Examinership was introduced in Ireland back in 1990 at a time when the Goodman Group of Companies (which was made up of about 60 companies) faced collapse. However, this does not mean that the process is a 'luxury' which is only afforded to large companies/groups of companies. In fact, the examinership process can be just as beneficial to a small or medium sized company as it is to the larger companies and so is worth considering where any company with a fundamentally sound business model encounters cash flow difficulties.
Examinership is a process which sees the appointment of an independent person (the "Examiner") by the Circuit Court (or High Court for large companies) to companies which are experiencing financial difficulties. The aim of the process is to allow a structured settlement with all creditors so as to prevent job losses and to allow companies with a potentially sound business model (but which has become burdened with an unsustainable level of debt) to continue to trade rather than having to go into liquidation. The appointment of an Examiner automatically puts the company under the protection of the Court. Such court protection will prevent any creditor from acting to wind up or appoint a receiver to the company in question for the duration of the examinership.
ADVANTAGES OF EXAMINERSHIP
Whilst a receivership or liquidation is accompanied by the shareholders/directors losing control of the business, this is not necessarily the case in an examinership. This can be particularly attractive where the company's shareholders/directors (and very often members of their families) are invested both personally and financially in the company.
During the period of examinership, a secured creditor may not appoint a receiver over any of the company's property and where any claim against the company is secured by a charge on the whole or any part of the property, effects or income of the company, no action may be taken to realise the whole or any part of such security unless consent has been given by the Examiner to do so. In addition, even where a secured charge holder has taken steps to realise their security by way of appointing a Receiver, and that Receiver has been appointed for less than 3 days, it is possible to make an application to have an Examiner appointed which has the effect of ousting the Receiver.
In circumstances where a director or shareholder has given a personal guarantee in relation to the company's debts, no proceedings of any sort may be commenced against such director on foot of that guarantee in respect of the debts of the company during the period of examinership.
Examinership can be a very useful instrument for a company that is experiencing financial problems. As the process enables a company to continue to trade while having the benefit of court protection for up to a maximum of 100 days, the company will be able to retain key employees and customers who are integral to the survival of the business. In situations where suppliers may be reluctant to continue supplying goods or services to a company that is in examinership, it is open to the Examiner to 'certify' the incurring of liabilities with such suppliers which gives those liabilities an elevated priority as an expense of the examinership. This helps prevent a scenario where concerned suppliers seek to vary their terms of supply to ensure payment (for example, to cash on delivery) which would most likely have a negative effect on a company's cash flow.
THE SCHEME OF ARRANGEMENT
Once appointed, the Examiner will investigate the affairs of the company and will be expected to, within 70 days of his appointment, prepare a compromise or "scheme of arrangement" which will be his proposal to help ensure the survival of the company going forward. This scheme of arrangement may include one or more different elements. For example, it may include:
- A requirement (as is almost always the case) that a portion of the company's debt is written off;
- A requirement that the company is permitted to repay its debts over a longer period of time;
- The forced termination of onerous contracts;
- The forced surrender/termination of property leases;
- An injection of capital into the company by a third party in exchange for a shareholding; and/or
- The investment of further monies into the company by an existing shareholder.
The Examiner is focused solely on allowing the company to regain a sustainable financial footing which will bring the company back from the brink of liquidation/receivership. In order to assist him in performing his role, the Examiner is granted several powers. These include the power to convene, attend, be heard at, and set the agenda for meetings of the board of directors; and the power to take whatever steps are necessary to halt, prevent or rectify the effects of any act, omission, course of conduct, decision or contract which in the opinion of the Examiner is likely to be detrimental to the company or any affected party.
When creating the scheme of arrangement, the Examiner groups the company's creditors into different classes (e.g. preferential creditors, secured creditors, unsecured creditors etc.). The number of different classes depends on the number of different "types" of entities who are shareholders and/or creditors of the company. Each class may be treated differently under the scheme of arrangement. For example, the secured creditors may receive the entire amount owing to them whereas the unsecured creditors may receive much less than what they are owed, and what is paid may be paid in instalments over a period of time. The scheme which is presented by the Examiner will deal with all of the debts of the company including, for example, contingent liabilities and claims which may not yet have been resolved.
While not every class of creditor may be happy with the scheme of arrangement, the approval of only one class of creditor is required in order for the Examiner to present his proposal to the Court for confirmation. While the proposal is also presented to the company's shareholders, their consent is not required for the scheme of arrangement to become effective. Clearly this requirement to have the consent of only one class of creditor is a significantly lower threshold for an Examiner to meet than the requirement to have the consent of 75% of creditors and members as is required where the company itself attempts to put a binding scheme of arrangement in place without having recourse to the formal examinership process (and which is sometimes proposed as an alternative to examinership).
Once the proposal is put to the Court by the Examiner, the Court will consider the views of the company's creditors and members. Any shareholder or creditor may object to the proposal before the Court if they feel their interests will be impaired as a result of the Scheme of Arrangement being implemented. Once the Court has considered the scheme of arrangement and has heard from any interested parties, the Court will then confirm, modify or reject it. If confirmed, the scheme will then be binding on all parties regardless of whether or not they consented to it.
