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Examinership for insolvency

14 Jun 2021 / business Print

Final examination

As the pandemic fallout continues, examinership can be an attractive option for insolvent companies, with the potential to offer widespread relief to many businesses. Graham P Kenny locks and loads.

As the pandemic continues to devastate large and small businesses alike, solicitors across the country are considering the role of examinership and the eagerly-awaited summary rescue process in order to assess how they may help their clients’ businesses to survive.

While many businesses are limping along on Government supports, attention is now turning to what will happen when ‘normality’ returns.

For now, banks, the Revenue Commissioners, and landlords have displayed a relaxed approach to the enforcement of debt, but it is only a matter of time before this forbearance ends and more formal restructuring is required.

Primal impact

The history of examinership reads like the script from an unlikely Hollywood thriller.

On 2 August 1990, rogue dictator Saddam Hussein invaded Kuwait, setting in motion a series of events that would dramatically change Irish company law.

By the late 1980s, millionaire beef baron Larry Goodman controlled over 40% of the Irish beef market. However, due to the hostilities in the Persian Gulf, the business was in peril. With an eyewatering £72 million deficit in its finances, the Goodman group looked certain to go under.

However, the Fianna Fáil government considered that the strategic importance of the Goodman group to the Irish economy was such that it would have to be saved.

On 24 August, Taoiseach Charles Haughey – during what would be his final term in office – recalled the Dáil from its summer recess. The Companies (Amendment) Act 1990 was passed, and the examinership procedure was brought into law. The rest, as they say, is history.

Basic verdict

Examinership was an entirely new process whereby a company could apply to the court for protection from its creditors while it attempted to restructure its debt. The overriding rationale of such a process was not designed to help shareholders whose investment had proved unsuccessful, but rather to seek to save enterprise and jobs (see Re Traffic Group Ltd).

The effects of court protection brought in by the 1990 act were dramatic, and will appeal to many companies suffering the stresses of the pandemic today. For example, for as long as the company is under the protection of the court:

  • No proceedings for the winding-up of the company may be commenced,
  • No receiver can be appointed to the company,
  • No action can be taken by a creditor to enforce its security (for example, a bank trying to enforce a mortgage), and
  • Any new proceedings that a party wishes to bring against the company can only be brought with the express consent of the court.

In effect, therefore, section 520 of the Companies Act 2014 places a total embargo on creditors acting against the company while it is under this protection. Arising from the delays caused by COVID-19, the period of protection under the act has been very considerably extended, and now lasts up to 150 days.

However, not all insolvent companies may avail of the court’s protection. Section 509(2) guides the court in exercising its jurisdiction and requires that a company demonstrates that it has a “reasonable prospect of survival … as a going concern”.

This requirement is usually achieved by the company instructing an accountant to produce what is referred to as an ‘independent expert’s report’. Such a report will confirm that, if the company is given the opportunity to restructure its debt, it will have a reasonable prospect of survival.

An examiner (who is normally an accountant) will then be appointed by the court, and the real work begins. In the normal course, the examiner does not run the company.

The directors continue in their usual role and carry out their executive functions. This is often a hugely attractive feature for clients who are considering taking the brave leap into examinership, but who are reluctant to relinquish control of their company.

The examiner is charged with conducting a full examination into the affairs of the company and reporting to the court. Once such an examination has been completed, the examiner will then move on to formulate proposals for what is termed a ‘scheme of arrangement’ under section 534.

This scheme is the blueprint for the company’s pathway out of debt. The act provides for far-reaching powers, which permit the examiner to recommend the writing-down of creditors’ debts within this scheme.

Of course, such draconian powers come with a series of checks in order to ensure that creditors are not being “unfairly prejudiced”, and the burden of proving this is placed upon the examiner (see Re McInerney Homes Ltd).

The court will assess whether a creditor’s objections amount to unfair prejudice by considering how they would likely fare on liquidation (or receivership, if applicable) and further consider their treatment vis-à-vis other creditors and the members.

If the examiner’s scheme is approved, the court will impose the harsh reality that there is simply not enough money to repay all the company’s debts. As every solicitor who has ever had to negotiate with a disgruntled creditor knows, such a reality is very often difficult to accept, and the court process is of immeasurable assistance in this regard.

