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Examinership law imbalanced for leasing Back  
Catherine Duffy highlights some pitfalls in the proposed amendments to company law
T he Companies (Amendment) No. 2 Bill 1999 proposes changes to the existing examinership legislation as set out in the Companies (Amendment) Act, 1990. While the Bill enshrines various protections for creditors developed through case law, it could have been more aggressive in tackling the issues faced by those in the financial services sector when dealing with a company in examinership.

The proposed changes for those in the leasing sector are welcome. These include
l a reduction in the scope of the examiner’s power to repudiate contracts. This is done by excluding contracts entered into by the company prior to the period during which a company is under the protection of the Court.

l prohibiting schemes of arrangement which provide for a reduction or extinguishment of rent due in respect of a lease of land or other leased property.

Whilst the latter is undoubtedly an improvement, a distinction is drawn between land and non-land property. In the case of non-land property, a test, not applicable to leases of land, has to be met before the prohibition will apply. The value of the leased property must be ‘substantial’. Whether an asset is ‘substantial’ is to be determined by the court having regard to:

l the length of the unexpired term of the lease;

l the extent to which the owner of the relevant asset carries on the business of leasing and the proportion, in general terms, which the value of that asset bears to the value of the total amount of property that, in the opinion of the court, is likely to be leased or hired by that person at any particular time.

In other words, if a lessor’s exposure to a company in examinership is not substantial having regard to its overall leasing business and notwithstanding the fact that the asset, the subject of the lease, is, of itself, of substantial value, the test applied by the court may not be met and the lease rentals payable by the lessee of such asset may not be protected by the prohibition under the Bill on a scheme of arrangement providing for a reduction of lease rentals. Accordingly, the lease rentals going forward may be subject to reduction under the examiner’s proposals.
One of the most disappointing aspects of the Bill is the assumption that land will inevitably have a higher value than non-land assets. This amounts to a failure to recognise the commercial reality of financial services leasing transactions in Ireland. The reality is that non-land assets are often of greater value than land.

The Bill was discussed in the Dail at the end of May and subsequently by the Select Committee on Enterprise and Small Business on 21st July. The revised Bill was published in July.
The discussions at Committee Stage revealed that a clear distinction was being made between the landlord of a building and the lessor of assets essential to the trade of a company; the emphasis being that a landlord should not be obliged to accept an ‘uneconomic’ rent for his property going forward. The corollary argument was not made strongly in respect of non-land assets. The discussions were not conclusive and the Minister agreed to withdraw the proposed amendment. He is to review it in detail and revert at Report Stage with the section as currently drafted, with the right of others to amend it and with his amendments.

Accordingly, the Bill, as drafted, does not address the issues which are of concern to the ‘big ticket’ finance leasing business of non-land assets directly or indirectly to lessees which are capable of being put into examinership.

If the Bill is enacted as amended at Committee Stage and without further attempts to redress the imbalance between land and non-land assets, great care will need to be taken by lessors in structuring their leasing transactions of non-land assets where the direct or indirect lessee is a company subject to the laws of examinership. It will be important to ensure, as far as possible, that such leases will come within the prohibition provided by the new legislation. The message for now is, ‘watch this space’.

Changes at Committee Stage

The changes effected to the Bill as initiated following discussions at Committee Stage insofar as it relates to the law of examinership, were few the main change being the addition to Section 24 of the Act (Confirmation of Proposals). The new provision introduces a prohibition on the Court confirming any proposals which would have the effect of impairing the interests of the creditors of the company in such a manner as to favour the interests of the creditors or members of the company or a related company to which an examiner has been appointed. The drafting is somewhat confusing. The change was discussed at Committee Stage and it seemed from such discussions that the reference to the proposals favouring the interests of creditors or members should in fact have been a reference to creditors or members of related companies only.

We await a further draft to ascertain whether further amendment will be made to this provision to make it clearer. The other change to the examinership provision was to the procedures relating to guarantees.

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