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Court’s property ruling could have significant consequences for banks
Sunday, December 14, 2008 By Ian Kehoe
It might have seemed like a routine examinership, but a High Court-approved deal to save a small Dublin company called Birchport could have major consequences for the relationship between lenders and borrowers.

The landmark legal action, sanctioned last week, could potentially compel banks and financial institutions to write down the value of their security over property assets if a company uses the examinership process, something previously unheard of.

Legal experts said the case was significant for bankers and property owners, many of whom have witnessed a significant decrease in the value of their properties or leaseholds.

‘‘I don’t think anyone can overstate the importance of the case,” said Barry Lyons, founding partner of Lyons Kenny, a commercial law firm which advised Birchport in the case.

Already, a number of companies are planning to use the new arrangement. It is a new concept, but Lyons said it would have major consequences due to the decline in property prices.

Birchport is the company behind the Ocean Bar, an upmarket pub and restaurant on Dublin’s docklands. The company went into examinership last month after experiencing cashflow difficulties.

The company was given court protection from its creditors, while its examiner, accountant Kieran McCarthy, prepared a rescue package. In the case, ACC Bank took a 30 per cent cut on a loan secured against the company’s assets.

The Ocean Bar lease was originally valued at €1.4 million. But the bank’s valuer agreed a new value of €950,000 in light of the fall in property prices.

Under the examinership proposal, the new value was treated as the secured element of the debt, while the rest was treated as an unsecured debt. So, under the terms of the deal, Birchport will pay ACC €950,000 over 15 years from next month in settlement of a €1.37 million debt that the bank had secured against the company’s lease.

The remainder of the loan will be treated as unsecured, and the bank will be paid 10 per cent of this sum, which is what all the company’s other unsecured creditors will receive. It had traditionally been assumed that a bank’s security could not be reduced or diluted.

Lyons said the case was particularly relevant to companies which were finding it difficult to meet high rents, which had been agreed at the top of the property market.

‘‘The established case law was that banks could not get less than the value of their security,” Lyons said.

‘‘In the past year and a half, however, assets have reduced significantly in value. This case proves that the bank’s security can be reduced in line with it.”

The case paves the way for other companies to renegotiate their loans with banks in light of the fall in property values, said Lyons.

Lyons said the case showed that loans were only secured on the actual value of the property, rather than the original value when the loan was agreed.

‘‘With property prices going up, this was never an issue, but times have changed,” he said.

Lyons said that a company had to pass a number of tests before it could be put into examinership.

Two rules govern the appointment of an examiner. The company must be insolvent, and an independent accountant must certify that the company has a reasonable chance of survival.

However, once in examinership, he said the system offered companies a chance to renegotiate their borrowings with banks in light of falling property prices.

‘‘To get into examinership, a company must prove to the court that it has a reasonable chance of survival if it can restructure its debts or secure new investment.

‘‘It is not a case of a profitable company deciding to write down its debts. The company must be in examinership,” Lyons said.

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