There is, however, one notable exception to the compromising of creditor claims. This exception is of particular relevance to companies struggling during the pandemic. Section 544 prohibits the reduction in the level of rent due to a landlord under a lease once the scheme has been approved (unless, of course, the landlord consents during the process).

There is, therefore, a very important distinction between debts owed under a lease before and after the company went into examinership. Historical rent arrears arising before the presentation of the petition for court protection are capable of being written down within the scheme.

This may be of huge significance to those companies whose outlets were closed during the pandemic, but who continued to amass rent demands from landlords during such time. However, once the scheme has been approved, the existing rent must be paid and the lease cannot be compromised in this regard.

Sudden edge

It may also be of considerable significance to struggling companies that the courts have found that leases can be repudiated under section 537 (see Linen Supply of Ireland Ltd).

While the court has discretion in this regard, a company can seek to repudiate a lease, which in turn will relieve the company of the obligation to pay further rents. This may be of particular significance where a retail store has a number of outlets, with differing degrees of footfall arising from the effects of the pandemic.

The case of Re New Look Retailers (Ireland) Ltd, however, should serve as a cautionary tale for any company rushing into examinership within the coming months. New Look sought the protection of the court during the pandemic in August 2020.

The company proposed the reduction of its rents and the repudiation of some of its 27 leases. Four of the landlords expressed the concern that the company had sought to “contrive” an examinership for the purpose of reducing its long-term liabilities.

Mr Justice McDonald said that, while the company did not have to wait until it reached “the edge of the precipice”, it should first invoke “an alternative and obvious route available to the company and seek to deal with its landlords – namely negotiation”. The judge refused, therefore, to put the company into examinership on the basis that the application was premature.

Personal attraction

Another intriguing feature of examinership that will be of interest to many directors in these times is the position of personal guarantees set out in section 550. It is regularly the case that directors have guaranteed the company’s debt, and have legitimate concerns that they will remain personally liable for such debt once the company has exited examinership.

Solicitors should remember two key points in this regard. If the debt that is guaranteed by a director is written down in a scheme, the director will still remain personally liable for the full amount under their guarantee.

However, it is critical to point out that the creditor must offer their vote in respect of the proposals for a scheme of arrangement to such director, or the guarantee will become unenforceable (see Re Eylewood Ltd).

One of the repeated criticisms of examinership has been its cost. While this is undoubtedly a valid concern, it is worth pointing out that the costs of the examinership are regularly paid from new investment under the scheme, and not from the company’s own existing reserves. It is certainly arguable that creditors, and not the company, bear the brunt of costs, as their dividend is regularly reduced by such payment.

It is also noteworthy that section 509(7) now permits an application to appoint an examiner to be taken in the Circuit Court. This amendment was made with a view to reducing costs for smaller companies and permitting them access to court protection.

Executive heat

Due to the inevitable surge of insolvencies arising from the pandemic, the Government is presently considering another form of streamlined examinership, known as the ‘summary rescue process’. Small and micro enterprises account for the majority of companies in Ireland and support somewhere in the region of 788,000 jobs, and so the new legislation is eagerly awaited.

While no concrete details of this process have emerged just yet, it is thought that this process would be commenced by the directors themselves and would be concluded within a shorter period than that of examinership.

A notable distinction of the summary rescue process is that no court application would be required, and the new process would be overseen by an insolvency practitioner, as opposed to the court.

It remains to be seen how such new legislation might work, and there would inevitably be challenges from creditors whose debts would now be written down without the oversight of the court. This new process is not envisaged to take over from examinership, however, and would operate as a separate procedure.

As the fallout from the pandemic continues in the months ahead, examinership is, therefore, still a very attractive option for insolvent companies and has the potential to offer widespread relief to many businesses.

Look it up

Cases:

  • Bestseller Retail Ireland Ltd [2010] IEHC 155
  • Eylewood Ltd [2010] IEHC 57
  • Linen Supply of Ireland Ltd [2010] IEHC 28
  • McInerney Homes Ltd [2011] IESC 31
  • New Look Ireland Ltd[2020] IEHC 514
  • Traffic Group Ltd [2007] IEHC 445; [2008] 3 IR 253

Legislation:

Read and print a PDF of this article here.

Graham P Kenny
Graham P Kenny is principal of Kenny Solicitors, Fitzwilliam Square, Dublin 2