Examinership is an option to be considered by companies and their directors experiencing significant solvency issues. It is not the exclusive domain of large companies though it may be perceived that way. The current financial crisis poses enormous challenges for survival for businesses and those managing them.
Examinership is a process that is available to companies as distinct from sole traders and partnerships. It is used regularly but not as often as it could or should be. It involves applying to the Circuit Court or the High Court and is not always available. The financial circumstances of the company must be such that the court is satisfied it is appropriate to grant it protection and does not unreasonably prejudice the company’s creditors.
One only has to consider what unfolded during the demise of the Celtic Tiger economy to realize that a different approach is required to save businesses experiencing financial difficulties but may not be doomed or should not be allowed to fail through inaction. In that recession, where access to credit and funding disappeared almost overnight, there was an acceptance of the inevitability of receiverships and/or liquidations.
In the last recession, businesses were closed arbitrarily. Employees, including owner directors, lost their jobs. Secured assets were sold, more often than not unceremoniously. Personal guarantees of directors and promoters were invoked where the debt exceeded the value of the proceeds of sale of available assets – something that was a rarity when it did not occur. Of course, that was bound to happen as the inflated values of the secured assets were substantially deflated by the reality of the depressed economy in all its guises.
Lending institutions may have provided primary loans to companies, but the fact of the matter was that the security was underpinned by the personal guarantees of the promoters. Inevitably, the courts were flooded with claims by lending institutions and the receivers/liquidators appointed by them. Unfortunately, many borrowers are still dealing with legacy issues from the last recession.
Individuals and entities who have provided personal guarantees for the performance by a company of its obligations, such as under a lease or a borrowing/facility from a bank, are not absolved of their liabilities through a direct role in the examinership. However, the process can present an opportunity to negotiate a reduction of the guarantor’s exposure.
What is the Examinership Option?
Examinership is a statutory process under the Companies Act 2014 by which a company, recognizing a current state of insolvency but having a fundamentally profitable business if freed from all or part of its debt, can seek court protection to allow efforts to be made to save the company as a going concern. Examinership allows the company breathing space to formulate and agree a Scheme of Arrangement with creditors through the appointment of a court approved Examiner. The company has an opportunity to take steps that will secure the jobs of the employees by returning to solvency through a combination of debt write-off and new investment.
The company’s survival, and especially the continued employment it maintains, are the focus. Examinership cannot commence without court approval. However, from the outset, the directors have a level of control of the ongoing business and the cost of the process that is not available in a liquidation. Examinership allows the directors to make every effort to secure a viable future for the company rather than witness an inexorable path to extinction through liquidation.
Preparing for Examinership:
The court will not entertain an application for the protection afforded by Examinership if certain ingredients are not present.
It will be necessary to satisfy the court that the company has a reasonable prospect of continuing in business:
- As a going concern;
- With a much -improved balance sheet;
- With a work force; and
- On a viable financial footing.
A report of an independent accountant must be furnished to the court confirming that if afforded the protection of an Examinership, the company has a reasonable prospect of survival. This is therefore an important first step int the process.
A company may be obliged to dispose of assets that are not critical to its survival. The net proceeds of sale will be applied towards securing the agreement of the creditors, and ultimately the court’s approval, for the Examiner’s Scheme of Arrangement. The company must convince its creditors that the dividend now being offered is attractive compared to the alternatives.
The Examiner will be initially appointed for a maximum of one hundred days and is tasked with attracting an investment in the company that will:
- Have the support of a sufficient percentage of the creditors;
- Achieve a return to creditors that is not less than would be available in a liquidation;
- Return the company to solvency;
- Secure the employees’ jobs; and
- Allow the company to trade viably.
Court protection by the appointment of an Interim Examiner is given for an initial period of one hundred days if an application to be placed into Examinership is successful. The application can be brought in the Circuit Court or the High Court. The Circuit Court will deal with an Examinership application for a “small company” as defined in the Companies Act 2014. To fall within that definition, a company must satisfy two of the following criteria for the relevant year:
- Turnover for that year does not exceed €8.8 million;
- The balance sheet total for the year does not exceed €4.4 million; and
- The average number of employees for the year does not exceed 50.
The process involves the company’s solicitors lodging a Petition which is accompanied by a Grounding Affidavit sworn by a director. The Petition should contain the details of the party making the application and the basis upon which it is entitled to be made. Corporate information is required.
The Petition should state that;
- The company cannot or is unlikely to be able to pay its debts;
- There is no subsisting resolution for the winding up of the company; and
- No Court Order has been made for the winding up of the company.
