Zoe survival plan 'flawed'

Developer Liam Carroll’s heavily insolvent Zoe property group has been given a short reprieve to Monday from a winding up bid by ACC Bank after the High Court again refused to grant protection to key Zoe companies on grounds the group had failed a reasonable prospect of survival.

Mr Justice Frank Clarke said today the prospects for survival of the group after a two-year moratorium on interest rates expires in 2011 were "significantly improbable", "at the further ends of optimism" and dependent on the "virtual impossibility" of a benign climate concerning interest rates, property values and letting capabilities.

In considering the group's prospects, he stressed he was concerned with its specific circumstances and not the general exposure of banks to property loans. However, he noted, it was likely much of the group's liabilities would ultimately be to Nama (if enacted) and Nama's overall interests would be "not dissimilar from a commercial bank".

The judge warned Zoe any appeal against his refusal of protection should be initiated before the Supreme Court within 24 hours from Monday.

Because of several court applications, the group had essentially secured protection over the past two months, he noted.

While this was "not through any wrongdoing" by it, he would take that into account and would be "very reluctant" to grant a stay on his order pending any appeal for longer than "the shortest conceivable period, if at all".

Rossa Fanning, for ACC, did not object to the adjournment to Monday but stressed ACC is anxious to proceed with its winding up petition.

In a 72-page judgment, the judge gave his reasons for refusing to grant protection to Vantive Holdings and Morsten Investments (the key funding companies in the Zoe group); Villeer Developments; Peytor Developments; Carragh Enterprises Ltd; Parlez International Ltd and Royceton.

He found the Zoe group had failed to show it has a reasonable prospect of survival from August 2011 when a two-year moratorium on bank interest repayments is due to end. He rejected the group's assertion, based on a revised business plan, it would emerge from the moratorium with a slight surplus of some €19 million assets over €1.3 billion liabilities and be able to meet interest payments as they fell due.

The judge noted the first petition for protection by six Zoe companies, rejected by both the High Court and Supreme Court, was grounded on a business plan which envisaged disposal of a signficant number of the group's property assets.

In its revised plan, the group was not advocating such an asset disposal but instead arguing it would have enough income from August 2011, when the two-year moratorium on interest rate repayments was due to cease, to service its interest repayments and pay its overheads as they fell due.

The judge found that plan contained several serious flaws, most significantly the failure to factor in likely hikes in interest rates from next year which could add between €15 million and €25 million a year from now to 2012 to the group's interest on its liabilities.

A half per cent hike in rates would add €4 million to the interest bill and, even if the group fixed rates, that would cost some €30 million which would entirely wipe out the projected €19 million surplus of the group.

The judge assessed the group's prospects against a modest improvement in economic conditions here from 2011 and built into his assessment the "real possibility" that estimates by Prof Morgan Kelly [of a fall in property values between 50-60 per cent] "may be correct".

This would affect the Zoe group in several respects, including the value of its property assets and its ability to achieve further interest roll ups.

While it was likely the values projected for the Zoe properties as of late 2010 were somewhat higher than are likely to be actually available then, the fact Zoe had applied signficant reductions to the values meant the extent of any fall in values was not as significant as the likely difficulties related to income and interest costs, he said.

He found "no real basis" for believing rent receipts would increase by anything like sufficient amounts to cover the additional interest costs. There was "more risk of a drop in income from residential property letting than an increase", commercial rents had fallen appreciably and there was no realistic prospect of significant upward rent reviews in the short to medium term.

The support or absence of opposition from most of Zoe's banker creditors for the revised plan carried no inference apart from the banks believing the plan was likely to reduce their "hit", the judge said. Bank of Scotland Ireland, he noted, was the only bank to have said it believed the group could survive.

Given all his findings, he ruled the group had not demonstrated a reasonable prospect of survival. If he had found such a prospect, he would have exercised his discretion to appoint an examiner, he added.

Earlier, Bill Shipsey SC, for the companies, sought to clarify some matters in independent accountant reports of David Wilkinson of KPMG for the companies following the judge's criticism of the presentation of those reports.

While not seeking to alter the court's refusal of protection, counsel said he himself may have misinformed the judge about issues in the reports. Mr Wilkinson regretted difficulties the judge experienced understand the information but this was "a presentation matter more than inaccuracies" and Mr Wilkinson stood over his figures.

Mr Justice Clarke said he did not agree with all that was said by counsel and nothing had been said to cause him to change his mind. He believed "a mistake" had been made but was not suggesting it was a deliberate mistake.