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Cite as: [2001] 1 IR 668, [2001] IEHC 27

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Tuskar Resources plc, Re [2001] IEHC 27; [2001] 1 IR 668 (26th February, 2001)

THE HIGH COURT

Record No. 2001 No. 41 Cos.



IN THE MATTER OF TUSKAR RESOURCES PLC

AND

IN THE MATTER OF THE COMPANIES ACTS 1963 TO 1999


Judgment of Mr Justice McCracken delivered the 26th day of February 2001


This is a petition by Tuskar Resources plc ( "the company" ) for the appointment of an Examiner pursuant to Section 2 of the Companies (Amendment) Act 1990 as amended. The Petition is being opposed by Green Sea.A/S ( "Green Sea" ), which has presented a petition to wind up the company. The winding up petition has been adjourned pending the hearing of this petition.
Facts

1. The company is a public limited company with a paid up capital of U.S.$27,573,076, and has some 17,414 shareholders, and the shares have been listed on the Exploration Securities Market of the Irish Stock Exchange. Allied Energy Limited ( "AEL") holds approximately 46% of the issued share capital in the company. The company currently has three directors, one of whom is a Mr Sunil Pathak.

2. The company is primarily engaged in oil exploration and production and has pursued these activities in various countries throughout the World since its incorporation in 1981. For the last two years the company's sole activity has been in Nigeria. However, the company has not itself carried on business in Nigeria, but has done so through a subsidiary



called Tuskar Resources Limited ( "the Nigerian company" ) which is a Nigerian registered company.

3. The Nigerian Government originally granted an oil mining lease ( "OML110") to a Nigerian company called Cavendish Petroleum Nigeria Limited ( "Cavendish"). As a result of several transactions the company claims that the Nigerian company is now the holder of OML110. As will be seen later, this claim is disputed, but undoubtedly the Nigerian company has been engaged in producing oil from the offshore area in Nigeria which is the subject matter of OML110. The company has entered into a management agreement with AEL, which is its principal shareholder, to represent and manage the interests of the company in relation to OML110 for a monthly fee, and the company has also entered into an agreement with AEL and Camac Holdings Incorporated giving it certain rights to participate in other West African explorations, but as I understand it the company has not availed of this agreement to date.

4. On 2nd July 1999 the company entered into a contract with Green Sea whereby Green Sea would provide certain services for the company in connection with the oil well, including a vessel called the Crystal Sea in which the oil is processed and stored in tanks. Green Sea claims that there is now over U.S$11,000,000 due to it by the company under this contract, and it is this debt which is the basis of the petition to wind-up the company. The company disputes the amount due, but does not deny that there is a very large sum of money owing. It should also be said that, in addition to petitioning to wind-up the company, Green Sea have obtained a world-wide Mareva injunction against the company from the Courts of the United Kingdom.

5. In addition there are proceedings between Cavendish and the Nigerian company arising from a claim by Cavendish that the Nigerian company is in breach of its agreement with Cavendish, and indeed in which Cavendish is claiming that the Nigerian company is not the holder of OML110 at all. Cavendish have issued proceedings before the Court in Nigeria seeking injunctive relief and the Nigerian company has sought arbitration of this dispute.

6. The present position appears to be that the oil well has not been in production for about three months, and that Green Sea is claiming a lien on all the oil which is at present stored in its vessel the Crystal Sea. Thus there are serious disputes involving large sums of money and challenging the validity of OML110 both between Cavendish and the Nigerian company and between Green Sea and the company.


The Present Position

7. On 2nd February 2001 an application was made to me by the company for the appointment of an interim examiner. Accompanying that application was a report of Mr Jason Sheehy as an independent accountant pursuant to Section 3A of the 1990 Act as amended. This report was stated to be based on the books and records of the company and discussions with the company's directors and management. It included an estimated statement of affairs as of 31st January which purports to show a surplus of assets over liabilities of over U.S.$14,000,000. However, this is based on a valuation of the OML110 which is calculated with reference to the monies expended on it, and of course assumes that is a valid lease. It lists liabilities of some U.S.$21,000,000, which appeared to me to be for a large part liabilities of the Nigerian company, in other words it is more in the nature of a group statement of affairs. The report also estimates trading losses from 1998 at over U.S.$13,000,000, although again these are presumably losses of the Nigerian company. Mr Sheehy gives his opinion that the company and the whole or any part of its undertaking would have a reasonable prospect of survival as a going concern subject to a number of conditions, which include "the successful resolution of current difficulties with its Nigerian partner Cavendish" and "resolution of Brovig claim" - that is the Green Sea claim. Based on the information then before me I appointed Mr Sheehy as interim examiner by order of 2nd February 2001.

