Special Committee on the Companies (No. 2) Bill, 1987 díospóireacht -
Thursday, 24 May 1990

SECTION 162.

Question proposed: "That section 162 stand part of the Bill."

Mr. Leyden

Section 162 is new and did not appear in the original text of the Bill as published. It is one of a series of new sections that were added by way of Government amendment on Committee Stage in the Seanad to try to ensure that the provisions of Part IX of the Bill would be as practical and as workable as possible.

Section 162 is aimed at trying to ensure that a company under the protection of the court will be able to continue to trade while it is under protection. After the Bill was published, the almost universal response was that one of the main difficulties to be faced by a company under court protection, and of course by the examiner, would be the reluctance of ordinary trade creditors to continue supplying the company during the protection period. Such refusal would be based on a fear that the company might be wound up afterwards or a receiver appointed after the company came out of protection, that they would be, effectively, throwing good money after bad. Not alone would this apply to such ordinary trade creditors so the argument goes on, but also to suppliers of other forms of credit, for example, bank overdrafts. If some special arrangements were not made for such suppliers the company would invariably be faced with demands for cash on delivery, and so on, and would not be able to obtain other forms of credit either. Suppliers would probably simply refuse to supply.

Section 162 addresses this problem of ensuring the continuity of supply by ranking any post-protection debts certified by the examiner as essential for the survival of the company as an expense of the examiner which, under section 181 (3) of the Bill, must be paid before any other debts, even preferential ones, in the event of the company being subsequently wound up or a receiver appointed. However, this right we are giving the examiner to effectively offer guaranteed ultimate payment to certain suppliers would have to be somewhat restricted. What the section provides, therefore, is that before the examiner could certify debt in this way he would have to be satisfied that the company could not survive in the absence of co-operation by certain creditors and suppliers, for example suppliers of essential raw materials.

Mr. S. Barrett

Is there a danger that the examiner's judgment would be tested afterwards — that he did something he should not have done? Could somebody argue that it was not absolutely essential that he made that payment and, therefore, that it would not have the preferential status we all want? Can somebody challenge it in other words?

Mr. Leyden

It is basically worded "in the opinion of the examiner", not the judgment, that is a fairly clear-cut statement by the standards practised in relation to those matters. I could not see any improvement or try to change the wording.

Mr. S. Barrett

Once he certifies it, that is it. Is that right? Could anybody challenge him afterwards?

Mr. Leyden

No, I do not see how anybody could challenge him. I am not going to foresee the future as far as any legislation is concerned because I am sure there are plenty of eminent lawyers who will decide at any stage to challenge any Act of the Oireachtas, and even challenge actions of the Oireachtas. I am sure it is not inconceivable that that could arise at some stage.

Mr. S. Barrett

When you were responding to the section you did say that it was only in respect of liabilities that were not important. Who decides that? Is it decided afterwards?

[Loss of text due to technical fault]

Mr. Leyden

I think section 162 will give the examiner these powers when this Bill is passed by the Oireachtas.

Question put and agreed to.

NEW SECTION.

Mr. Leyden

I move amendment No. 226.

In page 126, before section 163, to insert the following new section:

"163.—(1) Where, on an application by the examiner, the court is satisfied that the disposal (with or without other assets) of any property of the company which is subject to a security which, as created, was a floating charge or the exercise by the examiner of his powers in relation to such property would be likely to facilitate the survival of the whole or any part of the company as a going concern, the court may by order authorise the examiner to dispose of the property, or exercise his powers in relation to it, as the case may be, as if it were not subject to the security.

(2) Where, on an application by the examiner, the court is satisfied that the disposal (with or without other assets) of——

(a) any property of the company subject to a security other than a security to which subsection (1) applies, or

(b) any goods in the possession of the company under a hire-purchase agreement,

would be likely to facilitate the survival of the whole or any part of the company as a going concern, the court may be order authorise the examiner to dispose of the property as if it were not subject to the security or to dispose of the goods as if all rights of the owner under the hire-purchase agreement were vested in the company.

(3) Where property is disposed of under subsection (1), the holder of the security shall have the same priority in respect of any property of the company directly or indirectly representing the property disposed of as he would have had in respect of the property subject to the security.

(4) It shall be a condition of an order under subsection (2) that——

(a) the net proceeds of the disposal, and

(b) where those proceeds are less than such amount as may be determined by the court to be the net amount which would be realised on a sale of the property or goods in the open market by a willing vendor, such sums as may be required to make good the deficiency, shall be applied towards discharging the sums secured by the security or payable under the hire-purchase agreement.

