INSOLVENCY IN IRELAND WHAT THE EXAMINER WANTS YOU TO KNOW

Following articles on:

1. emergency liquidity for businesses adversely affected by the economic impact of the COVID-19  Pandemic:  https://www.dhirubhai.net/pulse/abc-de-emergency-liquidity-solutions-richard-ambery/  ;
2. Standstill Agreements as the first item out of the financial first aid kit:         https://www.dhirubhai.net/pulse/running-standstill-richard-ambery/ ; and
3. Ireland’s public sector lifeboat for SMEs and small mid-cap businesses: https://www.dhirubhai.net/pulse/liquid-spirit-richard-ambery/  ,
4. we turn to the main items for consideration by stakeholders when Examinership presents the best prospect for rehabilitation and long term recovery for a company in financial difficulty as a consequence of the Pandemic.

Testing times

In the current climate, it is unfortunately all too possible to imagine a business that has dealt with a severe business interruption by following the government’s advice and has: 

• lowered variable costs (while participating in the COVID-19 Wage Subsidy Scheme);
• delayed discretionary spending on replacing or improving assets, new projects and research and development;
• extended its payables, getting as much credit, and as many concessions, as possible from its suppliers;
• expedited its receivables, persuading customers to pay on time or even early to maximise cash reserves;
• explored supply chain financing options in order to fund the acquisition of raw materials and unfinished goods out of the proceeds of future sales; and
• possibly applied for and obtained a government guaranteed working capital facility for SMEs adversely affected by the Covid-19 Pandemic or another form of emergency liquidity facility.

Nevertheless, the business may be unable to negotiate a standstill with all of its lenders and / or is dealing with landlords that are unwilling or unable to reduce or defer rent that is due. The company may even be a defendant in litigation where the plaintiff is pushing to obtain or get a judgment debt paid while it still considers there is a chance of full recovery.

In the middle of this mêlée with debtors, creditors and probably the tax authorities as well, the company’s Directors will be particularly concerned about personal liability for reckless trading as described in s.610 of the Companies Act 2014 (the 2014 Act). Very broadly, the Directors can be made jointly and severally liable to contribute in person, without limit, to the debts of the company where it is shown that they allowed it to incur further indebtedness when they knew or ought to have known that their actions will cause a loss to creditors or to any one of them. Clearly, Directors could find themselves on the horns of a dilemma when a calculated extension of further credit could be the only thing between the company’s survival and total collapse. The Examinership regime introduced by the Companies Act 1990 (and refined in the 2014 Act) was passed precisely to deal with circumstances such as these.

The rubric

Examinership is a process used by a trading company in financial difficulty to reach a binding agreement with its creditors to pay back all, or part, of its debts over an agreed timeline. It has been described as being much closer to the regime under Chapter 11 of the U.S. Federal Bankruptcy Code than the more onerous procedure of administration pursuant to Part II of the United Kingdom Insolvency Act 1986.

The Examinership process is overseen by the Circuit (for small companies as defined in the 2014 Act) or High Court, and provides the company with protection from its creditors during the Examinership period.  This gives the company breathing space to find fresh investment. The 2014 Act made Examinerships significantly cheaper and more flexible, with the result that they became a realistic option not just for larger groups to consider, but also for struggling SMEs.

Nevertheless, an Examiner will be appointed only if the Court is satisfied that, although insolvent at the time the petition is presented, there is a reasonable prospect of the survival of the company and the whole or any part of its undertaking as a going concern. Paul McCann, Partner and insolvency practitioner at Grant Thornton has pointed out that “The company has to argue that its business or brand is something to save…there is no point, for example, in a manufacturer going into examinership when the market for the product it makes no longer exists”.

Moreover, the Court must conclude that a group’s or certain of its subsidiaries’ business is actually a trade, which might not be the case, for example, where a property development group is concerned. Likewise, in the wake of the Global Financial Crisis, the Court became “more and more reluctant…” to appoint Examiners over troubled companies that were merely “…on life support with no prospect of survival.” in the words of Mr Justice Kelly when hearing (and famously dismissing) a petition in respect of construction business Zoe group in 2008.

The company must also demonstrate that it has enough cash to get it through the period of Examinership. For this reason as much as any other, an increasing number of Examinerships, especially for larger and multinational concerns, are ‘prepackaged’ with at least the tacit approval of creditors, investors and management prior to kicking off the process. Prepacks also have the advantage of course that most, if not all, of the negotiation with interested parties has concluded, thereby mitigating the risk that the Court’s clock will run down before a Scheme of Arrangement can be approved.

Before and on the big day

For those outside the accountancy and legal professions, the procedure for Examinership can seem document-heavy, formalistic and obsessed with minutiae. Certainly, Examiner’s reports and proposals are necessarily very detailed. However, the basic elements of the process can be boiled down to the following:

1. The company applies to Court for immediate protection from its creditors and the appointment of an Examiner, who undertakes detailed examination of the company’s business, assets, liabilities and undertaking and divides its creditors into different classes
2. Protection lasts for up to 100 days (further in exceptional circumstances) and buys time for the company to come up with (or preferably finalise) a rescue plan and to get it sanctioned by creditors
3. It protects Directors from liability for reckless trading while the activities of a company under the protection of the Court are subject to the scrutiny of a Judge
4. The Examiner draws up proposals to put to the company’s creditors in the form of a Scheme of Arrangement whereby a substantial body of them will be put in a better position than they would were the company to be liquidated
5. The company sends out the Scheme to its creditors, together with notice of creditors’ meetings by class (the 2014 Act also requires that the Scheme be sent to and voted on by shareholders, but one would expect them to be among those most in favour of it)
6. Meetings are held where the Examiner explains the proposals in the Scheme to each class
7. The different classes of creditor vote on the proposed Scheme
8. Having persuaded at least one class of creditors to consent to the Scheme, the Examiner puts the Scheme before the Court for approval
9. The Court may be moved to approve the Scheme with any modifications of the proposals adopted at the meetings where the Examiner is able to demonstrate that it enjoys considerable support from creditors
10. Debts written down as per the Scheme’s proposals on the ground of likelihood that the company will survive as a going concern

The system is almost self-regulating because with few accountants and solicitors operating within the area, their integrity as officers of the Court is of paramount importance. Where the assigned Judge finds that the highest standards have not been met by the company or the examiner or that there has been any failure by petitioners for the protection of the Court to disclose all material facts, the Courts have been unequivocal about removing the company from the protection formerly afforded to it.

Examinership success

As with the conditions that we mentioned are commonly imposed in a standstill agreement, creditors of a company in Examinership are held at bay while its business is rehabilitated typically in one or more of three ways, namely:

• injection of fresh equity capital by existing owners, new investors, management or some combination of them;
• disposal of non-core assets or subsidiaries for reasonably achievable sums over a realistic yet sufficiently tight timeframe; and / or
• availing of new, more affordable, ‘work-out’ borrowing facilities to tide the company over as it restructures.

Pulling these strategies together into a proposal for a scheme of arrangement, the Examiner needs to persuade the Court that the plan is sound based on a number of commercial considerations in addition to those directly concerning lenders and sponsors, including:

• Are the assets of the business easily sold, how long a remarketing period will be required, can they be sold as a job lot or must they be divided into parcels? Are there specialist brokers that can advise on the market for a particular asset class and what fees and commission will they charge?
• Are the assets of the company sufficiently large to justify the costs of examinership? Examinerships of large and complex businesses can be expensive.
• How flexible is the workforce, what are the costs of making changes with respect to numbers and length of service and how are key employees likely to react to transition envisioned by the Scheme of Arrangement?
• The correct response to advice solicitors have given on the regulatory position and legal liabilities of the company including licenses, environmental matters, key customer audits, planning permissions, etc.

Assuming that both the Court and interested parties can be persuaded that Examinership is both appropriate and likely to facilitate a turnaround, what are its advantages?

• Large write downs of debts can be achieved
• Leases of property and equipment can be re-negotiated / disclaimed
• The company continues trading – an Examiner’s task involves actively engaging with management and stakeholders, in contrast to the unilateral role of a liquidator or receiver
• Directors, as those most familiar with the company’s business, suppliers, stakeholders, creditors and potential investors, stay in control of the company during the Examinership, subject to the Court’s oversight
• The process gives the company time to be restructured
• It avoids liquidation, while suppliers remain engaged and their priority ensured on foot of the expenses certified by the Examiner
• Protection from creditors – a receiver or liquidator cannot be appointed and goods kept free of claims or seizure by a creditor via the Sheriff or repossession by a lessor or supplier with a contract for retention of title
• Lower costs for small companies if the Circuit Court is used    

No retakes

For secured creditors, a borrower successfully navigating Examinership could be regarded as a failure: Depending upon the terms of the Scheme of Arrangement approved by the Court, a secured creditor’s normally inalienable right immediately to call in, deal with and directly receive proceeds from charged assets will not only be delayed, but may also be circumscribed.

However, an Examiner may ultimately be unable to secure a new investor, a lifeline debt facility, the consent of a significant body of creditors, Court approval or any of them in time. In September 2009, following another period of great, albeit different, financial stress, it was estimated that for every three companies entering the Examinership process, only one would come out of it successfully, with the other two placed in liquidation. This is not only a poor outcome for sponsors and management, but also for unsecured creditors, who rank behind the costs of an unsuccessful Examinership for priority of payment out of the bankruptcy estate.

Contact someone with the past papers

Nevertheless, there is a case to argue that businesses, creditors and insolvency practitioners have all learned from pre-GFC economics fraught with mismanagement facilitated by unfeasibly cheap credit. Prompted by perceived limitations of the Examinership regime in the last recession, the 2014 Act not only facilitated its application to SMEs, but also lowered the test for Court approval from “likely to facilitate the survival of the company” (Companies (Amendment) Act 1990) to “satisfied that there is a reasonable prospect of the survival of the company”. Together with better cash and risk management in the business community generally therefore, one would expect a continued increase in the proportion of petitions for the appointment of an Examiner granted, as well as companies placed in Examinership avoiding liquidation later.

Examinership can prove to be a powerful tool for corporate rescue, though not an appropriate relief for all companies and all kinds of financial difficulty. A 2017 analysis by Vision-net.ie found that of the 420 companies that had an Examiner appointed between 2007 and 2016, some 56 per cent of them now continued to trade successfully. And in situations where procuring warranties and indemnities for a buyer of a stricken company from directors is problematic or of little real value, the certainty provided by an Examiner’s forensic analysis can make all the difference to a sale going through.

Neither for the feint hearted nor those concerned only with the big picture, companies in financial difficulty considering the manifold advantages of Examinership would be wise to consult experienced professionals at the earliest possible stage.