A RECENT Supreme Court ruling has cleared up an issue that threatened to derail rescue plans for insolvent companies in examinership.
A number of recent High Court decisions left lawyers believing that companies placed in examinership could not “repudiate” – that is, get out of – leases on business premises to facilitate their rescue.
Lawyers say that the issue is particularly important to retail businesses where repudiating leases on branches that are not making money is central to rescuing the overall business from insolvency.
However, a Supreme Court ruling in the Linen Supply of Ireland case means that companies in examinership can repudiate leases.
In that case, examiner Kieran Wallace of KPMG wanted to cut overheads and secure better rental terms by repudiating leases on five properties operated by branches of the company.
The High Court originally ruled that it could not do so, but the Supreme Court subsequently stated that leases are contracts within the meaning of the examinership legislation, and could thus be repudiated.
In April, the High Court allowed DVD rental chain Chartbusters to repudiate leases on some of its stores.
The landlords’ claims for compensation for loss of future rent were then included in the examiner’s “scheme of arrangement”, the deal he made with the group’s creditors.
Last autumn, the High Court refused to allow O’Brien’s Irish Sandwich Bars to repudiate leases it held on franchised restaurants around the Republic.
The repudiation of the leases was an original condition of a rescue plan for the company that involved the takeover of its operations in the Republic by Abrakebabra Investments Ltd (AIL).
O’Brien’s was placed in liquidation after the court refused to allow it repudiate leases. However, AIL did subsequently rescue the business.
Lawyers have welcomed the Supreme Court’s ruling in the Linen Supply case. David Baxter, corporate restructuring specialist with Dublin solicitors AL Goodbody, said at the weekend that in light of the difficulties facing Irish retailers, “the importance of this decision cannot be underestimated”.
While he agreed that the decision would give landlords little comfort, he said that they should be ready to negotiate with examiners early on in the process.
Rod Ensor, head of corporate restructuring with Matheson Ormsby Prentice, said that the Supreme Court ruling effectively lifted the ban on repudiating leases.
“The ability of a company to repudiate onerous leases prior to the formulation of a scheme of arrangement could prove crucial to the success of an examinership in many instances,” he said.