(5) Where a condition imposed in pursuance of subsection (4) relates to two or more securities, that condition requires the net proceeds of the disposal and, where paragraph (b) of that subsection applies, the sums mentioned in that paragraph to be applied towards the sums secured by those securities in the order of their priorities.

(6) An office copy of an order under subsection (1) or (2) in relation to a security shall, within 7 days after the making of the order, be delivered by the examiner to the registrar of companies.

(7) If the examiner without reasonable excuse fails to comply with subsection (6), he shall be liable to a fine not exceeding £1,000 and, for continued contravention, to a daily default fine not exceeding £50.

(8) References in this section to a hire-purchase agreement include a conditional sale agreement, a retention of title agreement and an agreement for the bailment of goods which is capable of subsisting for more than 3 months.".

Section 163 was introduced by way of amendment in the Seanad and was based on a British provision, namely section 15 of the UK Insolvency Act, 1986. The reason for its introduction was that a company could effectively be hamstrung during the protection period if some of its assets, for example, buildings incurring heavy overheads, were the subject of a fixed security. This could clearly be a drain on the company's resources during the protection period and it was felt the examiner should be able to dispose of such property whether or not he had been given power by a court actually to run the business. As a quid pro quo however, the section provides that the examiner should be required to account to the security holder for the proceeds of any such disposal.

The effect of this section as currently drafted, therefore, is to allow the examiner, with the approval of the court, to dispose of property subject to a fixed charge as if it was not so subject but to account to the chargeholder for the proceeds. Similar arguments applied in cases where goods in the company's possession are the subject of retention of title agreements. Obviously if the supplier concerned could simply grab the goods, the company's position could very quickly become untenable. Accordingly, the section also currently gives the examiner a certain freedom to manoeuvre in this respect.

I have recently looked again at the UK provision involved and I am now proposing a further refinement which has to do with property subject to a floating charge. The most convenient way to effect this refinement is to replace the section altogether with a new version, and that is what amendment No. 226 does. The main changes are the addition of new subsections (1) and (3) with some other minor consequential drafting changes. Subsection (1) provides that where the court agrees with the examiner that the disposal or other treatment by the examiner of property which is subject to a floating charge would be likely to lead to the survival of the company as a going concern, the court may allow the examiner to do so as if the property were not subject to the charge. Where this happens, however, subsection (3) provides that the holder of the floating charge will nevertheless retain his priority rights over the property involved. This means that the rights of the chargeholder in a winding up to claim ahead of the unsecured creditors would not be affected.

While, as I said earlier, this extension of the section is based on a UK idea it differs in as much as my proposal would require the examiner to get the approval of the court before dealing with property subject to a floating charge, whereas the British provision contains no such restrictions. This extension of the power of the examiner to property covered by a floating charge is the only substantive change I am proposing to make to the section.

I note that in the printing of this amendment a slight error has occurred in subsection (4). This subsection repeats subsection (3) in the Bill, with a change in the reference in line 1 to subsection (2) rather than subsection (1). However, the last clause in paragraph (b), that is, "shall be applied towards discharging the sum secured by the security or payable under the hire-purchase agreement" should not be intended as part of that paragraph. I mentioned this so that the correct layout can be used when the section is included in the next print of the Bill.

Mr. J. Bruton

As I understand it, securities are a form of property and if the bank has security over assets, it has property in those assets. As I understand it, our Constitution protects property, unlike the British who do not have a Constitution. It depends on the time of day or whether Lord Hailsham or somebody else is doing the talking. We are treading on pretty thin ice, in allowing the court to set aside securities, in other words, essentially to set at nought without compensation certain property rights that exist in the form of securities. I am curious as to whether the Minister has taken advice on the constitutionality of this section or, indeed, its predecessor.

Mr. O'Dea

It is not really interfering with their rights as such. I take Deputy Bruton's point that securities are equivalent to property, but it seems to be merely replacing one form of asset, over which they hold a charge, with another, namely money.

Mr. Leyden

Chairman, just one point of clarification. This new amendment was cleared by the Attorney General's Office and they are satisfied that, from the constitutional point of view, the rights to private property would be protected under this section. In other words, we are satisfied with this section, and the clarification I have already given.

Chairman

That covers the query raised; the Attorney General's advice has been accepted by the Department.

