BUSINESS OPINION: A second chance for Zoe may set a precedent whereby the 100-day safe haven impedes Nama
IF ANYONE in ACC Bank’s Dutch parent, Rabobank, wants to know just who to blame for a law that allows Liam Carroll’s Zoe a second chance to apply for High Court protection from its creditors, they could point the first finger at the one-time dictator of Iraq, Saddam Hussein.
Back in 1990, Hussein sparked the first Gulf War by invading the neighbouring, oil-rich, Kuwait. Whatever about the international consequences, it had a particular impact here. Larry Goodman’s meat-processing empire had been selling to the Iraqi state. It was owed a lot of money but was unlikely to be paid, and its export credit insurance didn’t stretch to dictator’s whims, leaving an otherwise solvent business in a tricky situation.
Goodman was a big employer in an economy where one worker in five was out of a job, and the failure of his business would have had far-reaching ramifications for an entire industry. Back then, the government actually worried about unemployment and it responded quickly. The Oireachtas was recalled from its extended summer holiday to pass the law which created examinerships which, in turn, paved the way out of trouble for Goodman and the beef industry.
The system was simple. Any stakeholder connected with an insolvent company, with a chance of survival, could apply to the High Court to have it placed in examinership. Once this happened, it had protection from its creditors for up to 100 days, during which time it could put together a rescue plan and a new deal for those creditors, known as a “scheme of arrangement”. Once they backed it and the High Court approved it, the company could start again with a clean sheet.
It was all very straightforward – until the courts started applying it. Then it began turning up surprises. The most significant was that “chance” of survival was interpreted as more or less “any chance”. This meant that virtually anyone, deserving or otherwise, could avail of the protection. And they did. In at least one early case, the Supreme Court ruled that, despite evidence of bad faith on the part of the directors involved, the company in question was still entitled to be placed in examinership.
Then it emerged examiners could remove receivers appointed by secured creditors, which meant they could not rely on something that, up to then, was considered copper-bottomed. This outraged the banks, who to be fair, had some justification.
The fact was that we were now in uncharted territory. There was no real precedent for examinership so the courts relied on the legislation, and effectively found things that nobody realised were there.
Reform came a decade later. “Any chance” became “a reasonable chance”, backed up by an accountant’s report, and there were some extra safeguards thrown in for creditors. But its main purpose – saving ultimately viable businesses and jobs – was left unchanged.
Saving businesses and jobs that can be saved is a sane thing to do in any circumstance, even more so in a recession. When the legislation was first passed, we needed some kind of rescue mechanism for temporarily troubled companies which would otherwise have been wound up. Whatever about its bumpy start, it works well when it’s applied in the right situations, getting ultimately productive but troubled businesses out of difficulty and back to profitability.
But, like a lot of laws passed for a particular reason, it is now being used for something else: propping up developers and, by extension, their banks, neither of whom is particularly concerned with saving jobs, but all of whom are very concerned with their own skins.
Barring ACC, the banks are now enthusiastic converts, because a liquidation or receivership risks forcing a situation where we get hard evidence of the amount they have lost on their €90 billion property loans.
As the Supreme Court was originally sceptical about its chances of survival, giving Zoe a second chance to apply for examinership risks setting the “reasonable chance” of survival bar fairly low. If Zoe succeeds, it could set a precedent that will allow others to follow suit. And if the cases are similar enough, the chances are the courts will also give them protection.
Should this happen, we need to ask ourselves if it has implications for the National Asset Management Agency (Nama), which at this stage looks like the only ticket we have out of the current mess. If there are a lot of properties tied up at various stages of the examinership process, what will that mean?
The draft legislation for Nama includes a provision that allows it to take over properties that are the subject of an examinership, or some other such process, once it can show the High Court those proceedings are detrimental to its interests.
The legislation also limits the right of appeal against any such rulings in Nama’s favour and the scope for getting an injunction against the agency. All this indicates the Government is trying to anticipate legal challenges and deal with them.
Despite any efforts the Oireachtas might make to cut such challenges off at the pass, it won’t stop people taking them, particularly if they have already gone to the High Court for protection and have got its backing for a new deal.
The Government may well be more concerned with getting the legislation past a bolshie Opposition and a lukewarm Green Party, but once it does that, we are once again in uncharted legal territory. And at that point, nobody, not even the lawyers, can tell us what will happen next.
