There has been a recent increase in the number of cases in which applications for the appointment of examiners have been heard. Two important recent cases may signal the application of increasingly vigorous review before examiners are appointed and also to applications made during examinership.

Zoe Group

In the case of Vantive Holdings and certain related companies which form part of the Zoe Group, the High Court refused to appoint an examiner in circumstances where it considered that the projections in the Report of the Independent Accountant were “lacking in reality” and that the valuations used were “out of date”.

The decision was appealed to the Supreme Court, which refused the appeal.  In an unprecedented move a second application for examinership was made and the High Court again refused to appoint an examiner. It rejected the assertion that the companies would emerge from the two year interest moratorium with a slight surplus and that they would be able to meet interest payments as they fell due. It held that the Independent Accountants Report submitted with the second application contained several material flaws.

The Court will always consider the contents of the Independent Accountants Report carefully when hearing an examinership application, and there have been cases where examinership was refused on the grounds that the Court was dissatisfied with the Report.  What is unusual about the Vantive case is the level of scrutiny to which the Independent Accountants Report was subjected during the hearing and in the Court’s judgment.  In particular Clarke J considered detailed financial aspects of the Report and ultimately held that it was insufficient to enable the Court to satisfy itself that the test for appointment had been met.

This decision is likely to lead to an even greater emphasis on the accuracy and detail of the information contained in Independent Accountant Reports. As a result, it is a decision to which accountants in particular have paid great attention.

O’Brien’s Sandwich Bars

In July 2009 O’Brien’s Sandwich Bars Limited was granted High Court protection from its creditors when an examiner was appointed. As part of the restructuring plans the Company sought to repudiate the leases of all retail units occupied by its franchisees.

The High Court refused to allow O’Brien’s to repudiate the leases and found that S 20 of the Companies (Amendment) Act 1990, which governs the repudiation of leases, could not be used to repudiate all of the leases. 

O’Brien’s eventually went into liquidation and the liquidator is now seeking to obtain the Courts permission to disclaim the leases under Section 290 of the Companies Act 1963.

The O’Brien’s case heralds a warning to those operating franchise businesses to think carefully about the way that property lease arrangements are structured.  The recent Chartbusters examinership illustrated that the Companies (Amendment) Act 1990 permits the repudiation of certain contracts.  However, on the basis of the O’Brien’s case, it cannot be used to avoid all such contracts.