Marker set down for anyone considering entering Examinership

There are some interesting directions which can be taken from the judgement of Mr. Justice Denis McDonald delivered on yesterday in the matter of New Look Retailers (Ireland)Limited (“Newlook”)

Newlook which operates 27 stores and employs 475, sought the protection of the court in August through Examinership so that it could have time to address financial difficulties and losses caused by the fallout from the Covid-19 pandemic.

In particular, the company wanted as part of the examinership process to seek reductions in rent or possible repudiation of some leases due to the fact that many of them were of the "upward only" rent review type. This is something that many retailers are considering and landlords are very aware of.

In this context - four landlords objected to the examinership as they voiced concern that the company had sought to “contrive” insolvency for the purposes of using the examinership process to reduce its long-term liabilities. This was not withstanding that the business was profitable for the last two financial years and had cash reserves of around €15 million.

Justice McDonald in his judgement concluded he believed that

1. In this case it is entirely premature to consider the appointment of an examiner to the Company.
2. The Company failed to demonstrate that the appointment of an examiner is necessary at this time
3. It is entirely inappropriate that the jurisdiction (of Examinership) should be invoked when there is an alternative and obvious route available to the Company to seek to deal with its landlords - namely negotiation
4. Before taking the very serious step of seeking the appointment of an examiner, a company which is not currently insolvent, should, in the first place, make serious efforts to explore less drastic options.
5. In circumstances where no real attempt has been made to date to enter into negotiations, it would be wrong, as a matter of principle, to allow this factor to influence the outcome of the present application or to presuppose that the parties will not act commercially and sensibly

What this means that if not actually insolvent at the date of petition- companies really need to be able to demonstrate that they have tried to negotiate over their leases before they attempt to use Examinership to comprise those leases which they believe will trigger or contribute to insolvency.

This will set a marker for anyone considering going into examinership and in effect forces both parties to purposely come to the table before a solvent company petition for Examinership. Furthermore, both parties, Company and Landlord, will have to demonstrate that they engaged in bona fides negotiations in those conversations.

This make some companies who were considering examinership to pause for thought. That being said - it could be a double-edged sword for Landlords. They will also need to show they have negotiated in a meaningful manner to have a positive chance of successfully stopping a petition.