Intervention by the Court in the Conduct of an Examiner
The Irish High Court recently clarified the standard of conduct by which the actions of examiners will be judged and the circumstances in which the Court may interfere in the exercise of an examiner's powers.
The case involved, heard an unprecedented application for directions made by a “disappointed contender” in the eircom examinership, which is the largest examinership to date in Ireland. Of particular interest to Irish insolvency practitioners will be the Court's findings in relation to the standard by which the conduct of an examiner is to be judged. In summary, it was held that:
(a) the Court will only interfere in the exercise by insolvency office-holders of their powers if they have done something “so utterly unreasonable and absurd that no reasonable man would have done it…The legal basis for interference is the office-holder's perversity or irrationality”;
(b) where the examiner made a commercial decision, he was the person qualified to make that decision, not the Court;
(c) the Court has a supervisory role over the examinership process and decides legal issues;
(d) in the event of an examiner either “misbehaving or doing something which was wrong in law" it may be permissible for the Court to intervene; and
(e) in areas of commercial judgement, the Court’s scope for intervention is limited.
The Examinership Period
In an ex tempore judgment delivered on 17 May 2012, Mr. Justice Kelly noted that the examiner had initially been appointed, on an interim basis, in circumstances where the Court had been satisfied that, having regard to the advanced state of negotiations with eircom’s creditors and the fact that proposals had already been put to and voted on by certain of those creditors, the appointment of an interim examiner “would accelerate the process as a whole”. However, a degree of criticism had subsequently been levelled at the examiner for the alacrity with which he had conducted the process.
The judge observed that it should not be presumed that 100 days is the statutory period of examinership and that the initial 70-day period can only be extended if there are circumstances which would warrant an extension being granted. The judge also noted that an examiner is obliged by statute to formulate proposals for a compromise or scheme of arrangement "as soon as practicable after he is appointed" but warned that this was not "a warrant for an examiner once appointed to ride rough-shod over the rights of anybody or to cut corners". That said, an examiner should not be criticised simply because he has shown an enthusiasm for carrying out his statutory obligation.
The judge then noted that the Court was not being asked to determine questions, but to give directions. In particular, the Court was being asked to make directions providing for engagement between the examiner and the disappointed bidder and for due consideration to be given to the bid which had been rejected by the examiner. The judge found that there would be "considerable difficulty" in making any of the orders of the kind sought by the applicants. For example, how could the Court assess the sincerity of any negotiations between the parties if an order was made providing for engagement between them?
It was submitted on behalf of the parties opposing the application (including the second lien co-ordinating committee represented by Maples and Calder) that to make the orders sought would interpose into the examinership legislation a procedure which cannot have been envisaged by the legislature. It would mean, they contended, that the Court would, in effect, be "micro-managing" the examinership. It was also submitted that the examinership legislation did not envisage either an appeal mechanism from decisions made by an examiner or a form of judicial review of the examiner's commercial decisions.
The judge noted that the legislation "presupposes" that the person to be appointed as an examiner will have particular knowledge and expertise, and that is why examiners are invariably drawn from insolvency practitioners who have considerable experience involving insolvent entities. He said that the Court has “neither the expertise nor the back-up” to make commercial decisions – rather, it has a supervisory role over the process and decides legal issues which may arise during the course of the examinership. While in the event of an examiner either "misbehaving or doing something which was wrong in law" there may well be an ability for the Court to intervene, the judge found that, in areas of commercial judgement, the Court’s scope for intervention is limited.
Standard of Conduct
As to the question of the standard by which the conduct of an examiner is to be judged by the Court, the judge noted that, while there was no Irish authority on this point, he was "very much inclined" to take the view that the position adopted by the English Courts is persuasive and that the Court should only intervene in respect of the behaviour of an examiner in very limited circumstances. The judge approved of the English test whereby, in the absence of fraud, the Court will only interfere in the exercise by insolvency office-holders of their powers:
"…if they have done something so utterly unreasonable and absurd that no reasonable man would have done it. The question is not whether the Court would have acted in the same way or would have reached the same conclusion as the insolvency practitioner. Nor will the resulting transaction be set aside where it is established merely that a reasonable practitioner may have acted differently or reached a different conclusion as long as the course of action pursued...was one that a reasonable practitioner could reasonably have contemplated. The legal basis for interference is the office-holder's perversity or irrationality".
The judge concluded that this was the appropriate standard to apply when looking at the decisions of the examiner which were sought to be impugned in this case. Overall, the judge was satisfied that the applicants fell "far short" of demonstrating that the examiner had done anything so utterly unreasonable and absurd that no reasonable man would have done it. On the contrary, he found that there was "an entirely rational and reasonable basis" for the examiner to have come to the conclusion which he did - namely, to reject the investment proposal made by one of the applicants. The rejection of the proposal in question involved the examiner making a commercial decision and he was the person qualified to make that decision, not the Court. Consequently, the judge refused each of the reliefs which had been sought by the applicants and dismissed the application.
This decision will be welcomed by insolvency practitioners as it clarifies their duties when acting as examiners and affirms that they will be allowed significant lee-way by the Courts when making commercial decisions.