An examiner was appointed to McEnaney Construction Limited on 11 January 2008. The examiner's proposed scheme of arrangement (the Scheme) was initially presented to the High Court for consideration on 12 February 2008. However, the Judge in this matter, Ms. Justice Finlay Geoghegan, refused to confirm the Scheme at that time on the basis that it included a provision cancelling the company's issued paid-up shares under section 24(8) of the Companies (Amendment) Act 1990 (the 1990 Act).

Section 24(8) of the 1990 Act provides as follows:

"Where the court confirms proposals under this section it may make
such orders for the implementation of its decision as it deems fit."

Notwithstanding that on many previous occasions, the court had approved schemes of arrangement containing provisions cancelling a company's issued shares pursuant to section 24(8) of the 1990, on this occasion Finlay Geoghegan J. held that the practice should not continue.

In particular, Finlay Geoghegan J. pointed out that there was no express provision in the 1990 Act which enabled a company, to which an examiner had been appointed, to reduce its share capital as part of a scheme of arrangement. In doing so, she highlighted the contrast with other provisions of the 1990 Act which expressly permit a company, under the protection of the court, to do matters which it would not otherwise be authorised to do (e.g. section 20 of the 1990 Act which permits the repudiation of certain contracts).

As a result, Finlay Geoghegan J. indicated that the court was not empowered to cancel shares or reduce the share capital pursuant to the "catch-all" provisions of section 24(8) of the 1990 Act; there being nothing in the 1990 Act which has created an exception to section 72(1) of the Companies Act 1963.

Where a company wishes to reduce its share capital, the provisions of section 72(1) of the Companies Act 1963 (as amended by section 231(c) of the Companies Act 1990) remain applicable (being provisions of the Companies Act which expressly permit such actions in certain circumstances and with court approval).

Any order to cancel shares or reduce a company's share capital other than in accordance with that section would be an order requiring the company to carry out an unlawful act.

In practice, an examiner may have difficulty in getting the requisite members' support to approve a cancellation of share capital pursuant to the provisions of section 72 of the Companies Act 1963. In this case the Scheme was subsequently amended to allow for the allotment of new shares to the investor thereby diluting the holding of the existing shareholder; and was then approved by the High Court. Other methods may be resorted to in the future in order to write off the value of existing shares and circumvent this new development.

In addition, Finlay Geoghegan J. held that it was not possible for the articles of association of the company to be "deemed . . . to be amended to the extent necessary" to implement the Scheme; rather it was necessary for the detail of the proposed amendments to be specified in the Scheme and for the amended articles of association to be filed with the Companies Registration Office (CRO).

Judgment of Ms. Justice Finlay Geoghegan delivered on 25 February 2008, High Court.

May 2008.

For further information please contact Emmet Scully.