The recent examinership concerning the companies within the Cara Pharmacy Group (“Cara”) received widespread publicity. The petition for examinership was brought by the secured creditor to Cara. Ultimately, the examiner secured a substantial investment in Cara. The scheme of arrangement proposed was approved by Judge McDonald in the High Court.
However, an issue emerged during the Judge’s consideration of the examiner’s report under section 534 of the Companies Act 2014 (“the Act”). The report informed the Court that an agreement had been reached between the secured creditor (which was also funding the investment in Cara through the scheme of arrangement) and two directors/employees of Cara. As a result of the agreement reached, the directors/employees had withdrawn their opposition to the application to sanction the proposals for the schemes of arrangement in respect of each of the companies under Court protection. The agreement itself was not included with the examiner’s report. It was deemed "confidential". Judge McDonald was concerned that a document of significance in the context of the Court ordered protection had not been disclosed to the Court. The Judge directed that the agreement should be provided to the Court for review. The Judge was also very concerned that monies may have been paid to the directors/employees (and ultimate beneficial owners of Cara) which had not been disclosed either to the Court or to creditors of Cara.
In his judgment, Judge McDonald stressed the fact that the payments to each of the two directors/employees (€200,000) were redundancy payments or long service payments in relation to employment as opposed to their position as shareholders. However, he was equally careful to point out that this fact did not take the agreement outside the scope of what may be scrutinised by the Court in the context of an examinership. The Judge noted that had the payments been mere statutory redundancy payments then that may have precluded them from a test for "unfairness". However, the Judge described the payments in question as "not inconsequential" and, as such, were subject to scrutiny by the Court. The Judge expressed a strongly held view that, as a matter of principle, creditors should be informed, prior to any vote on proposals for a compromise or scheme of arrangement, of any payments to be made to directors or shareholders or those who, through a corporate structure, are the ultimate beneficial owners of the shares in the companies which are the subject of such proposals. He stated that were it otherwise, creditors would be unable to form a view as to whether the proposals are in any way unfairly prejudicial to them. By way of example he noted that if payments that are to be made directors are unjustified or are disproportionately high (when the amount of the dividend to the creditors is taken into account), creditors must be in a position to determine whether they should, in the first instance, vote for the proposals and, subsequently, to consider whether they should object to the confirmation of the proposals by the Court on the grounds of unfair prejudice or any other ground.
Ultimately, in all of the circumstances of the case, Judge McDonald did not take issue with the agreement entered into with the exiting directors/employees and took into account the relative size of the payment made pursuant to the agreement when compared to the overall investment into Cara that had been secured by the examiner - in excess of €14 million. He also had regard to the fact that the agreement entered into with the two directors/employees had brought to an end the threat of proceedings to challenge the validity of the examinership process. Thus, a significant cost saving had been achieved and the examinership process itself had been kept on track.
In conclusion, Judge McDonald stated that in the very particular circumstances of the case, the payments to the two directors/employees did not give rise to unfair prejudice to the creditors or to any other interested party. The Judge also noted that he was satisfied that the examiner had achieved a very satisfactory outcome of the examinership which is to the benefit both of creditors and employees and which will secure the future viability of the trading entities within Cara.
For further information on any of these issues, please contact Partner Matthew Austin email@example.com at Hayes solicitors.
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About the Author
Matthew is a partner in the Commercial & Business team at Hayes solicitors. Matthew advises clients in relation to all forms of commercial dispute resolution and provides general commercial advice. Matthew also advises clients on general commercial matters including contract law, intellectual property/copyright, media law and general commercial agreements.