Ashling Walsh & Michael Quinlan: Examinership – an underutilised option for vulnerable but viable companies
Ronan Daly Jermyn partner Ashling Walsh, solicitor Michael Quinlan and trainee Mark Costello take a look at the examinership process as a potentially important restructuring tool for companies in Ireland weathering the current COVID-19 storm.
This year marks the 30th anniversary of the introduction of the examinership framework in Ireland and given the current challenges facing businesses, 2020 could be the year that the process comes into its own to assist struggling but otherwise viable companies and, very importantly, to maintain employment.
Brexit, inconclusive election results and an unprecedented partial lockdown in an effort to combat against the spread of COVID-19 has created enormous challenges for certain companies who had been thriving in an erstwhile rapidly improving economy.
The Government has recently announced a number of packages to assist struggling companies including:
- advancing funding under the Strategic Banking Corporation of Ireland (SBCI) COVID-19 Working Capital Loan Scheme, for eligible businesses impacted by COVID-19. Loans of up to €1.5m will be available with the first €500,000 being made available on an unsecured basis;
- advancing unsecured funding of up to €1m for terms of up to seven years under the Credit Guarantee Scheme;
- increasing sick pay allowances available to employees who are required to self-isolate;
- increasing the level of funding available to companies through the Enterprise Ireland Rescue and Restructuring Scheme; and
- suspending the application of interest on late payments by the Revenue Commissioners for January/February VAT and both February and March PAYE (Employers) liabilities.
Furthermore, most banks and financial institutions have agreed to suspend debt enforcement action until further notice. This is clearly a very welcome development for distressed companies.
While the above measures will come as a welcome relief to some businesses, in some cases these measures will not be enough or only offer short term relief. Early action in tackling cash flow issues and engagement with creditors will be crucial in securing the future viability of companies struggling with the current unprecedented challenges.
If restructuring is a viable option, examinership may prove to be an important restructuring tool for companies weathering the current storm.
The Examinership Process
Examinership is a statutory scheme the subject of Part 10 of the Companies Act 2014 designed to rescue certain distressed companies. The purpose of the scheme is to facilitate the survival of the company and the whole or any part of its undertaking as a going concern. Survival of the relevant company is facilitated by the placing of the company under the protection of the Court for a limited period while its affairs are investigated by an examiner with a view to establishing whether the company can be rescued and, where appropriate, to formulate proposals for a scheme of arrangement. The key features are as follows:
- application by way of petition must, where possible, be presented to the High Court/Circuit Court (as appropriate) and the Court must be satisfied that there is a reasonable prospect of survival of the company and the whole or part of its undertaking as a going concern;
- the company must demonstrate to the Court that the company is, or is likely to be, unable to pay its debts, no resolution subsists for the winding up of the company, and no order has been made for the winding up of the company. Furthermore, the Court will not give a hearing to a petition if a receiver stands appointed to the whole or any part of the property or undertaking of the company the subject of the petition and has been so appointed for a continuous period of at least three days prior to the presentation of the petition;
- unless an extension of time is afforded to the petitioner where exceptional circumstances outside the control of the petitioner can be demonstrated, the petition must be accompanied by an independent expert’s report. The main purpose of this report is for the independent expert to opine on whether the relevant company, and the whole or any part of its undertaking, would have a reasonable prospect of survival as a going concern and to advise the Court of any conditions or steps that would be required to ensure its future survival;
- Examinership may not be used simply as a method of delaying payments to creditors or writing down liabilities and the Court will not approve a proposal in circumstances where it can be demonstrated that it is unfairly prejudicial to a creditor or creditors;
- the period of Court protection afforded to a company generally commences on the date of presentation of the petition and ends on the expiry of 70 days (which can be extended to 100 days) after the presentation date or the withdrawal of, or refusal by the Court of the petition, whichever happens first. Importantly, for so long as the company is under the protection of the Court no proceedings for its winding up may be commenced or resolution passed, no receiver can be appointed, no attachment, sequestration, distress or execution shall be put in force against the company’s property or effects except with the consent of the examiner, no steps can be taken to repossess goods under a hire purchase arrangement and no proceedings of any sort may be commenced except by leave of the Court and subject to its conditions;
- the key function of the examiner is to formulate proposals for a scheme of arrangement in relation to the company, which would normally involve a new investment into the company in addition to a cram-down of the existing liabilities of the company. He/she may also recommend changes to the company’s board of directors and senior management;
- the proposals for a scheme of arrangement must be accepted by a majority in number representing a majority in value of at least one class of impaired creditors (e.g. secured creditors, preferential creditors, contingent creditors etc.). Once deemed to be accepted by at least one class of impaired creditors, the proposals for a scheme of arrangement are presented to the Court for consideration. It is open to the Court to confirm the proposals, confirm them subject to modifications or to refuse to confirm them. The Court must be satisfied in confirming the proposals that the proposals are fair and equitable in relation to any class of members or creditors that has not accepted the proposals and whose interests or claims would be impaired by their implementation and that the proposals are not unfairly prejudicial to the interests of any interested party. Where the Court confirms the proposals, the proposals for a scheme of arrangement shall be binding on all creditors or the class or classes of creditors affected by the proposals. The protection of the Court shall cease on the coming into effect of the proposals for a scheme of arrangement or, on such earlier date, where it is not possible to formulate proposals for a scheme of arrangement or where the Court refuses to confirm the proposals;
- a successful examinership will result in the company exiting from the examinership process in just over three months (or less) with no legacy debt and a viable future business. However, where it is possible to formulate proposals for a scheme of arrangement or where the Court refuses to confirm the proposals, the appointment of the examiner shall terminate and a liquidator and/or receiver is generally appointed to the company.
Given the current need to implement social distancing measures, this may lead to difficulty in convening quorate creditors meetings; however there is no obligation on creditors to attend the meeting in person, proxies can be submitted in advance of the meeting. Furthermore, it may prove challenging to have an examinership application heard in Court given that this type of application does not fit neatly within the list of limited Court sittings put forward by the High Court and the Circuit Court in recent days arising from the COVID 19 pandemic. That said, it is hoped the Courts will appreciate the urgency associated with examinership applications in terms of the need to ensure the survival of certain companies and for the purposes of maintaining much needed employment and would accordingly look to prioritise the hearing of these applications.
While there is no doubt that examinership may prove very effective in ensuring the survival of certain companies affected by the COVID 19 pandemic, it may not be appropriate for all companies especially those which have no reasonable prospect of survival. Companies’ circumstances will need to be considered on a case by case basis to ascertain which insolvency mechanism (including winding up) is best suited to individual companies. The impact of COVID 19 is ever evolving; therefore taking early advice is of key importance so that the correct restructuring mechanism or insolvency process can, when required, be implemented effectively and without delay.