The High Court ruled that a €2.006bn “other reserve” expected to arise under a proposed Irish Life & Permanent restructuring would count as a realised profit capable of distribution under section 45 of the Companies (Amendment) Act 1983.
Mr Justice Clarke delivered the judgment on 21 December 2009. The issue was one part of an application by Irish Life & Permanent plc, which the judgment calls “old ILP”, seeking directions for shareholder meetings to consider a scheme of arrangement. Under the proposal, a new holding company would be created, existing shareholders would become shareholders in it, and old ILP would become its subsidiary.
The court considered the reserve’s status before the shareholder meetings. On 3 November, the judge had informed the parties of his view that the reserve was a profit, deferring detailed reasons until this judgment. The judgment supplies those reasons. It does not say that shareholders approved the scheme or that a distribution was made.
The reserve arose from accounting rules that would require the new company to record its investment in old ILP at €3.584bn, matching old ILP’s recorded equity. The evidence put the old company’s market value at about €1.578bn and the nominal value of the new company’s shares at €89m. After €1.489bn was assigned to share premium, the difference of €2.006bn would appear as the other reserve. The figures were based on accounts available at the hearing and would be updated if the scheme proceeded.
The judge accepted evidence from Una Curtis, a KPMG technical accounting director, that the accounting treatment would also require an impairment of €2.006bn, recorded as a loss, after the investment was initially recognised. He noted that the reserve was not profit in an ordinary or tangible sense. But, applying company law and the relevant accounting standards, he concluded that it had to be treated as either capital or profit. He found no theoretical basis for treating it as capital, and considered profit the interpretation that did less injustice to the underlying logic. The parties agreed that, if it was legally a profit, it could be treated as realised.
Clarke said the conclusion applied to the special and unusual circumstances before him. He also said the case exposed a problem in the cumulative effect of the relevant accounting standards and called for their urgent revision, while leaving the form of any changes to others.