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GAZETTE
SEPTEMBER 1992
Appoint ing an Examiner -
Is It Worthwhi le?
by J ohn L O'Donnell,
B.GL. L I .M.
(Cantab), Barrister-at-Law.
Does a petitioner have to establish
that a company has a real prospect
of survival before the High Court
will order the appointment of an
Examiner? The recent Supreme
Court decision in
Atlantic
Magnetics
rejects this contention. John L.
O'Donnell analyses the issues.
To a company encountering severe
financial difficulties, the prospect of
obtaining court protection from
pursuing creditors is undoubtedly
attractive. In a procedure analogous
to that of Chapter 11 in the United
States, the Companies (Amendment)
Act, 1990 allows the High Court to
place a company under its protection
and to appoint an Examiner to that
company for the purpose of
examining the state of the company's
affairs during that period of
protection.
1
The court, however,
clearly has a discretion in exercising
its jurisdiction to appoint an
Examiner and while the rules
contained in Order 75 A envisage the
possibility of appointing an interim
Examiner on the basis of an
ex-parte
application prior to the hearing of
the petition itself,
2
there does not
appear to be anything to stop a
creditor who has been served with
notice of the hearing of the petition
(or who has seen an advertisement
of the hearing) from attending court
at the hearing of the petition and
objecting to the appointment of an
Examiner to the company. Faced
with such a dispute between a
petitioner and a hostile creditor or
creditors, the court must then
exercise what appears to be a fairly
wide discretion under the Act in
deciding whether or not to appoint
an Examiner. Since the matter of
how this discretion is exercised may
in such circumstances effectively
mean the difference between survival
John O'Donnell, BL
and death for the company in
question, it is unsurprising that a
recent Supreme Court decision
indicating how this discretion might
be exercised has attracted
considerable attention.
3
Insofar as
the decision rejects the contention
(apparent in a number of English
decisions) that a petitioner should
establish that the company has a real
prospect of survival before an order
for the appointment of an Examiner
will be made, it is a decision which
will surely be welcomed by stricken
companies seeking at least the time
to investigate whether or not their
affairs can be put in order. The
decision will thus facilitate rather
than obstruct the appointment of an
Examiner in the appropriate
circumstances.
The decision in
Atlantic Magnetics
was also of significance in another
notable respect. Since an Examiner
will not be appointed to a company
unless it is (or is likely to be) unable
to pay its debts, any appointment of
an Examiner to a company in
difficulty is in effect an express (or
implied) admission of insolvency. An
Examiner who wishes to investigate
the prospects for survival of a
company may wish to continue to
trade as a going concern while so
doing, but will frequently require
significant additional funding. A
financial institution is unlikely to be
willing to advance monies to an
insolvent company unless it can be
given an extremely firm assurance
that monies so advanced by it will
be repaid in priority to any other
claims, even if the company
subsequently goes into liquidation.
By a combination of section 10 and
section 29 of the Act, the Supreme
Court enabled the Examiner to
borrow monies by declaring that
monies so borrowed and expended
would be treated as expenses
properly incurred by him and would
be repaid in full out of the assets of
the company in priority to any other
claim. The effect of this part of the
decision cannot be underestimated
for it means that if such a
declaration is made, an Examiner of
an insolvent company would be able
to borrow monies (which may indeed
secure the future financial stability
of that company) by guaranteeing to
the relevant financial institution that
these monies will be repaid in
priority as reasonable expenses
incurred by
him,
even if the
company is subsequently placed in
receivership or wound up. The fact
that the financial institution in
question is a secured creditor of the
company with a charge over the
entire of the assets which have
become fixed will not necessarily be
sufficient to enable it to prevent the
Examiner from obtaining access to
monies standing to the credit of the
company in that financial institution.
It is clear that the Supreme Court
4
were not prepared to countenance a
situation where a secured creditor
could also veto the appointment of
an Examiner and the consequential
exercise of a variety of powers which
might follow from this. The purpose
of the Act is to provide a protected
"breathing space" for the company
I and its shareholders, workforce and
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