The Gazette 1994

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 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 direction of the court in certain cases. However, a

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

the court with regard to the incurring of debts during the protection period.

creditors; accordingly, the examiner's discretion in this regard should be controlled.

9. The creditors' committee be comprised of the largest creditors in value and, when necessary, be

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