Repudiation And Disclaimer Of Leases In Examinership And Liquidation

Author:Ms Louise Wright
Profession:Dillon Eustace
 
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Introduction

The recent unprecedented economic downturn has resulted in many companies suffering substantial loss of business revenue due to a lack of demand for their products and services. Although companies have been faced with a reduction in their revenues, there has been no corresponding reduction in their overheads including the payment of rent which for many companies is a significant cost. A substantial amount of companies operate their businesses from properties which are held under lease. Most of these leases were negotiated prior to the downturn when rents were inflated. They contain upwards only rent review clauses with a limited option to break, usually subject to the payment of a penalty. It has become apparent that onerous covenants in leases coupled with high rents are playing a substantial role in the financial hardship of companies leading in many cases to insolvency. The recession has resulted in a dramatic surge in the number of companies seeking to appoint an examiner where they are considered to have a reasonable prospect of survival. The large volume of examinerships and liquidations has required both examiners and liquidators to address and resolve one of the key causes of insolvency, namely onerous leases with overinflated rents. This article proposes to outline the legislation governing the repudiation and disclaimer of leases in an examinership and in a liquidation and the interpretation and clarification of such legislation as a result of various cases.

Examinership

Examinership is generally construed as a positive option for a company suffering financial hardship which has a reasonable prospect of survival if restructured. It allows the company the opportunity to find an investor, which is considered crucial for the likely success of an examinership. Provided that the scheme of arrangement is approved it prevents the company from going into liquidation and allows it to continue its business operation and to preserve employment. Clarke J. stated in the case of Re Traffic Group Limited1 that, "it is clear that the principle focus of the legislation is to enable, in an appropriate case an enterprise to continue in existence for the benefit of the economy as a whole and, of equal, or indeed, greater importance, to enable as many as possible of the jobs which may be at stake in such enterprise to be maintained for the benefit of the community in which the relevant employment was located."

Examinership is governed by the Companies (Amendment) Act 1990 (the "1990 Act") as amended by the Companies (Amendment) (No.2) Act 1999 (the "1999 Act"). There are two pre-requisites to the appointment of an examiner: (i) that the company is insolvent; and (ii) that there "is a reasonable prospect of survival of the company and the whole or any part of its undertaking as a going concern". In accordance with s.3 of the 1990 Act the company's application for examinership may be made by the company, directors of the company, the creditors including contingent or prospective creditors (including an employee) of the company, or members of the company holding at the date of presentation of the petition at least 10 per cent of the issued share capital. In most cases the application is made by the company. Under the 1999 Act the petition must be accompanied by an independent accountant's report, which must among other matters contain his opinion as to whether the company has a reasonable prospect of survival as a going concern and whether the formulation, acceptance and confirmation of the scheme of arrangement offers a reasonable prospect of survival for the company. The examiner is appointed for 70 days which period may be extended by a further 30 days upon application to the court. During this time the examiner prepares a survival plan known as "the scheme of arrangement" to facilitate the company's continued operation.

During an examinership the company is protected by the court and creditors are prohibited from taking action against the company. Secured creditors will not be permitted to enforce charges over part or all of the company's property unless the examiner consents. A receiver may not be appointed. If a receiver is already in place, the court may restrict his work. No proceedings for the winding-up of the company may be commenced or resolution for winding-up passed in relation to the company and any resolution so passed will have no effect. No attachment, sequestration, distress or execution can take place against the property or effects of the company except with the consent of the examiner. An examiner may ignore negative pledge clauses and debentures so as to borrow the necessary funds for the period of the protection provided that this has been approved by the court. If the scheme of arrangement is approved by the court it then makes whatever orders...

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