8. Since the appointment of the interim examiner there have been two important developments. Firstly, a meeting was held in Lagos in Nigeria on 14th February, apparently at the invitation of the Nigerian authorities, at which all the relevant parties were present. Unfortunately there is a serious dispute as to what took place at this meeting. In an affidavit sworn on 16th February Mr Eugene Manson on behalf of the company swore that at that meeting:-

"Cavendish expressed their willingness to deal with the company subject to an agreement being reached in relation to the placing of funds in an escrow account and to the reaching of an agreement in relation to the operation of the well."

9. On the other hand Mr Peter Lynch on behalf of Green Sea has sworn in reply to Mr Manson's affidavit that:-

"On the crucial issue of Cavendish's alleged willingness to 'deal' with Tuskar, the account is, quite simply false."

10. Mr Ibrahim Deribe, the managing director of Cavendish, swore:-

"At the meeting, I made it entirely clear to Tuskar and the DPR that Cavendish has no interest in dealing with Tuskar and that there is no prospect of any agreement being reached with Tuskar or for any form of ongoing business relationship to be established between our respective companies."

11. The meeting was also attended by the interim examiner, and he has filed a second report dated 19th February in which he states that there were certain agreements in principle, primarily concerned with the furnishing of books and records by the company to Cavendish, but he also states that:-

"In order to facilitate the re-commencement of production, Cavendish and Tuskar to meet."

12. I have now been furnished with the official minutes of the meeting taken by an officer of the Ministry of Petroleum Resources in Nigeria, and the parties accept that this was an independently taken minute. This minute clearly repeats Cavendish's contention that it has no relationship with the company or the Nigerian company, but rather with AEL, and, while it confirms an agreement in relation to the books and records of the company, it makes no mention whatever of any willingness by Cavendish to meet the company any further. It seems to me quite clear from the evidence before me from both Green Sea and Cavendish that neither entity is prepared to enter into negotiations with the company or the Nigerian company at the moment. It has been urged upon me that, if an Examiner is appointed, their attitude might well change, and of course this may well be so, but my reading of the minutes of the meeting of 14th February is that the Nigerian authorities were making every effort to act as mediator, without much success.

13. The second matter of importance that has arisen in recent days is that an offer has now been made to assist the company by an English company called Reliance Trade Corporation plc ( "Reliance"). Mr Pathik, who is a director of the company, is group managing director of Reliance, and it would appear that Reliance is a substantial trading company with influential contacts in West Africa. The proposal put forward, subject to an appropriate scheme of arrangement, is that there would in effect be a reverse take-over in which the assets and activities of Reliance would be incorporated into the company, and that the company could then explore other options in terms of oil exploration and otherwise and in the meantime that Reliance would provide funding to facilitate the development of the business and the implementation of the scheme of arrangement. The proposal envisages that Reliance would then obtain a majority share holding in the company of not less that 51%, that it would make available to the company sufficient funds to pay its creditors a dividend greater than that which would be available in the winding-up, and that it would make available to the company sufficient working capital to meet its ongoing needs. There is therefore a serious prospect of an investor being available.


The Law

14. The appointment of an examiner is governed by the Companies (Amendment) Act 1990. Section 2 of that Act as originally enacted provided:-

"(1) Where it appears to the Court that:
(a) a company is or is likely to be unable to pay its debts and
(b) no resolutions subsists for the winding-up of a company and
(c) no order has been made for the winding-up of the company
It may, on application by petition presented, appoint an examiner to the company for the purpose of examining the estate of the company's affairs and performing such duties in relation to the company as may be imposed by or under this Act.
(2) Without prejudice to the general power of the Court under sub-section (1) it may in particular, make an order under this section if it considers that such order would be likely to facilitate the survival of the company, and the whole or any part of its undertaking, as a going concern."

15. Under the Companies (Amendment) (No. 2) Act 1999 Section 2(2) of the 1990 Act was amended by substituting a new sub-section namely:-

"The Court shall not make an order under this section unless it is satisfied that there is a reasonable prospect of the survival of the company and the whole or any part of it undertaking as a going concern."

