.”
At p. 46, he stated:
“Either the word ‘creditors’ in s. 425(1) includes creditors who have claims which are not presently enforceable, such as a landlord with a right to future rent, or it does not. If it does, it goes a long way towards destroying Mr. Schaw-Miller’s thesis regarding the natural or ordinary meaning of the word ‘creditors’ because there is no relevant statutory enlargement of the term. If it does not, and the Midland Coal case, contrary to the views expressed in Buckley , is no longer good law in relation to s. 425 of the 1985 Act, Parliament has radically restricted the power of compromise with creditors in a way which would deprive it of a great deal of its usefulness. The only other possibility that I can see would be that the word ‘creditor’ would have a variable meaning according to whether or not the company in question was in liquidation, with a wider construction applicable to those that were in liquidation and a narrower for those that were not in liquidation. That is also a profoundly unsatisfactory construction, giving a single word different meanings in the same sentence in relation to different situations.”
It seems to me that the reasoning of Knox J. is equally applicable to our company law as it applies in winding up and examinerships.
20. I have been referred to the Interpretation Act 2005. Section 5 of the Act applies to the construction of ambiguous or obscure provisions. The section provides that if a provision of any Act is obscure or ambiguous or would, on literal interpretation, be absurd or fail to reflect the plain intention of the Oireachtas:
“. . . the provision shall be given a construction that reflects the plain intention of the Oireachtas . . . where that intention can be ascertained from the Act as a whole.”
The landlords rely on the decision of the Supreme Court in Albatross Feeds Limited v. Minister for Agriculture [2007] 1 IR 221, which held that the exercise of a power depriving a citizen of his property rights would require to be justified by clear legal authority. At p. 245, Fennelly J. stated:
“However, clear words are necessary where fundamental rights are at issue. I do not accept that our courts are obliged to interpret our laws so as to confer drastic powers by vague or indirect words, or, indeed, by none. In the present case, such a result cannot be achieved by any normal process of legal reasoning.”
21. Undoubtedly, the property rights of the landlords in this case are being impaired or interfered with (see Blake v. A.G. [1982] 1 I.R. 117 and In the Matter of Art. 26 of the Constitution and In the Matter of the Housing (Private Rented Dwellings) Bill 1981 [1983] 1 I.R. 181). It seems to me, however, that the plain intention of the Oireachtas, in enacting the Companies (Amendment) Act 1990, was to provide for the repudiation of certain contracts (including leases) and that the court could appoint an Examiner who may present a scheme of arrangement that impairs the rights of a creditor, including a prospective creditor. In those circumstances, I hold that the agreed debts due to the landlord creditors is subject to impairment under the Act, and the court does have jurisdiction to confirm a scheme which makes provision for such impairment. I am satisfied that the proposals are fair and equitable in relation to the landlord creditors.”
Bestseller Retail Ireland Ltd -v- Companies Acts
[2010] IEHC 155
McGovern J.
“Purpose of Examinership
8. In enacting the Companies (Amendment) Act 1990, the legislature sought to provide a rescue mechanism for companies that were in trouble, but potentially viable. The jurisdiction to appoint an examiner has been described as “. . . an exceptional jurisdiction . . . which negatively affects the rights of creditors”. See Denham J. in Re Vantive Holdings Ltd. (No.2) [2009] IESC 69, at paragraph 30.
9. In Re Traffic Group Ltd. [2008] 3 IR 253, Clarke J. stated:
“It is clear that the principal focus of the legislation is to enable, in an appropriate case, an enterprise to continue in existence for the benefit of the economy as a whole and, of equal, or indeed, greater importance, to enable as many as possible of the jobs which may be at stake in such enterprise to be maintained for the benefit of the community in which the relevant employment is located. It is important, both for the court and, indeed, for examiners, to keep in mind that such is the focus of the legislation. It is not designed to help shareholders whose investment has proved to be unsuccessful. It is to seek to save the enterprise and jobs.”
It has been accepted by the courts that although the Act provides a breathing space for troubled companies, it does so at the expense of some creditor or creditors.
10. In an application such as this, the court has to exercise its discretion as to whether or not the repudiation of leases should be permitted. In the case of Linen Supply of Ireland [2010] IEHC 28, this Court allowed the company to repudiate leases, subject to certain conditions. That was a case where the scheme of arrangement involved an investment being made by the company’s parent. However, that case can be distinguished from the matter before me. In the present case, the parent company is guarantor for the rent due under a number of the leases, and no application is made to repudiate the leases on foot of which there are guarantees.
11. In my view, this is a material consideration in exercising my discretion as to whether or not to permit repudiation of the leases. There is no doubt that all the Company’s outlets in the State are running at a loss. But the criterion for picking out those leases which are to be repudiated seems to have been solely or predominantly on the basis of guarantees by the parent company. Indeed, in the Dundalk case, it was not even listed in the report of the independent accountant as requiring to be repudiated. The Examiner subsequently took a different view, but it appears to have been postulated on a number of assumptions connected with future turnover and planned renovation costs. The landlords complain that they have not been furnished with sufficient information and that they have been given information on a piecemeal basis and at the last minute. For example, in the case of the Navan property, a substantial figure is claimed by the Company as overheads, but no explanation is given concerning a breakdown of the figure, and the landlord says that the effect of the large amount claimed by way of “overheads” is to turn a profit of approximately €1m into a loss of €408,000. In my view, the landlord was entitled to this information.
12. The repudiation of a lease under s. 20 of the Act is a significant interference with the property rights of a landlord and it must not be exercised lightly. The court has a wide discretion. I must consider the overall purpose of the examinership legislation. But the court is also entitled to consider an application under s. 20 in the context that it is an interim application in the examinership process and does not necessarily determine whether or not a scheme of arrangement can be brought before the court. If this application is refused, it does not terminate the examiner’s appointment and he would then have to go back and look at the situation afresh. I am aware that the landlords of many of the premises referred to in the independent accountant’s report have reached a compromise with the Company and it is quite possible that a compromise could be reached with the objecting tenants in the event that I refuse the application of the Company.
13. Throughout the hearing of this motion, one fact stood out in stark contrast, namely, that the only leases in respect of which repudiation was not sought were those where the parent company had given guarantees. The evidence suggests to me that the dominant motive for excluding these properties from the ambit of the motion was to protect the interests of the holding company which is the shareholder in the Company. This, in turn, suggests that it is a process “. . . designed to help shareholders whose investment has proved to be unsuccessful” to use the words of Clarke J. in Re Traffic Group Ltd. and this is something which is outside the scope and purpose of the Act.
14. That is a shortcoming which affects all of the leases in which the landlords propose repudiation.
15. I therefore refuse the application of the Company in respect of the leases in Navan, Dundalk, Tralee and Sligo. I will hear counsel as to the effect of that order on the remaining leases.£