ABILITY TO DEAL WITH SECURED PROPERTY
Where the company holds an asset, against which a creditor (such as a bank) has security, which has fallen in value, it is possible for the Examiner to negotiate that the secured creditor be treated as secured only in respect of the current market value of that asset, and unsecured in respect of the balance of the debt, meaning that creditor will be treated in the same way as all other trade creditors in respect of the balance. However, such a reduction tends only to arise where the bank or secured creditor has consented. When dealing with a company in examinership, a bank will often work with the Examiner to find realistic and pragmatic outcome to enable the company to continue to trade and generate revenue which will then be used to repay the debt owed over time. In many cases, reducing the value of its security may be preferable to the alternative i.e. the bank having to appoint a receiver or place the company into liquidation in which case the bank will then be responsible for the costs associated with having someone manage the asset and will most likely have to accept a loss upon the sale of the asset.
EXAMINERSHIP FOR SMALL AND MEDIUM SIZED COMPANIES
While many business owners have a perception that examinership comes with prohibitively high costs, in most cases this is a misconception. While it may be true that in some cases involving large interconnected groups of companies the professional fees can be sizeable, many small and medium sized companies have also been able to successfully avail of the examinership process with the associated professional costs being very economical.
Unfortunately it is very common for business owners to have utilised significant amounts of their personal resources to stave off what is (unless the company can come to a workable compromise with its creditors) an inevitable insolvency situation. It may be the case however that these funds could have been put to better use by investing them in the company for the purpose of allowing an examinership to take place and a successful scheme of arrangement to come into effect between the company and its creditors.
It is also sometimes not clear to shareholders/directors seeking a solution that the company is a separate legal person to its shareholders/directors and despite their involvement in the company during the period where the debts were incurred, it is at all times open to those shareholders/directors (including any one of them individually) to provide the capital investment required to finance the survival of the company. In return for that capital investment the existing shareholder will allow the company to carry on and rescue some value from his/her original share ownership in the company.
The Companies (Miscellaneous Provisions) Act 2013 introduced a new regime for “small companies” enabling them to apply directly to the Circuit Court for the appointment of an examiner whereas prior to the Act their only option was to apply to the High Court. In order to avail of this new regime, companies are required to satisfy two of the following three conditions:
- The value of the company must not exceed €4.4million;
- The company's turnover must not exceed €8.8million; and
- The company must have no more than 50 employees.
The new regime has made the examinership process more viable, cost effective and accessible for small and medium sized companies. It has played a key role in the survival of SMEs by enabling them to restructure their debts and protect jobs and their businesses. SMEs which are burdened with heavy debts should make use of this new regime and enter the examinership process before a creditor moves against them and applies to the Court to have the company wound up.
ELIGIBILITY FOR EXAMINERSHIP
In order to be eligible for examinership, the Court must first be satisfied that:
1. The company is or is likely to be "unable to pay its debts" (or is likely to be unable to pay its debts). Under the Companies Act 2014, a company will be unable to pay its debts if:
- It is unable to pay its debts as they fall due; or
- The value of its assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities (i.e. the balance sheet test); or
- A statutory demand for a debt issued by a creditor under the provisions of the Companies Act 2014 remains unsatisfied for a period in excess of 3 weeks;
2. There has been no resolution or court order to wind up the company; and
3. A receiver has not been appointed to the company for a continuous period of 3 days or more. This means that even where a receiver is appointed, the company, if it considers itself to be a suitable candidate for examinership, can still make an examinership application within the 3 day period following that receiver's appointment. While this might seem like a very small window, in some cases (especially where the company directors are organised and have already given some consideration to examinership) the appointment of an Examiner and the ousting of a Receiver is achievable within this timeframe.
There is no automatic entitlement to the appointment of an Examiner. Assuming the above conditions are satisfied, the Court will still have discretion as to whether or not an Examiner is appointed. The Court will, in any event, only appoint an Examiner to the company where that company (and the whole or any part of its undertaking) has a reasonable prospect of survival as a going concern. Where it is appropriate to do so, and where it may have a bearing on the survival of a company, the Court may also appoint an Examiner to an associated or related company and may grant that Examiner all of the same powers that he has over the first company.
While household names such as B&Q (Ireland), Pamela Scott and Elverys Sports have generated most of the examinership headlines in recent years, SMEs such as Transaero Engineering, Odessa Club and Restaurant and Carl Scarpa have successfully emerged from examinership. In first 6 months of 2015 alone, it has been reported that over 700 jobs were saved through SME examinerships which is a testament to the fact that the process is just as relevant for SMEs as it is for bigger organisations. It is clear from the recent year on year increase examinership applications that the process is increasingly being looked at by business owners of large organisations and SMEs alike as an alternative to liquidation and that there is an increasing acceptance and appreciation of how the process can, and does work. For this reason it should be considered carefully with the benefit of professional legal and accountancy advice as soon as the extent of the company's financial difficulties have been recognised.
Adrian Burke & Associates have acted on behalf of shareholders, company directors, and companies in making the initial Court application and have also acted on behalf of Examiners following their appointment.
The above is a very general and simplified summary of the law on the subject matter. As such you should obtain professional advice before taking any actions as regards you or your company's affairs. Should you wish to make enquiries in relation to any of the areas touched on by this article please contact Adrian Burke & Associates.