Building a case for survival without a solid foundation...
IN a certain fairytale, a vain emperor struts through the streets showing off his "new clothes". The adoring crowd applauds the naked emperor until a small child cries out: "But he has nothing on!"
Yesterday, Judge Peter Kelly, head of the Commercial Court, gave short shrift to developer Liam Carroll's "fanciful" scheme to turn a €1bn-plus loss into a €300m profit in three years.
Liam Carroll, a reclusive director of 203 companies, is the developer least likely to exhibit any degree of vanity.
But he is naked.
He is broke. His companies are insolvent. Not only insolvent, but so interconnected in a "byzantine" corporate structure that if one company falls, the empire does too.
Carroll knows this. The Government knows this.
Carroll's benign lenders, who are rolling up his interest with "great forbearance", know this.
These are the same banks, incidentally, who are hammering small borrowers and homeowners in our courts.
Dutch-owned ACC Bank, whose demands for €136m triggered a bid by Carroll to seek court protection to avert a potentially catastrophic fire sale of his assets, knows this.
Everybody knows it, but it took Judge Kelly to have the guts to shout out that Carroll's companies are bust.
Yesterday he refused to appoint an examiner to six of Carroll's companies that, by extension, would place his property empire under court protection.
Examinership is aimed at rescuing troubled companies.
It provides for a temporary breathing space (70 to 100 days) for a company to trade out of its difficulties.
But there is a major caveat: anyone seeking such protection must satisfy the court that the company, in whole or in part, has a reasonable prospect of survival as a going concern.
Even if an entity or group succeeds in establishing that there is a reasonable prospect of survival, the courts have discretion to refuse to appoint an examiner.
Carroll failed the basic legal test. Spectacularly.
The survival projections put forth, said Judge Kelly, were devoid of reality.
An Independent Accountants Report (IAR) furnished to the court was originally littered with inaccuracies, though later corrected.
The IAR, the backbone of any examinership application, was written by an accountant who acted as auditor to Carroll's companies.
Prepared in four days, the IAR contained trading projections crafted by the same captains of management that steered the ship onto the rocks.
Not only were the projections not independently assessed, but the two valuers -- CBRE and Hooke and McDonald -- who prepared the now seven-month-old valuations, had previously worked for Carroll's companies.
Add in current market conditions and the degree of optimism "borders or even trespasses on the fanciful", said the judge.
In addition, Carroll's survival plan deviated from previous examiner case law because it did not anticipate any additional investment or writing down of debts.
The only creditors are the banks. The job losses, mooted at 650, are less than 100.
When the Supreme Court sits down next week to hear an appeal by Carroll to challenge the refusal, they will have a tough time disagreeing with Judge Kelly's factual and legal conclusions.
Indeed, Carroll's lawyers must, according to the Supreme Court's own recent jurisprudence on examinership -- see the First Equity Group ruling by the court on February 2 last -- introduce additional evidence to convince the court that Carroll can survive and be satisfied that all his creditors support him.
Otherwise, if the Supreme Court affords Carroll protection in the face of a hopeless survival plan, it may stand accused of bending the law to accommodate a political crisis.
The ACC/Carroll dispute was never really about Carroll's prospects of survival.
It is all about NAMA.
ACC admitted as much in recent court proceedings and the Government held secret talks with the lender last Thursday.
As the secret meetings were under way, Finance Minister Brian Lenihan unveiled a polished 200-page dossier on NAMA.
Not a NAMA bill, a draft bill or even heads of a bill, but a proposal document "for public consultation purposes only".
The parliamentary process has not begun.
The proposal for NAMA Bill 2009 is a mere statement of intent, and until it is published in the form of a bill, NAMA is a legal fiction.
This makes life very difficult for the Government which is setting up NAMA to avert a fire sale of up to €90bn in toxic development loans.
If the Supreme Court upholds Judge Kelly's ruling, the subsequent liquidation of Carroll's empire will jeopardise the process under which NAMA will value loans.
A fire sale of Carroll's assets this side of NAMA being established will effectively set the market price for development assets, and this will form the basis for the write-downs banks will have to take.
This crowd will see the naked write-downs and this will make it difficult, if not impossible, for the Government to justify over-paying the banks.
Under the planned NAMA Act, judges will be obliged to consider the public interest and the reasons why NAMA was set up when handling legal challenges to it.
But the Supreme Court can't consider a speculative law that is not yet in being.
Report - Irish Independent