The Gazette 1992

GAZETTE

1 W

1 N

JULY/AUGUST 1992

P 0

Examinership: Too many

Difficult Ques t ions

The concept of Examinership, first

introduced in the Companies

(Amendment) Act, 1990 has been in

operation for a sufficient time to

enable its operation to be reviewed.

It cannot be said that the experience

has been entirely satisfactory and it

is far from clear that teething

troubles are the sole cause of

concern.

Various Common Law jurisdictions

have introduced provisions whereby

companies which may be temporarily

insolvent can be put into some form

of curatorship during which their

prospects of long term survival can

be examined without the danger of

creditors putting them into

liquidation or receivership. These

arrangements fall broadly into two

types. The first, and best known, the

US Chapter 11 System provides for

the freezing of the creditors' rights

to move for a specified period while

the directors of the company,

perhaps assisted by outside experts,

endeavour to get the company back

on the rails again. The other method

exemplified by the UK Administrator

and our Examiner system provides

for the introduction into the

company of an outside financial

expert, almost invariably an

accountant, whose brief is to

produce, within a relatively short

period of time, a report on the

financial prospects of the company

and a plan for its survival.

It is not too unkind to say that the

drafters of our companies legislation

do not seem to have given sufficient

consideration to the position of the

banks or other major lenders to the

company in question. There is no

obligation on a creditor bank to

offer facilities by way of working

capital for the business when it is in

examinership. Given that most Irish

banks and lending institutions will

have fixed charges over the assets

of the company, the lender may well

take a view that its security, which

cannot be enforced during the

examinership, may not be improved

if the examinership is permitted to

proceed. In such circumstances the

lender may refuse working capital.

The Examiner may not be able to

raise capital elsewhere having no

security to offer.

At first sight the answer to this

difficulty is not obvious. It may not

be reasonable to expect a bank

which has already extended

significant credit to a company and

which is facing losses on that

lending, to do anything other than

try to cut its losses and freeze the

company's obligations to it at the

known level. What perhaps needs to

be looked at, as has been suggested

in these pages before, is the methods

of operation of Irish lenders and

indeed the whole concept of the

floating charge and the power to

appoint a receiver. The power to

appoint a receiver gives a lending

institution an unfair advantage over

all unsecured creditors.

This creation of English law does

not exist in the United States or

Canada which may explain why their

curatorship procedures can operate

more satisfactorily than appears to

be the case either in the UK or in

our recent history here.

The ability to appoint a receiver

enables lenders to take too relaxed a

view of their creditor companies.

Secure in the knowledge that they

can at any time appoint a person to

realise the assets of the company

almost exclusively in their own

interests, Irish banks, in contrast to

their European counterparts, as a

general rule, take no equity

investment in the companies they

lend to, do not appoint directors to

the boards of significant borrowers

and, most tellingly of all, do not

review the financial accounts of their

creditor companies on a regular and

satisfactory basis. Too often the

lender only discovers the true

financial state of a borrower

company when it is in grave

difficulty.

The concept of a curatorship is a

good one but there must be grave

doubts as to whether it can operate

satisfactorily in the interest of the

creditors or companies that may be

temporarily insolvent, or their

employees, so long as the Damoclean

sword of receivership hangs over

Irish companies.

•

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