16. The 1999 Act also introduced the requirement for a report by an independent accountant to be available to the Court at the time of the application for the appointment of an Examiner. To understand these amendments it is helpful to consider the decision both in the High Court and in the Supreme Court in Re Atlantic Magnetics Limited (1993) 2 IR 561, which concerned the appointment of an Examiner under the 1990 Act. In his judgment in the High Court Lardner J. said:

"In some cases the evidence may make it clear that survival of the company is not a practical possibility and the order is likely to be refused. In other cases the evidence may give a strong possibility of requisite adjustment. With requisite adjustment the company will survive and prosper therein. Here, it may be clearly possible to make an order appointing the Examiner. In other cases, such as the present, the evidence may not lead to a clear-cut conclusion. There may, as here, be a conflict of evidence on matters concerning the company's affairs - in such a case by what standards should the Court make its decision? It seems to me that the standard is this: does the evidence lead to the conclusion that in all the circumstances it appears worthwhile to order an investigation by the Examiner into the company's affairs and see can it survive, there being some reasonable prospect of survival?"

17. The Supreme Court took the view that there was a much wider discretion in relation to the appointment of an examiner. Finlay C.J. said at page 573 having quoted the above passage from the judgment of Lardner J. said:-

"I am satisfied that this analysis of the situation arising under Section 2 and, in particular, the learned trial judge's statement of the standard to be applied to the question in a case which was not clear-cut is correct, subject to the minor qualification that I would consider it more in accordance with my view of the true standard if the last line of this quotation were to read:
'There being some prospect of survival'"

18. McCarthy J. seems to have gone ever further and said at page 578:-

"He quoted from Keane, Company Law in the Republic of Ireland (2nd edition) at p.455 where the author expressed the view that the Court should consider that there is a real prospect that either the company will be rescued or that the interests of those financially interested in its future will be better served by such an order than by a winding-up, before appointing an examiner. In contrast with the English Insolvency Act, 1986, which prescribes four stated purposes at least one of which must be served before the Court will make the order, there is no criterion expressed in the Act of 1990. Sub-section 2 appears to require that the order be made if the Court is satisfied that it will facilitate the survival of the company. I reject the 'real prospect' test; I would adopt the test applied by Lardner J., omitting the words 'there being some reasonable prospect of survival'. It is not that I consider such may not enter the equation, but it appears to me to be difficult to come to a firm conclusion on such a matter until the examiner has carried out his preliminary task within the first statutory period - that of three weeks."

19. The amendments introduced by the 1999 Act are much more in keeping with the decision of Lardner J. in the Atlantic Magnetics case than with the decision of the Supreme Court, and further, by introducing the independent accountant's report at the preliminary stage, the Legislature clearly disagreed with the views of McCarthy J. that no real decision can be reached until the Examiner has been in place for some weeks. The requirement for an independent accountant's report clearly means that the decision must be made at the initial stages of the application.

In the Atlantic Magnetics case Finlay C.J. also stated that there cannot be an onus of proof on a Petitioner to establish as matter of probability that the company is capable of surviving as a going concern. It seems to me that this is no longer the position under the 1999 Act by reason of the wording of the new sub-section 2(2). Under the 1990 Act as originally enacted there would appear to be a wide discretion given to the Court. However, the new sub-section prohibits the Court from making an order unless it is satisfied there is a reasonable prospect of survival. If the Court is to be "satisfied" , it must be satisfied on the evidence before it, which is in the first instance the evidence of the Petitioner. If that evidence does not satisfy the Court, the order cannot be made, and in my view this is tantamount to saying that there is an onus of proof on the Petitioner at the initial stage to satisfy the Court that there is a reasonable prospect of survival. For this reason, the Court has to view the evidence in a different manner to that applicable prior to the 1999 Act.

20. This gives rise to a number of issues which have been argued before me and which I propose to consider individually.

Who can be appointed Examiner?