Mr. J. Bruton

It would not be the first time the Attorney General lost a case in the Supreme Court on property isues. That is quite persuasive; it is not definitive. Exactly what will happen where property, which is subject to security, is sold? It should be a condition that the net proceeds of the disposal, if less than the market value, should be applied towards discharging the sum secured by the security or payable under the hire purchase agreement. Will that be part of a proposal under section 174, or will that money be paid over separately prior to a proposal? If the proceeds of secured property are put into proposals for a compromise, then I think you are interfering with property rights in the sense that people might not get the full value.

Mr. Leyden

If the examiner disposes of property in such a fashion, then it would be used to reduce the debts of the company.

Mr. J. Bruton

Will they be used to reduce the debts of the company in the context of a scheme of a compromise under section 174, where this will go into a pot with a whole lot of other debts and people may be getting 80p in the pound, or is it the case that the owner of a security in respect of an item of property owed by the company will be paid in full in advance or outside the context of a compromise scheme under section 174?

Mr. Leydon

The Bill is rather silent on the points raised by Deputy Bruton, that is, in relation to the disposal of assets but I have outlined already in my explanation of this subsection the exact procedures that would be followed in relation to the disposal of property. Our own feeling is that he could pay off the chargeholder straightaway.

Chairman

Under subsection (1) the court gives the power to dispose of such property which would be likely to facilitate the survival of the whole or any part of the company as a going concern. Would that indicate that the assets could exceed the liabilities? If it is likely to provide for the survival of the company, then the idea of disposing of assets, which would be insufficient to allow it to remain a going concern, would not form the subject matter of an application under this section. Do you get that point? You will only get this power to dispose of the asset when it will facilitate the survival of the company and to ensure the survival of the company, would the asset have to exceed the liability of the company?

Mr. J. Bruton

You will get the power to do it before you know what you are going to realise. In fact, the court will not know at the time it is making that decision whether the value of the asset is such. Arising from what the Minister has said, it is not sufficient that the legislation should be silent on this. I am not talking about the disposal; the application of the proceeds of the disposal is the key issue. Deputy O'Dea made the very valid point that the property right was not being taken away in the sense that people were going to get the value of their security in cash rather than in the form of the security but if the proceeds of the disposal have to be put into a pot, along with all sorts of other debts under a scheme of compromise under section 174, the person may not get the value of their security. If there is a possibility that they will not get the value of their security, then I contend that the constitutional protection of property, enjoyed by the security holders, are potentially being undermined by this section.

Chairman

Section 174 has to be read in conjunction with section 163. The new section 163 (3) says:

Where property is disposed of under subsection (1), the holder of the security shall have the same priority in respect of any property of the company directly or indirectly representing the property disposed of as he would have had in respect of the property subject to the security.

In other words, even if there is a compromise arrangement under section 174, your rights under section 163 (3) as a person who has a preferential charge on the property will be maintained. You read both sections together; they are both part of the same statute.

Mr. J. Bruton

If you look at section 176 (6) it states clearly:

Where the court confirms proposals (with or without modifications) the proposals shall, notwithstanding any other enactment, be binding on all the creditors . . . . affected by the proposals in respect of any claim or claims against the company and any person other than the company who under statute, enactment, rule of law or otherwise, is liable for all or any part of the debts of the company.

My understanding in that case is the securities could be set aside; they would just have to accept that.

Chairman

It is precisely because the securities are property rights that you have a specific section in relation to them. Section 163 states that in respect of those securities which involve property rights the preference will be maintained, but other classes of creditors will simply have cash debt due to the company, regardless of the preference that may exist there. They may have to go into the pot. In other words you are pari passu with everyone else.

Mr. S. Barrett

What you are saying in simple language is that when it all goes into the pot there is £600,000. and if the security was in respect of £80,000 on a particular property that was sold, out of the £600,000 the £80,000 must be paid first, and the £520,000 is shared out amount the remainder. Is that it?

Chairman

That is the story now. You cannot sell until the fixed charge registered against the deed has been got rid of. That is how it is under the present law; there is no way around it. That property right is not going to change under this proposal.

Mr. O'Dea

Deputy Bruton is worried in case all the security — we will say the property on which the charge is taken, is worth £100,000 and the debt is £100,000 — will have to go into the pot and the creditors are getting 80 per cent, in other words, he is only going to get £80,000 even though he had a charge on property worth £100,000. I agree there is a certain amount of ambiguity there, but I think the interpretation will be taken that the present position will not change, and the position is as the Chairman stated it — he gets the full amount of his debt in respect of which he has a fixed charge.

