Voluntary sale over liquidation?

In the Matter of Bayview Hotel (Waterville) Ltd [2022] IEHC 516What factors will a court consider in determining whether to approve a liquidation or a voluntary sale where certain shareholders and creditors disagree?

Overview

This case demonstrates the analysis a court may undertake when one group of stakeholders, including a shareholder and certain secured creditors, seek to have the company wound up, while another group, including a purported shareholder and certain unsecured creditors, argue that a voluntary sale between the parties would be financially more productive.

Background

The petitioner, Williams Holding Ltd. (“the petitioner”), sought an order winding up Bayview Hotel (Waterville) Ltd (“the company”), the owner of a hotel in Waterville, County Kerry, on the grounds that the company was unable to pay its debts or, alternatively, on the basis that winding up the company would be just and equitable. The petitioner, which is the sole registered owner of the company, advanced €479,249 to the company in 1986 on a secured basis. Two additional secured creditors supported the petition.

The petition was opposed by two other largely unsecured creditors who claimed to be owed a total of €489,565. The fault line between the two groups of creditors lay in their support of one of the two purported owners of the hotel, with the creditors opposing the petition supporting Mr. O’Shea, and the creditors in favour of the petition supporting Mr. Noonan. The issue of ownership will be addressed in further detail below.

The opposing creditors accepted that the company’s property would have to be sold to meet the company’s indebtedness, but asserted that a forced sale by a liquidator would impair the value of the company’s main asset, the hotel, resulting in less funds becoming available to discharge the amounts owed to them. They argued that a voluntary sale by agreement “between the parties” would be financially more productive. The petitioner and the supporting parties contended that the extent of the falling out between the two groups was such that agreement on the voluntary sale of the company’s property was completely unrealistic. They also argued that court supervision would in any event be required to deal with the conflicting claims being made on the proceeds of sale.

The Issue of Ownership

The petitioner, the sole registered shareholder of the company, is owned by Mr. Noonan. However, Mr. O’Shea argued that he and Mr. Noonan agreed in 1986 that the hotel was to be a joint venture in which Mr. O’Shea was entitled to 50% of the equity. Mr. O’Shea claimed that his 50% beneficial interest in the company reflected working capital he provided for the company (although the amount of working capital allegedly provided by him was not specified, nor was it the subject of any claim in response to the petition). He also pointed to the fact that he ran the hotel business for the company without payment to support his ownership claim. Mr. Noonan agreed that Mr. O’Shea was not paid a salary for his role, but stated that significant consideration was provided to him through his rent-free use and/or occupation of other Noonan property, including commercial property, in the area.

In considering whether Mr. O’Shea had a 50% ownership interest in the company, Ms. Justice Butler noted the inconsistency in the positions taken by Mr. O’Shea. In a related proceeding pertaining to the ownership of the company, which was outstanding, Mr. O’Shea took the position that the parties had agreed that he would be allocated a 50% shareholding in the company once the moneys advanced by the petitioner had been repaid by the company. No reference was made at this point to those sums not being repayable until after the hotel was sold. However, he later argued that his ownership interest was not predicated on the prior discharge of the sums owed to the petitioner, and that the debt to the petitioner would not be repayable until the hotel was sold. Ms. Justice Butler found this version of facts highly unlikely, as it would mean that Mr. Noonan effectively agreed to give Mr. O’Shea control over the company’s repayment of its debt to the petitioner. By contrast, Mr. Noonan’s position had remained consistent – he refused to agree to the transfer of any of the company’s shares into Mr. O’Shea’s name because the debts owing to the petitioner remained outstanding. Accordingly, Ms. Justice Butler concluded that, at best, Mr. O’Shea had a contingent interest subject to the outcome of the other litigation, whereas Mr. Noonan, through the petitioner, was the registered owner of 100% of the shares in the company.

Inability to Pay Debts / Justice and Equitable to Wind Up the Company

Ms. Justice Butler went on to find that that the company was unable to pay its debts, having regard to the company’s accounts and the directors’ reports attached thereto and the total of the debts claimed by the creditors who responded to the petition. This included the sum claimed by the petitioner on the basis that, even if Mr. O’Shea was correct in his assertion that the company was not liable to pay this amount until the hotel was sold, it was nonetheless an admitted, contingent liability to which regard could be had. The same applied to the sums claimed by certain other creditors.

Having reached this conclusion, it was not necessary to consider whether it was just and equitable for the company to be would up. Nevertheless, Ms. Justice Butler briefly outlined her views on the matter, finding that there had been a complete falling out as between the Noonan interests and the O’Shea interests, such that the company had effectively become inoperative. There was a deadlock on the board of directors comprising two members of the O’Shea family and two members of the Noonan family. There were also extant proceedings in which Mr. O’Shea claimed an entitlement to a 50% shareholding in the company, and had obtained an interlocutory injunction to preclude the petitioner, as the sole shareholder, from taking action to remove Mr. O’Shea and his wife as directors of the company. The reasons behind the breakdown of relations between the Noonan interests and the O’Shea interests had not been made known to the court. At a minimum, however, it was clear that there was a serious dispute between the parties, not just as to the ownership of the company, but as to the ownership by the company of the entirety of the hotel premises.

Exercise of Discretion

Finally, Ms. Justice Butler considered whether the court should exercise its discretion to grant the winding up order. The main argument made against the exercise of the court’s discretion was that a voluntary sale would likely yield a higher purchase price than an enforced sale through a liquidation. In this case, the breakdown of relations between the parties and the deadlock in the management of the company’s affairs were undoubtedly factors which supported the exercise of the court’s discretion in making the order sought. They also supported the conclusion that the “voluntary sale” proposal made by Mr. O’Shea was not realistic, since the parties would likely be unable to reach agreement on the sale. In addition, there was no reason to believe that a liquidator would allow a sale at undervalue to take place, as suggested by Mr. O’Shea. On the other hand, a situation where Mr. O’Shea had joint control over the sale of the hotel property in circumstances where he had not yet established his entitlement to the shareholding in the company would undoubtedly give him unwarranted leverage as against the Noonan interests.

Consequently, Ms. Justice Butler granted the petition on the grounds that the company was not able to pay its debts.

Judge: Ms. Justice Butler