21. Mr Gordon S.C. has argued with some considerable logic that the person who gives the independent accountant's report at the time of the application ought not to be appointed examiner, as is sought to be done in the present case. It should immediately be said that this argument is not in any way directed against Mr Sheehy personally, but rather is made as a matter of principle. I have to say that I have considerable sympathy for the argument, and accept that, on the general basis that justice must be seen to be done, there can be a question mark over how independent an accountant can be if the purpose of his report to the court is to determine whether he personally should or should not be appointed to a position such as examiner. It should be noted that in Re Wogans (Drogheda) Limited (No.3) (unreported 9th February 1993) Costello J. held that the Court would be very slow to appoint an accountant previously associated with the company as examiner, as his impartiality could be questioned. However, on the other side it can be argued that there would considerable additional expense involved if two accountants had separately to investigate the prospects of the company, and there is also merit in that argument. In view of the fact that the Legislature did not take on itself to prohibit the independent accountant from acting as examiner, I do not think that there is any statutory restriction on the Court in so appointing him, although I can see there may be cases where it would be undesirable to do so.


Bona Fides of the Parties

22. Both sides in the dispute before me have challenged the bona fides of the other side. Green Sea point in particular to Section 4A of the 1990 Act, which was introduced by Section 13 of the 1999 Act. It reads:-

"The Court may decline to hear a petition presented under Section 2 or, as the case may be, may decline to continue hearing such a petition if it appears to the Court that, in the preparation or presentation of the petition or in preparation of the report of the independent accountant, the Petitioner or independent accountant -
(a) has failed to disclose any information available to him which is peculiar to the exercise by the Court of its powers under this Act, or
(b) has in any other way failed to exercise utmost good faith."

23. It is urged by Green Sea that the original grounding affidavit was misleading and failed to disclose material matters to the Court, in particular by underplaying the problems between the company and the Nigerian company on the one part and Cavendish on the other part, and also the seriousness of the existing proceedings in London and in Nigeria. It is also alleged that it failed to disclose that the storage facility provided by Green Sea, which is essential to the operation of the oil well, is not going to be available, and it might be extremely difficulty for the company to obtain an alternative facility. I have no doubt that, in the light of subsequent evidence, both the grounding affidavit and the independent auditors report were overly optimistic as to the future of the company, and in particular as to the future of its operations in Nigeria. However, I do not think that over-optimism is sufficient to show bad faith, and in any event there is clearly a wide discretion in the Court under the sub-section, as it uses the word "may" rather than "shall". I do not think that in my discretion I should refuse to hear the petition on this basis.

24. The Petitioners on the other hand allege bad faith in Green Sea in that they postulate that Green Sea’s motive for opposing the application is to ensure that the Nigerian operation will cease, and in the hope that it, or possibly it and Cavendish together, would then obtain the lease from the Nigerian authorities which is at present held by the company. This may be so, although I cannot determine it from the facts before me, but it could not be a ground for ruling out the opposition on the part of Green Sea. Green Sea are entitled to protect their own interests in whatever way they see fit, so long as their actions are not illegal, and there is no doubt that they are owed very large sums of money by the company and the Nigerian company. If the company is wound up, they certainly will not recover a great deal of this money, although they do claim to have a lien on the oil which is at present stored on board the "Crystal Sea". I see nothing wrong or illegal in them taking the view that, in their own commercial interest, they would be better off exercising such lien as they may have in the winding up and leaving themselves with a chance to obtain the lease themselves, rather then facing the uncertainties of an examinership.


The sufficiency of the independent accountant's report

25. It is also argued by Mr Gordon on behalf of Green Sea that the independent accountant's report must show that the company has a reasonable prospect of survival based on evidence, and that the report must set out the evidence as to how the necessary conditions for survival can be achieved. The necessary contents of such a report are set out in detail in Section 3 sub-section 3 of the 1990 Act as inserted by Section 7 of the 1991 Act. This only requires the independent accountant to give an opinion as to whether the company, and the whole or any part of its undertaking, would have a reasonable prospect of survival as a going concern and a statement of the conditions which he considers are essential to ensure such survival. It does not say that he must set out in detail the evidence which leads him to this opinion, and I think it should be borne in mind that this can only be a preliminary opinion, and that if he is appointed, an examiner will usually find out a great deal more about the company and its prospects during the seventy days available to him. I consider that in the present case the initial independent accountant's report, particularly as it is followed by a further report from Mr Sheehy as interim examiner, gives a full account of his views and the reasons for them.


What is the undertaking and business of the company?

