ACC takes a €378,000 hit on €1.37 loan secured on Ocean Bar lease as firm takes refuge in quirk of Irish examinership law, writes Barry O'Halloran

BANKERS AND developers are likely to have paid close attention to a High Court case that virtually slipped under everybody else's radar earlier this week. It has far-reaching implications both for business lenders and borrowers.

On Tuesday, in the High Court, ACCBank took a 30 per cent hit on a near €1.4 million loan secured against a lease held on the Ocean Bar in Dublin. The pub's owner, Birchport Ltd, went into examinership in October. It was not able to meet repayments to its creditors, including the bank, Revenue and other parties.

Under the deal agreed by the examiner, Kieran McCarthy, with the creditors and approved by the High Court, ACC will get €950,000 over 15 years in repayment of the €1.37 million debt owed to it by Birchport, and secured against the lease which the company held over the property.

The balance of the loan will be treated as unsecured, which means that ACC will receive 10 per cent of this sum, in common with all other creditors who had no security over the amounts Birchport owed them.

During the hearing at which Ms Justice Mary Finlay Geoghegan approved the settlement - or scheme of arrangement, as it's known in this case - the High Court heard that both the examiner and bank had the lease valued. The examiner's figure was €500,000, while the bank came up with €950,000.

Either way, the bank will now get considerably less than it was owed on a secured loan. The lease was originally valued at €1.4 million, a figure in all likelihood reflected in the bank's balance sheet, where it would have been recorded as an asset.

The idea of securing a loan against an asset is that, if the borrower cannot pay, or defaults, the lender gets the asset and can sell it to recover the cash they are owed. But, according to Graham Kenny, partner with solicitors' firm, Lyons Kenny, a specialist in this area which advised Birchport and worked on the settlement, examinership law allows the value of a secured loan to be "compromised", to the market value.

"Compromised" means reduced, and in the current climate, any settlement means that banks will have little option but to accept a sum less than the original amount borrowed, and less than the original valuation. Both sides can get a valuation, and if there is a difference, they can arrive at a compromise.

If there's a shortfall, the balance is treated as unsecured, which means that just a small percentage of this sum will be repaid. In the Birchport case, it was 10 per cent.

Examinership is a quirk of Irish law that is geared towards saving insolvent companies and protecting as many of their jobs as possible. It gives businesses High Court protection from their creditors while they are going through the process.

The system allows the examiner up to 100 days to put together a scheme of arrangement aimed at settling with the creditors and giving companies a chance to start again with a clean sheet.

That is just what the people involved in the Birchport examinership believe will happen in this and similar situations. Kenny points out that it sets the terms under which insolvent businesses can deal with their debts and begin trading again.

The High Court has to approve the scheme of arrangement. As the company is insolvent, approving these settlements is the lesser of two evils. The other option is to wind up the business with resulting job losses.

This will leave a secured lender with the right to take ownership of the asset against which their debt is secured, and taking their chances with selling it on the open market. This is not an attractive option if it is property.

There is an extra twist to examinerships. Banks and other lenders are entitled to appoint receivers where they have secured a loan against a company's assets.

But once the receiver moves in, the company can still have an examiner appointed within three days, once it can demonstrate that it has a "reasonable" chance of survival.

Also, companies, their directors or other interested parties can themselves go to the High Court and ask that the company be placed in examinership if the business is insolvent, ie cannot pay its debts as they fall due.

It is understood that a number of developers whose bank loans are secured against properties bought close to the peak of the market are looking at this option. If they are having trouble meeting repayments, examinership gives them protection from their creditors.

The net effect of the system is that they can benefit from the reversal in property values, as a scheme of arrangement is likely to reduce the burden of bank loans on their business.

Creditors have a right to be heard in all this. The law requires that the examiner split them into separate groups, generally secured, preferential, unsecured etc. If one class votes in favour of the scheme of arrangement, which in real terms will be some form of compromise hammered out with all of them, it then goes to the court for approval.

Kenny says that in general, at least one class will vote in favour of the scheme. If another class objects, they can be heard first at the general creditors' meeting that the examiner is obliged to call to get the scheme approved, and they will also have the opportunity to be heard in court.

But the key point to the law, most of which is contained in the 1990 Companies Act, is, where possible, to rescue businesses. Throughout its 18-year history, this is what the courts have done, sometimes to the point where critics have said it compromised creditors' rights.

That led to a later amendment, but the basic idea stands. This may not be such a bad thing today - unless of course, you are a bank.