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Examinership: Too many
Difficult Questions
Dear Editor,
Your editorial in the July/August
issue highlighted some difficulties
encountered under the Companies
(Amendment) Act, 1990 ("the Ac t " ).
However, in suggesting that court
protection is not working due to the
security held by lenders, your
editorial has misinformed the
Gazette's
readers as to the
application of the law under the Act.
For instance, you suggest that:
(1) an examiner may not be able to
raise capital apart from the
secured lender as he would have
no security to offer - this in
fact is incorrect as borrowings
incurred by the examiner during
the court protection period rank
first in priority ahead of secured
creditors (clarified and confirmed
by the Supreme Court in
re.
Atlantic Magnetics Ltd),
(2) court protection cannot operate
satisfactorily due to the ability of
Irish lenders to appoint a receiver
but, under the Act even where a
receiver has been appointed such
receiver may be required to stand
aside in favour of an examiner
(as in
re. Atlantic Magnetics
Limited);
contrary to your
suggestion, in practice the
possibility of an examiner
replacing a receiver acts as a
deterrent from lenders appointing
receivers,
(3) lenders should appoint directors
to their corporate customers -
this is not taken up by lenders
partly no doubt due to the
extremely wide reckless trading
provisions introduced by the
Companies Act, 1990; indeed,
this Act may have further adverse
implications for lenders who may
in certain circumstances be
deemed to be shadow directors,
(4) lenders, through their own fault,
find out too late when there is a
problem - this often arises due
to the historical nature of
accounts as by the time audited
accounts reach the lender they
are usually at least three months
out of date; more regular
management accounts sometimes
prove to be unreliable; hopefully
financial information will
improve following the Report of
the Financial Reporting
Commission.
Secured lenders have had their
priority substantially eroded in the
past decade. The priority granted
principally to the Revenue
Commissioners over floating charge
holders under section 285 of the
Companies Act, 1963 was extended
under the Companies (Amendment)
Act, 1982 as well as by further social
welfare and VAT legislation. This
ever increasing encroachment of the
Revenue Commissioners has pushed
lenders towards taking fixed security
where possible. However, even here
priority has been lost. Within six
months of the Supreme Court's
confirmation that an effective fixed
charge could be created over present
and future book debts (re.
Keenan
Brothers Limited)
the Revenue
Commissioners obtained super
preferential status which they can
trigger at will against lenders with a
fixed charge over a customer's book
debts (Finance Act, 1986). This
draconian legislation has resulted in
the principal lenders in Ireland in
practice declining to take fixed
charges over book debts.
In 1988 additional powers were given
to the Revenue Commissioners
whereby they can now, by means of
an attachment notice, obtain monies
deposited with banks (as security or
otherwise) where the depositor is in
arrears on its tax payments. These
attachment powers have been
extended by the Finance Act, 1992.
Furthermore, the prohibition on
banks setting off monies in a '
customer's account where an
examiner has been appointed is a
further drawback to lenders.
Trade creditors may often be in a
position to protect themselves by
retention of title (thereby effectively
taking a company's stock out of the
charge held by the lender). This
leaves secured lenders with little
assets on which they may obtain
effective security - land on
realisation may well fall far short of
the balance sheet value as indeed
may expensive sophisticated
machinery where there may not be a
readily obtainable market. Security
over shares in private companies is
generally of minimal value.
The court protection procedure is yet
another erosion in a secured lender's
rights in that, apart from having its
first fixed security subordinated to
the examiner's liabilities, many
schemes of arrangement arising from
a period of court protection result in
a secured lender writing off some
debt essentially in favour of the
Revenue Commissioners and
unsecured creditors. In this regard
the US Chapter 11 System to which
you referred is more favourable to
secured lenders than the Act. In view
of the diminishing assets that are
available to lenders as effective
security, it is little wonder that
lenders appear to be reluctant to
make funds readily available -
lenders too must protect the interests
of their depositors, shareholders and
employees.
The principle of court protection is a
good one to be used in appropriate
circumstances but the legislation does
need improvement. To suggest,
however, as your editorial does, that
the fault lies with the secured lenders
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