There have been significant changes in the interpretation of the law governing examinerships throughout 2009. One matter in particular came under close judicial scrutiny – the repudiation of leases in an examinership.

Relevant Legislation

Section 20 of the Companies (Amendment) Act 1990 (“the Act”) essentially provides that when formulating a scheme of arrangement, the examiner may, with the approval of the Court, repudiate any contract “under which some element of performance other than payment remains to be rendered both by the company and the other contracting party” and it is this section upon which examiners rely when bringing an application to repudiate an onerous lease.

Section 25B of the Act provides that proposals for a scheme of arrangement shall not contain a reduction in the amount of any rent, or, the complete extinguishment of the right of the landlord to the rent that falls to be paid after a scheme of arrangement. In retrospect, it is not surprising that these two provisions were on a collision course.

Conventional Practice

The divergence of judicial interpretation in the cases of Chartbusters Limited and O’Briens Sandwich Bars, put what was believed to be conventional practice, into some doubt. The formerly accepted right of an examiner to repudiate leases was questioned further in the case of Linen Supply of Ireland Limited.

Linen Supply of Ireland Limited (“Linen Supply”) – High Court

In December 2009, the examiner had sought to rely upon section 20 of the Act in formulating the scheme of arrangement and brought an application before the courts, to repudiate certain onerous leases. Mr. Justice McGovern in the High Court ruled that the court was prohibited from approving the repudiation of the leases by reason of the provisions of section 25B of the Act. Mr. Justice McGovern’s decision was appealed to the Supreme Court.

The Supreme Court.

On 10th December 2010, the Chief Justice of Ireland, John L. Murray delivered an ex-tempore judgment on behalf of the majority of the Supreme Court, allowing the appeal. In his judgment he held that “a lease by its very nature involves the performance of obligations by both the lessor and the lessee other than payment of money”. By way of example, he suggested that the obligation to insure and the right to quiet enjoyment are ancillary obligations which are part of any lease.

Therefore, he held that “contract” in section 20 of the Act must be interpreted to include a lease. The two sections were further distinguished by the Supreme Court. It was held that the repudiation of a lease involves the “mutual release” by both the landlord and the lessee and that this was entirely different to a situation anticipated by section 25B. He submitted that section 25B prohibits a reduction in rent or a complete cessation of rent where the lessee continues to enjoy the use of the property.

The Supreme Court ruled that regardless of whether the date of repudiation of the lease occurs outside the examinership, for any repudiation to be effective it must be approved by the court, in a separate application, before the scheme of arrangement itself is approved. The repudiation of a lease of a company often provides the lifeblood to an examinership and the judgment in Linen Supply has effectively lifted the uncertainty which has clouded this area for much of 2009.

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