A Company Law Review Group was established by the Minister for Enterprise and Employment to report on the inadequacies that should be tackled and the reforms that should be made in the area of company law. One of the most controversial provisions in Irish company law is the process of examination which affords an insolvent company protection by the courts from its creditors (who are most likely to be its lenders) while restructuring proposals are being prepared. The measure is akin to that of administration in the United Kingdom and Chapter 11 in the United States. The banks, who have been unhappy with certain provisions of the law on examination, have given a broad welcome to the thrust of the proposals.

The main effect of the recommendations, if enacted, will be to force companies to address their financial and other difficulties as soon as they are recognised. There has been a perception that companies which have no possibility of ever being viable are seeking temporary protection from the courts under the examination process.

If the Review Group proposals are implemented - and amending legislation would be required - it should improve the secured position of any lending bank and also give creditors a significant input on the appropriateness and the outcome of an examination procedure.

Preliminary Report to the Court

The Review Group recommends that an application to the court for the appointment of an examiner should demonstrate that a company has a "reasonable prospect of survival" rather than simply a prospect (however remote). The Review Group also recommends that an independent accountant should prepare and make available to the court a report which expresses a view on whether the company is capable of surviving as a going concern. In particular, that report should address the ability of the company to fund itself during the period of examination. A number of recent examinations have failed due to a lack of cash resources during the examination period.

Position of the Banks

One of the main criticisms made by the lending banks of the present regime is the power which an examiner has to borrow and effectively repay loans during the examination period by selling assets which could include charged assets. The Review Group recommends that any borrowings certified by an examiner during the period of examination should not rank ahead of any fixed charged security though they may rank ahead of floating charge securities.

The Review Group also recommends that a bank which has a right of set-off between bank accounts should not be restricted in exercising this right during the examination process. However, some concern has been expressed that a repeal of this restriction could result in the company having to borrow cash resources which otherwise would have been available to it.

The effect of the examination rules can be to reduce the value of any third party guarantee which is held by a bank. This can arise because proceedings cannot be issued against a guarantor while the company is in examination. Furthermore, if the amount of the debt is reduced under any scheme of arrangement, the liability of the guarantor is thereby reduced. The Review Group appears to recommend that a guarantor should remain liable for the full amount of the debt and not just the reduced amount set out in any scheme of arrangement.

Position of Creditors (including Banks)

On the hearing of the application seeking the protection of the courts if the proposal for a preliminary report is accepted, creditors should have considerably more information available than is the case at present. Since the preliminary independent report will contain a funding statement, a creditor can form a view on the viability of a company and whether it would be prudent to trade with a company during the examination period.

The current rules require that only one class of creditors has to accept the scheme of arrangement that is put forward by the examiner. The Review Group recommends that acceptance by a majority in value of the creditors should be required. Although this appears to be more democratic it will only be effective if a restriction is introduced where the creditors include shareholders and other group entities as their votes otherwise distort any voting arrangements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances