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On 13 August 2014, the Irish High Court gave a judgment which addresses significant issues in examinerships and provides some clarity regarding loan acquisitions and the timing and other considerations for creditors when issuing letters of demand.


The Companies (Amendment) Act 1990 (as amended) introduced the examinership process into Irish law to provide a mechanism for the rescue of ailing but potentially viable companies. The legislation provides the company with protection from creditor action while an examiner attempts to formulate a scheme of arrangement to restructure its debt.

The process is commenced by a petition which is usually presented by the company itself but which can also be presented by creditors of the company and certain other parties. Presentation of a petition by creditors is relatively infrequent. The presenter of a petition has a duty of utmost good faith in relation to the application.

In order for the company to automatically get protection from creditor action, the petition when filed in court must be accompanied by an Independent Accountant’s Report (IAR) which addresses certain prescribed matters in relation to the company’s finances and prospects for survival.

If the petition is filed without an IAR the company does not receive automatic court protection and the petitioner must then apply to court that same day on an ex parte basis for an order granting protection.

The Case

The corporate loans of the O’Flynn Group were acquired and transferred to NALM, a wholly owned subsidiary of NAMA, in January 2010. In or about the same time, certain personal loans of Michael O’Flynn and John O’Flynn were also transferred to NAMA.

On 16 May 2014, NALM assigned its interests in the corporate and personal loans to Carbon Finance Limited (Carbon) in a loan sale. Under the terms of the Assignment Agreement, Carbon became bound by obligations equivalent to those formerly owed to the borrowers by NALM.

Following the assignment, there ensued a period of intensive and acrimonious engagement between Carbon and the O’Flynn Group in relation to debt management, information provision and the proper construction of key provisions of the assigned facilities agreements.

On 29 July 2014, without any prior notice, Carbon issued demand letters to Michael O’Flynn and John O’Flynn in respect of their personal borrowings. Within 3 hours of service of the demand letters, receivers were appointed over a number of their assets including their shares in a corporate entity known as Colebridge.

The appointment of the various receivers at 1.05 p.m. was then treated by Carbon as an event of default under the O’Flynn Group’s commercial facilities agreements on foot of various cross default provisions. Demand letters were subsequently served by Carbon on key holding companies within the O’Flynn Group that afternoon, declaring that all sums then outstanding (approximately €1.4 billion) fell due for immediate payment.

On the same day, an examinership petition was presented by Carbon in respect of four O’Flynn group companies without an accompanying IAR. The petition was premised on the balance sheet insolvency of the companies and the reasons for not having an IAR given by Carbon were:

  1. The lack of full co-operation by the O’Flynn Group’s directors and principal shareholders; and

  2. The lack of access to both the companies’ books and records combined with the lack of publically available information relating to the said companies.

Carbon then successfully applied ex parte for creditor protection and the appointment of an Examiner on an interim basis and for an order directing the directors of the companies to co-operate in the preparation of the IAR.

The four O’Flynn companies and Michael O’Flynn and John O’Flynn then brought an application to (1) discharge the ex parte order (2) dismiss the petition and (3) discharge the receivers appointed.

The basis for the application was:

  • That there was a material non-disclosure by Carbon of all relevant facts in the presentation of the petition and in seeking the relief sought in breach of the petitioner’s obligation of utmost good faith.

  • That the petition was presented for an improper purpose, being part of a commercial strategy to take control of the companies in the O’Flynn group and to displace the management for Carbon’s own benefit.

  • The demands to repay personal debt did not give the O’Flynns adequate time to pay in circumstances where the loans could have been paid had they been given adequate time.

  • The demands were void because they were made for a collateral or improper purpose in that Carbon did not, in fact, want repayment. Rather, it wanted to engineer cross default on the corporate facilities.

  • The demands were void because they were made in breach of fair procedures which NALM had been bound by as a public body and which bound Carbon as an assignee of NALM.

The Ruling of Judge Irvine

The examinership

Judge Irvine held that Carbon had failed in its duty of utmost good faith as the petitioner as it failed to disclose five key items.

First, it failed to disclose that there had been no failure to make repayments by the O’Flynns on either the corporate or personal facilities.

Second, it failed to disclose the dispute between the parties regarding the interpretation of the facilities agreements and the fact that this dispute had a very material bearing on whether or not the O'Flynn Group would suffer a cash flow crisis later in 2014.

Third, that in the reasons given for the failure to produce an IAR when the petition was first presented, Carbon had failed to disclose that it had not sought engagement from the companies’ management in this context and it did not disclose the fact of the extensive correspondence between the parties in relation to the provision of information and the extensive nature of information provided.

