Where a creditor wishes to preserve its ability to rely on a guarantee for a liability of a company in examinership, it must carefully follow the procedure set out in section 549 the Companies Act 2014 (the Companies Act).
In essence, where a write down of a liability is proposed in proposals for a scheme of arrangement, a creditor must make an offer in writing to the guarantor to transfer any voting rights as they relate to the debt to the guarantor within 48 hours of receipt of notice of the creditors’ meeting convened by the examiner (an Offer Notice).
Failure to do so can make the guarantee unenforceable, save with the leave of the Court in limited circumstances. That could mean, in the majority of cases, that something in the region of 90-95% of the liability may be unrecoverable by the creditor assuming the dividend under the scheme is at the typically modest level of 5-10 cent in the euro.
Recent Judicial Consideration
In the recent High Court decision in Leonard & Woods Developments Limited v Brian Pagni, the plaintiff company sought an order for summary judgment against the defendant on foot of sums it claimed he owed to it by reason of personal guarantees. The company whose debt the defendant had guaranteed had successfully exited the examinership process leaving a significant portion of the amount due to the plaintiff unpaid.
The defendant raised two arguments in the case. Firstly, he submitted that the Offer Notice was delivered out of time and the plaintiff could not rely on the guarantee.
Secondly, he argued that the Plaintiff had acted inconsistently with the Offer Notice and conducted itself in such a manner as to revoke the offer. The acts complained of were i) that the plaintiff had executed and sent a proxy form to the examiner to allow the plaintiff, via its proxy, participate in the creditors’ meeting and ii) that the proxy had voted in favour of the scheme on the plaintiff’s behalf at the creditors’ meeting.
With regard to the first argument, the Court was satisfied on the evidence before it that the Offer Notice had been sent by the plaintiff to the defendant within the statutory 48-hours from the time the plaintiff received notice of the creditor’s meeting.
As to the second argument, the evidence established that the defendant had not attended the creditors’ meeting. Moreover, the defendant had not communicated with either the examiner or the plaintiff to confirm if he had accepted the offer contained in the Offer Notice. The Court held that “It is very clear that the statutory provisions place an onus on the guarantor to positively indicate an acceptance of the offer, before the guarantor is in a position to displace the creditor’s right to vote at the meeting” and rejected the argument that the conduct of the plaintiff amounted to a revocation of the Offer Notice.
In that regard, if the guarantor wishes to accept such an offer, then the guarantor must furnish the examiner with a copy of the offer at the meeting and inform the examiner that the offer is accepted.
Creditors who receive notices convening creditors’ meetings from an examiner should be aware of the strict and short timelines imposed by the Companies Act that must be followed to preserve their rights against guarantors.
While this case is of assistance as the creditor’s case ultimately prevailed, it may be prudent for creditors to refrain from attending creditors’ meetings where they have the benefit of a guarantee for the liability to avoid any debate as to compliance with the relevant legislation to serve an Offer Notice.
Somewhat separately, the issues raised in the case will also be of relevance to creditors who hold guarantees of the debt of companies who seek to avail of the new rescue process proposed under the Companies (Rescue Process for Small and Micro Companies) Act 2021, given the wording of section 558ZI of that Act mirrors that of section 549 of the Companies Act.
For more information, please contact a member of our Restructuring & Insolvency team.