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GAZETTE
MARCH 1994
Companies (Amendment) Act , 1990 -
Submission suggests greater use
of Court Protect ion
The Department of Enterprise and
Employment has invited submissions
concerning the court protection
legislation with a view to possibly
amending such legislation. The
Company and Commercial Law
Committee of the Law Society made a
submission to the Department in
January 1994. A copy of the
Submission may be obtained from
Eileen Brazil
in the Law Society. In
summary, the submission attempted to
identify matters which have created
difficulties and to suggest measures
which may encourage a greater use of
the court protection procedure.
Legislative schemes dealing with
court protection in the United
Kingdom, United States and Australia
were examined. The submission
includes proposals that:
1. A pre-petition report be prepared
containing appropriate detailed
financial information so that the
court may assess correctly
whether there is a reasonable
prospect of survival for a
company if it is granted court
protection.
2. A set of objective criteria or
purposes be introduced for the
granting of court protection. The
court would then have to consider
that the making of the order
would achieve at least one of
these purposes before granting a
company protection, as currently
there is no onus of proof on the
petitioner to show that there is
either a real or reasonable
prospect of the company
surviving but only some prospect.
3. Either the court should not
consider the appointment of an
examiner where a receiver is
already in place, or where a
receiver is in place for not more
than three days a court would
appoint an examiner (subject to
(I) and (2) above) only where a
majority of two-thirds in value of
the creditors approve such a
course of action.
4. Where a receiver is obliged to
cease to act on the appointment of
an examiner, the obligations and
liabilities of the receiver,
including the obligation of the
receiver to make payment to
preferential creditors (pursuant
to section 98 of the Companies
Act, 1963), should be terminated.
5. A fixed chargeholder's security
should not be diluted by fresh
borrowings secured in priority to
it and the Australian system
whereby fresh borrowings rank in
priority to floating charges but
not to fixed charges should be
considered.
6. A bank's right of set-off be
unaffected by the appointment of
an examiner.
7. To foster the concept of a "rescue
culture" it is suggested that, as
provided in the Act, the directors
should retain control subject to
the direction of the court in
certain cases. However, a
schedule of the debts which may
be repaid should be set out in the
pre-petition report to avoid
directors re-paying indebtedness
to creditors of their choice. In
other cases, the examiner
should be required to apply
to the court before the debts
are repaid.
8. There should be a reporting
procedure by the directors,
possibly through the examiner to
the court with regard to the
incurring of debts during the
protection period.
9. The creditors' committee be
comprised of the largest creditors
in value and, when necessary, be
supplemented by the appointment
of representatives of the
unsecured creditors.
10. That guarantors may have their
guarantees enforced, even if the
company is under court protection
and, in any event, remain liable
for the full amount of the
guarantee even if the company
debt is written down (with
retention of the guarantor's right
of subrogation).
11. The present requirement providing
that there must be approval of the
examiner's proposals by at least
one class of affected members and
one class of affected creditors be
replaced by a requirement that
there must be approval by two
classes only, at least one of which
is a class of creditors. The Act
provides that a court may confirm
proposals which it considers to be
"fair and reasonable" in relation to
a class of creditors which has not
accepted the proposals. The
absence of a definition of "fair
and reasonable" leaves much
discretion to the court which may
lead to uncertainty. It is suggested
that guidelines and restrictions
similar to those in the United
States could be stipulated in
the Act.
12. The designated classes of
creditors be set out by statute and
court approval should be required
also in respect of the examiner's
establishment of and division into
classes (along the lines applicable
in the United States).
13. There is inadequate control in the
Act and Rules on the content of
the proposals formulated by the
examiner, particularly in relation
to the priority of entitlements of
creditors; accordingly, the
examiner's discretion in this
regard should be controlled.
(Continued on page 78)
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