26. The Court has to be satisfied that there is a reasonable prospect of the survival of the whole or any part of the company's undertaking as a going concern. The company in the present case is a holding company, its sole trading being carried out by the Nigerian company. The question then arises is whether in those circumstances it can be said that any part of the company's undertaking is a going concern. Its only undertaking is the holding of shares in the Nigerian company, and I do not think that under any circumstances that could be called "a going concern" . It seems to me that the wording of the Act precludes the Court from making an order appointing an Examiner to a holding company simpliciter, and that indeed to do so, particularly in the circumstances of this case, would be totally contrary to the objects of the Act. The Act is intended to give a breathing space to try to get the affairs of an insolvent company put in order. This is frequently to the detriment of some creditors, particularly secured creditors, but the Legislature has considered that their interest may sometimes have to suffer if there would be a general benefit to other creditors, to the shareholders, and to the employees of the company. However, these considerations are unlikely to apply to a pure holding company.

27. This does not mean that a holding company cannot have an Examiner appointed, as Section 4 of the 1990 Act specifically gives the Court power to appoint the Examiner to the company to be Examiner also of a related company, which in this case would be the Nigerian company. In such a case, both the holding company and the trading company are subject to the examinership and come under the investigation of the same Examiner. This, in many cases, would be highly desirable, particularly where there is a group of companies trading in this jurisdiction. However, in my view the definition of a related company in Section 4(5) does not include a company registered outside this jurisdiction, as it sets out the conditions in which "a company is related to another company", and the word "company" as defined in the Companies Act 1963 means a company formed and registered under that Act, or an existing company. In the present case the Nigerian company is not formed or registered under the 1963 Act.


Position of the Nigerian Company

28. Even if it were permissible to appoint the same Examiner both to the company and to the Nigerian company, in my view it would not be possible in the present case. By an amendment introduced by Section 12 of the 1999 Act, the Court may not make an order in respect of a related company unless it is satisfied that there is a reasonable prospect of the survival of the related company and the whole or any part of its undertaking as a going concern. I certainly do not have sufficient evidence before me to show such a reasonable prospect.

29. The position of the Nigerian company is also relevant in relation to the prospects for survival of the company itself, as the Nigerian company is its only asset, and the sole business of the Nigerian company as a going concern is the oil well. The Nigerian company is subject to Nigerian law, and its asset, namely the lease, is held from the Nigerian Government. I have no evidence of Nigerian law or of the statutory basis on which the lease is granted. The Nigerian company is also involved in litigation in Nigeria. It is not at present capable of carrying on its business because it has no storage facilities for its oil, and its undertaking appears to have ground to a halt.


Conclusion

30. I am not satisfied there is a reasonable prospect of the survival of the company and the whole or any part of its undertaking as a going concern for the following reasons:-

1. I do not think the Court can make an order or appoint an Examiner of a company that is purely a holding company, because such a company has no undertaking to continue as a going concern.
2. Even if I am wrong in this, the Court has a discretion as to whether to appoint an Examiner, and in the circumstances of this case, where the subsidiary company is a company registered in Nigeria and subject to Nigerian law, in my discretion I would not appoint an Examiner.
3. The company and the Nigerian company are in serious disputes with both Green Sea and Cavendish, and there is evidence before me that neither entity is prepared to negotiate with the company or with an Examiner. The company has no prospect of success unless it can come to terms with these protagonists.
4. The company owes an indeterminate, but very large sum of money to Green Sea and I can see no real prospect of that being discharged.
5. The company or the Nigerian company owe considerable sums of money to the Revenue and other authorities in Nigeria. While I accept that the Nigerian authorities have used their best endeavours to bring the parties together, I have no information as to the status of monies owing to them, for example whether they are preferential creditors in Nigerian law.
6. The proposal put forward by Reliance is not really a proposal to continue the undertaking of either the company or the Nigerian company as a going concern. It is a proposal that other businesses at present operated by Reliance will be transferred to the company in return for a majority shareholding in the company. That is certainly well outside the purposes of the Act, and has nothing to do with the survival of any part of the undertaking of the company as a going concern. It is introducing a new undertaking to the company.
7. I have no evidence whatever of the financial position of the Nigerian company. No accounts have been exhibited and I have no evidence of the attitude of its creditors.

31. Accordingly I will refuse the relief sought.




mtfjudgemcc

© 2001 Irish High Court

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