Examinership Petition Allowed to Proceed Despite Settlement Agreement
Can an examiner be appointed to a company which had previously entered into a standstill agreement with one or more of its creditors? In Re KH Kitty Hall Holdings Limited  IECA 247 the Court of Appeal answered "yes".
Does a petitioner have to show that it is unmotivated by self-interest? "No" was the court's answer.
The companies in question had entered into a standstill agreement with a secured creditor. The companies later sought the appointment of an examiner. The secured creditor objected on the basis of the standstill agreement. The court held that the standstill agreement was not, in the circumstances, a bar to the appointment of an examiner. The statutory test (reasonable prospect for the survival of the business or part of it) had been met and so it was right that the examinership should proceed.
The court also held that the mere fact that those controlling the companies had a commercial incentive to seek the appointment of an examiner was not necessarily a bar. A bona fide commercial interest is not an impermissible ulterior motive. The question of motive might be relevant at the later stage of deciding whether to confirm the examiner's proposed scheme of arrangement, but it is unlikely to be relevant to the threshold matter of whether to appoint an examiner.
Hogan J held that the presentation of an examinership petition where there had been a previous standstill agreement is not, in itself, an abuse of process. In this case, there was no express contractual commitment by the companies not to petition for the appointment of an examiner.
The court did not address in detail the question whether – as a matter of public policy – a company might be precluded from petitioning for its own examinership on foot of its own agreement not to do so. There is case law that a company cannot waive its statutory rights: that issue did not have to be resolved in this case.
Finlay Geoghegan J approached the question differently. Was the secured creditor prejudiced by the appointment of an examiner? There was no such evidence. Accordingly, on this basis, the settlement agreement was not a bar to examinership.
The decision confirms that the core test to be applied in an examinership is the reasonable prospect of survival test. While the company in question may have had previous dealings with creditors which appeared to conflict with an intention to go into examinership, strong evidence or policy reasons will be required to deprive the company or its stakeholders of the examinership remedy where the statutory test is met.
The court's recognition that petitioners will have individual commercial motivations is pragmatic. To require petitioners to be totally free of self-interest would be unrealistic and would defeat the purpose of the legislation.
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