When the Petition is lodged in the Court Office, the protection commences. The Petition must be accompanied by an Independent Expert’s Report (IER) stating that, in the expert’s opinion, if an Examiner is appointed the company has a reasonable prospect of survival. The IER will include, but not be limited to, the company’s trading history, cash flow projections for the period of the proposed Examinership, trading projections for twelve months, a balance sheet and a comparison of the outcomes for creditors in the Examinership and in a liquidation.
Notice must be given to the Companies Registration Office (CRO) by the Petitioner within three days of it being lodged in court. The Examiner must publish notice of his/her appointment in two daily newspapers within three days of their appointment. The Examiner must also publish notification of their appointment in Iris Oifigiuil within twenty one days of their appointment.
The Petition is given a return date to come before the court for hearing. On that return date, where an IER is lodged with the Petition, the court will decide if the protection should continue. A creditor may have an objection and wish to have it heard. Obviously, the court must be satisfied that the company can discharge its obligations for the period of protection.
The Examinership Scheme
During the initial period of one hundred days, a Scheme of Arrangement must be prepared by the Examiner. It will be necessary for the Examiner to monitor both the cashflow and performance as well as any adverse trading events. The directors and management team will continue to have responsibility for the day to day management of the company. The directors and management team will be given an opportunity to contribute positively to the process beneficial to the company and its employees.
The costs involved in an Examinership are less than those involved a liquidation.
The Examiner will convene separate meetings with the various classes of creditors. The Examiner will notify each creditor in writing, with three days’ notice, of the relevant meeting. After discussing the proposed Scheme of Arrangement with each class of creditor, the Examiner will ask each creditor class meeting to vote on whether to approve or reject the Scheme. Approval at a meeting is by a majority in number holding a majority in value. At least one class of creditor must approve the Scheme.
The more creditor support secured in the meetings, the greater the likelihood of approval for the Scheme by the court. The Examiner is required to inform the court of the outcome of the meetings with creditors.
The Examiner is expected to advertise the business as an investment opportunity.
It is difficult to imagine a successful exit from Examinership without the introduction of additional funding. In an Examinership, the investment will almost certainly result in a significant dilution of the shareholdings of current shareholders or the acquisition of the entire shareholding in the company.
Who Can Invest?
As long as the investor introduces sufficient funds to satisfy the court, and, by implication a significant number/value of creditors, there is no bar on who or what that might be. The investor can be the existing owner. The Examinership process carries the risk of an uninvolved party making the most attractive offer of investment to the Examiner. If an existing owner or director wishes to be the preferred investor, that individual should move early and in earnest. Shortening the Examinership makes financial sense and strengthens the argument for approval of the Scheme of Arrangement based on that investment.
The Examiner seeks the approval of the court for the recommended Scheme of Arrangement. If approval is obtained, the process can be concluded quickly and a return to normal trading will not be delayed unnecessarily. If the Examinership does not succeed, then the company will go into liquidation.
In summary, Examinership should be carefully considered because:
- If the initial application is successful, it provides court protection for a specific period of one hundred days;
- It allows the company to explore a beneficial restructuring of its finances;
- It can protect jobs and livelihoods;
- It provides a level of control, that would otherwise be unavailable, to the directors and management team;
- Costs are not prohibitive; and
- It gives the company a reasonable opportunity of continuing in business.
The Examiner may have to engage with individuals or entities that have provided guarantees for certain of the company’s obligations. Guarantors stand outside the Examinership but can have a role in its success or failure.
By the nature of a guarantee, a guarantor is directly liable to the creditor to whom the guarantee has been provided. Therefore, it is open to the creditor to pursue the guarantor independently outside the Examinership process. However, Guarantors may view the process as an opportunity to renegotiate the extent of their exposure.
If the Examiner is unable to reach an agreement on the variation of the lease which is commercially acceptable to all parties, including the guarantor, then the Examiner may find it necessary to disclaim the lease. The court does not have the power to impose a variation that one of the parties affected finds unacceptable. That will create commercial challenges for not only the guarantor but also the landlord. Furthermore, in that event, the company will be required to find an alternative premise from which to conduct that element of the business.
If you want to discuss the above issues further, please do not hesitate to contact Tommy Dalton at [email protected]
Dated 4 June 2020
Crowley Millar Solicitors LLP Disclaimer: This is a general information note and is intended for information only. It does not constitute legal advice and should not be regarded as a substitute for legal or other professional advices. Such advice should always be taken before acting on any of the matters referenced in this information note.