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— Bankruptcy —
Coolfadda Developers Ltd. and its liquidator, Michael McAteer, are testing the country's insolvency laws to allow more time to complete projects, with an unusual and highly expanded definition of the term "provisional." The country's Supreme Court is set to hear the case on July 7. McAteer doesn't argue that the company isn't broke. But instead of liquidating the Bandon, County Cork-based residential developer immediately, McAteer wants Coolfadda to remain in provisional liquidation indefinitely. Lawyers for the liquidator argue that this state of suspended animation would allow the company to eventually complete projects, avoid what they believe would be wholesale contract cancellations and get far better results for creditors.
Coolfadda has eight residential developments in various stages of completion and owes creditors more than €30 million ($42 million), with a further €20 million tied up in land. Its revenue plummeted to €4.5 million last year, from €26.5 million in 2006. Coolfadda is a relatively small-time player but exemplifies the country's property-market train wreck. In the past two years, prices have fallen anywhere from 40% to 50%, and development has mostly shut down. This followed a decade of crazed building. Property prices on average tripled. Developers paid outlandish sums for any available land. By 2006, construction accounted for 20% of Ireland's GNP. Now homebuilders are failing in record numbers. According to statistics compiled by the Irish publication Insolvency Journal, 184 construction companies filed for insolvency between January and April, more than double retail-related insolvencies. McAteer, an insolvency partner with the Dublin office of Grant Thornton Ireland, says his firm alone has administered 80 receiverships this year, 20% of which are construction and property related. Builders keep falling. Late last month, for example, Youghal, County Cork-based Blackwater Homes, one of the largest homebuilders in southern Ireland and a luxury resort developer in Bulgaria, applied for bankruptcy protection. Most end up being liquidated. In Ireland, provisional liquidation is usually a 21-day stopgap measure desinged to protect assets, after which a liquidator is appointed. A high court judge, Mary Laffoy, rejected Coolfadda's argument in late May. "The company is hopelessly insolvent and no matter what happens it is never going to return to solvency," she wrote. But Laffoy allowed the provisional status to continue, pending appeal. Since the court adjourns in August and September, a decision might not come before October. In a telephone interview, McAteer says he was looking for a case to test the law and that Coolfadda fit the bill "on a number of issues." Most notably, most of its projects are almost ready to go, "94, 95%, 96% completed. They're not holes in the ground," he says. So, with some time and a little more money, the houses will be ready for occupancy and contracted sales can be enforced. In submissions his lawyers say that at least one lender has agreed to put up more money to finish work. Under the law, buyers could walk away from new homes if the company is liquidated. With prices dropping by as much as half, that's a good assumption. Provisional liquidators by common practice merely hold a company in place, insuring that creditors or directors can't cannibalize assets. But according to William Day, a Dublin-based partner with Arthur Cox Solicitors, the Companies Act allows the court to grant other powers; it's just not called upon to do so. That leaves Coolfadda in a legal quandary. It doesn't want to liquidate, but can't qualify for conventional reorganization. So it turns to what is always considered temporary for a longer-lasting solution. "It's the use of one process to try to get around another process," says Rod Ensor, Dublin-based head of the corporate restructuring and insolvency law group at Matheson Ormsby Prentice, who isn't involved in the case. Ireland has a unique restructuring mechanism called examinership. This gives creditors the chance to work out a court-supervised reorganization, with a moratorium on all prepetition debts. The problem is that examinership has a strict 100-day limit. A judge must be convinced the odds of success are high. "You can't go into examinership unless you can prove to the court that there's a good chance of success," Ensor says. According to research by Neil Hughes, managing partner with Dublin accountancy Hughes Blake, examinership during the Celtic Tiger boom had a success rate that eclipsed 90%. That fell dramatically, however, and is now about 50% to 60% successful. Hughes attributes this drop to an inability of potential investors to gain funding. "Our banks are bust," he says. Day calls examinership "a hybrid of Chapter 11 and British administration," although Hughes believes the statute was really lifted from the U.S. Bankruptcy Code. Legislation created the process in 1990, and it was used widely for some years, Day says. But the law was modified in 1999 and fell out of common use. Possibly the biggest examiner case this cycle involved a high-profile Dublin investment company called First Equity Group, which collapsed in December, after investing in projects that included an indoor ski resort in Britain and a condo development in Beverly Hills, Calif. A high court turned down First Equity's plea for an examiner. The Supreme Court overturned that decision. However, First Equity couldn't come up with a reorganization plan in the allotted time and went into liquidation in March. Investors and creditors stand to lose more than €150 million, according to local press accounts. Despite that failure, Ireland's legal and business communities support the examiner system. "One of the great advantages of examinership is the short period of time. It focuses everyone's mind," Ensor says. In the Coolfadda case, however, a reorganization may take three years, not three months. In its arguments before the high court and its appeal filed earlier this month, Coolfadda cited scattered case law in Commonwealth countries to demonstrate provisional liquidation can be stretched. The lone Irish case cited involved Novi Insurance Ltd., a subsidiary of Scotland's Independent Insurance Group plc, which wound down earlier this decade. The British courts allowed the Scottish insurer to remain in provisional liquidation for several years. Insurance companies at the time couldn't use administration. An Irish court allowed Novi to do the same, and it remained in provisional liquidation for almost four years. Laffoy rejected that example, saying the insurance industry is unique. "The application by [Coolfadda] would appear to be unprecedented," she wrote. Ensor doesn't expect the Supreme Court to side with Coolfadda. "It would be hugely significant if the Supreme Court overturned the high court, but it's unlikely," he says. "There would be massive consequences." Among those consequences, Ensor says, involve the state of contracts. Under liquidation, certain contracts can be terminated. Under provisional liquidation, those contracts are held in abeyance. Day, who also isn't involved in the case, is more optimistic. "There's a need for another device to deal with the economic crisis," he says. "This is a clever way, although it may have limited use." Hughes has another take on the attempt: What this could be saying is that "the bankruptcy laws themselves need updating." According to government estimates, problem real estate loans now total between €80 billion and €90 billion. The government has had to bail out the country's largest bank, Anglo Irish Bank Corp. plc, which alone has €17 billion in impaired property loans, equal to 20% of its portfolio. By all rights, lenders should be hauling into court even more developers. However, Irish banks -- as opposed to foreign-owned commercial banks in Ireland, which have been more aggressive -- have been reluctant to call in many bad real estate loans because of what that will do to their balance sheets. They are waiting for the government to come to the rescue. The country's Dail, or parliament, is expected to vote in early September on the creation of a government agency, the National Asset Management Agency, which will buy at a discount bad property loans from banks. "What's happening now is that bankers up and down the country are less and less able to make decisions," says Hughes. "They feel they don't have the authority." This has created a "holding pattern," Hughes says, who warns that there could be "a very big shakeout coming in September." |
Ireland is suffering from a monumental property collapse, with no end in sight. Homebuilders are falling like construction dust. In this bleak environment, one property developer and its court-appointed liquidator argue it's better for creditors to push off the day of reckoning, which is a big change for Ireland bankruptcy practices. 
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