Mr. Leyden

Between now and Report Stage, we can check the case law taken under the British Act. This will give us a guide for a review of this section in view of Deputy Bruton's concerns. Trying to balance the future of the company and the rights of the asset holders is a very difficult and complex area. It is difficult to get the right wording to satisfy everybody. We have checked this out. Deputy Bruton is quite correct when he says that because the Attorney General's Office said it was constitutional it was, but as far as I am concerned, it would be constitutional.

Mr. J. Bruton

175 (4) — I know, Chairman, we are going ahead which you do not want us to do, but all these sections are interlocked. However section 175 (4) reads:

Proposals shall be deemed to have been accepted by a meeting of creditors or of a class of creditors when a majority in number representing a majority in value of the claims represented at that meeting have voted, either in person or by proxy, in favour of the resolution of the proposals.

It is quite clear that proposals can be accepted by a majority of the creditors. Section 176 (6) makes it clear that the court can confirm those proposals notwithstanding any other enactment.

Chairman

The court will protect the property rights under the Constitution of anyone who has a fixed or floating charge on the property. If those proposals are in contravention of those property rights, the constitutional rights of those who own the charge will take precedence.

Mr. J. Bruton

That is not made explicit on the face of this legislation.

Chairman

That is the legal reality.

Mr. J. Bruton

I know that but this is a very large piece of legislation and we do not want doubts in it and we do not want people asking if it is constitutional. It has been represented to me by people with professional involvement that this group of sections could interfere with the flow of loan capital to companies from banks where those loans traditionally relied on securities if they thought that as a result of this legislation there was any doubt that a majority of the creditors could put themselves, by majority vote, in a position that reduced the value of securities, as previously seen. I take what the Chairman says about his understanding that the court will, in fact, maintain the value of securities over and above any unsecured loans and so on, but I would feel that should be made clear on the face of this legislation.

Mr. Leyden

Deputy Bruton is sharpening his legalistic background on this. As there has been a doubt expressed at the meeting I will bring this back to the Attorney General and get clarification because it is a very important point and it is a very basic principle of our Constitution to protect property rights. If any section in this Bill undermines that it could be damaging to the Bill itself. If there is any question about it being unconstitutional, then the Bill could be undermined. I will get clarification from the Attorney General's Office but it will be difficult to get a detailed assessment of the points being raised here before Report Stage.

Chairman

I think we should proceed on the basis that at the moment the Attorney General's Office is satisfied that this part stands up to constitutional scrutiny — that would be taking all the sections into consideration, not simply a section on its own. I am satisfied on the basis of what we have said that it is safe, but as the Minister said, when we come back on Report Stage we can expect him to clarify it in more detail and satisfy all Members that this problem will not arise.

Mr. J. Bruton

My point is not just a constitutonal one; it could be also a practical point. If it was felt that it was possible that securities could be overturned constitutionally, the banks might be less inclined to lend. That is a practical difficulty as well. That dimension should be looked at also.

Mr. S. Barrett

As you said, Chairman, in subsection (1) all of this is subject to permission by the court. Is there not a difficulty in that subsection where it says "whole or any part of the company as a going concern"?

Chairman

Not if by so doing the court will ensure that the preference of full security is compensated for. In other words, if there is a company with an annual charge of £60,000 which owes a lot more than that, we can save part of it if we sell the property over which I have a charge. Once I get my £60,000 back, I am not interested in whether the company keeps its five operations going, or one operation going. I am not involved in the commercial end of it. I only want my money. It will not affect me. If we are worried about the person who has the charge, we are asking if this person's preference is maintained? The Minister's, the Attorney General's and my interpretation of it is that it will be maintained. The fact that we are only saving part of the company as a consequence of selling it is not concern of mine, in terms of ensuring that my preference is respected.

Mr. S. Barrett

The court would have to be satisfied as well.

Chairman

The court will ensure and will only give that power to the examiner once it knows that my constitutional property right is not being infringed, that is, I get full compensation and my preference is maintained. The fact that not all the company is being saved as a consequence does not worry me if I am the person who has the charge. It does not matter if the directors of the company are going to lose part of their business, that is their problem. It has been a good discussion and we can come back on Report Stage to cover those points. There is an interlinking of a few sections which are difficult to follow. At Committee Stage we take section by section.

Amendment agreed to.

Section 163 deleted.

Section 164 agreed to.