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Examiners to the rescue

26 Feb 2019 / business Print

Examiners to the rescue

Causes of disputes are often rooted in economic recovery – when opportunity presents itself again, the directors cannot agree on the direction the company should take. Issues include how it should be recapitalised, how fast it should gear back up, or ‘who gets what’.

The directors may still be under personal financial pressure or their personal circumstances may not be aligned, with some needing more from the company than others. This has the potential to influence their view of the company’s appropriate course of action.

Bottom of cycle

When everyone was bumping along at the bottom of the cycle, there was nothing to fight over.

However, as the economy improves, the potential for value appears – and so do cracks: the fight intensifies and, in the absence of agreement about strategies, decision-making stasis can cause trading losses to spiral out of control.

As an independent officer appointed by the court, an examiner is unlike a judge. He will get into the nuts and bolts of the company’s trade and operations over a significant period of time, which makes him an ideal independent adjudicator for this type of dispute resolution.

Other options

Options to resolve these disputes otherwise include minority oppression applications under section 212 of the Companies Act 2014 and the eye-watering costs associated (including separate legal representation for the shareholders and the company), all typically paid for from the company’s remaining diminishing assets.

After a bruising encounter in the Four Courts – including the incredible disruption that such proceedings cause – if the company wasn’t in difficulty beforehand, its position will inevitably dramatically deteriorate afterwards.

Oppression proceedings

Winding-up applications are sometimes tactically made in lieu of oppression proceedings, with one side of an argument that can see the commercial opportunity presented looking to acquire company assets, including goodwill, from ‘their’ liquidator.

Options on the ‘other side’ include either resisting the liquidator’s appointment (which rarely works), or getting involved in an auction with the liquidator to buy the company’s assets, or taking the initiative by petitioning to have an examiner appointed to the company and have him (there has never been a female examiner, by the way) decide the way to resolve the shareholder dispute.

Advantages of examinership

There are two fundamental requirements for a company to avail of examination: it has to be insolvent, and it has to have a reasonable prospect of survival as a going concern.

In the space available, it is presumed both apply. In relation to the insolvency, it can be on an assets versus liabilities basis, or its ability to discharge liabilities as they fall due and owing.

Liabilities include outstanding director and shareholder loans – in calculating its liabilities, section 509(3)(b) of the Companies Act 2014 allows a company take “into account its contingent or prospective liabilities”, and so is suitable for many companies supported by shareholders over the past years where balances remain outstanding to these connected parties.

Four recent cases illustrate the advantages of the examinership process in determining shareholder disputes: In Re Quesada Developments Limited (2017), Re Ryco Book Protection Services Limited (2018), Re Frontier Entertainment Limited (2018), and Re Yvolve Limited (2018).

Dispute

In Quesada, a long-running dispute regarding the status of three inter-shareholder loan accounts undermined the operation of the company, which runs a nursing home. Here, on one shareholder’s version of events, the company was completely insolvent – but, on another’s, so long as forbearance was exercised by the shareholders, it was not.

In his proposals for a scheme of arrangement, the examiner correctly recognised the limitations of the scope of his appointment and removed himself from allegations of bias in determining the dispute. He had the issue remitted to an expert experienced in the area for determination.

Arising from the expert’s binding determination, the shareholders each received a dividend, which was enhanced following the expert’s determination.

The only shareholder in a position to raise the funds required to provide for the proposals (not the petitioning member) ultimately retained control of the company.

Acrimonious dispute

In Ryco, a long-running and extremely acrimonious dispute about ownership of trade secrets and research, as well as other multi-faceted inter-shareholder litigation, ultimately was resolved under the overarching scope of the examination.

The court confirmed the proposals, which compromised company liabilities and retained its entitlement to recover where elements that were assets of the company remained.

Once again, the successful bidders were those that were best placed to provide the funds required to pay the company’s obligations under the proposals.

Property

Frontier was a company that had completed most of the works required to refurbish a property in which The Vaults visitor attraction was to be located, and from where it would operate.

Here the majority shareholder blamed the other shareholders for construction costs overruns and sought an examiner’s appointment, presumably envisaging that the process would compromise its creditors and cancel the minority shareholders’ interest in the company.

An unanticipated investor trumped their strategy; the minority shareholders retained most of their stake and took into the business an altogether more suitable partner.

In Yvolve, when a petition for the examiner’s appointment was filed, the company shareholders realised just how perilous their position was in terms of their continued membership of the company.

The Sword of Damocles of the examiner’s appointment and the potential cancellation of their shares focused the minds – the inter-shareholder dispute was resolved prior to the return date for the confirmation of the examiner’s appointment, and the petition was withdrawn.

Untouchables

The examinership process is pure for two reasons. The first is that the examiner is immediately answerable to the court, and there are costs implications for them if a finding of objective bias is made as to their treatment of company stakeholders.

The second reason is that, ultimately, disputes are resolved with one side coming up with more money than the other to invest in the company for the benefit of its creditors.

Conflict

With the resolution of the shareholder dispute as part of the examinership process, there are other positive side effects: the company balance sheet is also repaired, there will be investment (where without its framework it would be impossible), and the removal of the conflict enables the company to trade uninhibited.

Because the examiner and his lawyers are the only professional fees incurred by the company during the process (other than the petitioner fees and costs, which should be easily established up front), the cost to the company and its shareholders will be dramatically less than a fully-fledged shareholder dispute.

Absent all the shouting, allegations, claims, counter-claims and hoo-ha that are typical of shareholder disputes, if a company qualifies for it, examinership is the fastest, and ultimately most efficient manner of their resolution.

Barry Lyons
Barry Lyons
Barry Lyons has practised for over 20 years in commercial litigation