Fourth, there had been a failure by Carbon to fully disclose the asset disposal strategy which had been agreed between the O’Flynn companies and NAMA and which was detailed in the relevant facilities agreements.

Fifth, that Carbon’s suggestion that there had been no proposals to repay personal facilities by the O’Flynns was inaccurate given that there had been dialogue in that regard. Carbon’s attempt to portray this dialogue as discussions about restructuring rather than repayment was not accepted.

Given the level of non-disclosure, Judge Irvine was satisfied to vacate the original orders made ex parte and dismiss the petition. She had regard to the fact that the dismissal would not prejudice other stakeholders as the companies would continue as going concerns.

The appointment of receivers over the personal assets

In the separate but related application seeking an injunction removing the receivers appointed over certain of the O’Flynns’ personal assets pending a trial, the court granted the O’Flynns’ application pending a trial in October. The usual test for the granting of an injunction was applied by Judge Irvine.

Judge Irvine accepted that the O’Flynns had raised fair and substantial questions to be tried in relation to:

• the contention that the demands gave the O’Flynns insufficient time to respond and pay even applying the test, which she found applied, that the O’Flynns only had to be given sufficient time to mechanically effect payment; and
• the contention by the O’Flynns that the demand letters were invalid as they were sent for a collateral or improper purpose, namely Carbon’s alleged strategy to wrest control of the underlying assets from the O’Flynns by engineering a wider corporate default based on the personal default.

She readily accepted that the O’Flynns met the other parts of the test for an injunction, namely that damages would not be an adequate remedy and that the balance of convenience was in favour of removing the receivers for the short period pending a trial.

The Judge of course made no determination on the merits of the arguments at this stage but flagged that she thought that Carbon would have the better end of the argument at trial in relation to the alleged collateral purpose point, seemingly swayed by Carbon’s forceful contention that a lender is entitled to operate commercial agreements freely entered into by parties with the benefit of advice.

She also rejected as “unstateable” the further argument advanced by the O’Flynns that Carbon was bound as an assignee by NALM’s obligations to act “fairly and reasonably, substantially or procedurally” in the exercise of its powers. She held that these duties were public law duties held only by NAMA / NALM as a public body and Carbon could not be held to have assumed the duties on foot of the loan sale.


This was an aggressive, pre-planned enforcement move by Carbon where there had been no default in repayment. The response of the court suggests that such moves will be stringently examined so a creditor moving in such circumstances will need to be meticulous in the execution of its strategy as it will be held to a high bar on issues such as disclosure and the proper exercise of its rights. Even though it was not disputed that the companies were in fact balance sheet insolvent, this fact did not sway the court.

In previous cases where petitioning companies had failed to make full disclosure, courts have not dismissed the petition because the consequence of dismissal was immediate liquidation or receivership. Where creditors petition, the consequence of a dismissal is more likely to be business continuance, at least in the short term, and this makes it easier to dismiss. Therefore, petitioning creditors will need to make absolutely sure to meet their obligation of utmost good faith disclosure.

A creditor presenting a petition without an IAR will likely need to demonstrate very significant attempts to get information to formulate an IAR and fully disclose those efforts to the court if protection is to be granted on an ex parte basis.

The judgment provides comfort for parties who have acquired loans from NAMA / NALM and are seeking to enforce these loans. The unequivocal statement that the argument by the O’Flynns that NALM’s public law obligations to act “fairly or reasonably, substantially or procedurally” were transferred to Carbon is “unstateable” should end any debate on this point.

The judgment further provides an insightful examination of the issues regarding the time a creditor must give a debtor to pay a demand. The Judge concluded that there is no basis to argue that a debtor should be given any more time than is mechanically required to effect payment. This should dispel any notion that a debtor obliged to pay on demand should be given some reasonable period to make proposals or repay the demand. The mechanics of payment test almost invariably means that a full business day’s notice is sufficient time to pay and that a failure to meet a demand in such a timeframe will almost certainly be a default.

Of more concern to creditors, the judgment has kept alive, though only just, the contention that a creditor should have some valid reason to make a demand rather than being able to do so as of right when they enjoy a demand facility. The court favoured the view that if a creditor has a right it may exercise it as it pleases, but was satisfied to let that issue go to trial where it may be laid to rest absent settlement or further proceedings between the parties.

The content of this article is provided for information purposes only and does not constitute legal or other advice.

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