VINCENT & BEATTY LLP: A focus on examinership in Ireland and the new regulations proposed for small companies02/19/2021

Corporate Insolvency and Restructuring to the fore as effects of Brexit and COVID-19 begin to show;

A focus on examinership in Ireland and the new regulations proposed for small companies.

Introduction

Examinership is a rescue process whereby the protection of the Court is obtained to assist a company when it finds itself in financial difficulties. Whilst mainly an Irish process, interestingly Cyprus has, in recent years, also introduced examinership, and the process there works in an almost identical manner to that in Ireland.

In placing a company into examinership, the Court gives the company temporary protection from its creditors. Through the appointment of an examiner, the aim is that during this breathing space provided by the Court, a restructuring of the company’s debts is sought to ensure its ability to continue trading and seeking the Court’s approval on the proposed restructuring. This Court protections means that none of the company’s creditors can call in their debts or seek to take any action in respect of their debts during the period of protection.  It will inevitably require a compromise to be reached with the creditors as part of the process, known as a ‘Scheme of Arrangement’, After a prescribed period of Court protection, the examiner is required to report back to the Court on the viability or otherwise of the company’s prospect of survival. This is in contrast with the usual position of when a company is insolvent and unable to pay its creditors and is liquidated, as it is wound up and each creditor, in the appropriate order of priority, is paid a proportion of whatever assets remain.

There are two criteria for determining whether a company is a candidate for examinership:

  1. Whether the Company satisfy the tests set out in the Companies Acts; and
  2. Whether there a possibility of saving the company and more particularly the jobs of its employees.

Companies Acts

Examinership was introduced as a corporate insolvency rescue by the Companies (Amendment) Act 1990 and is now regulated by Part 10 of the Companies Act 2014.

While comparisons can be made with process of Administration in UK company law, the Irish legislation takes a similar approach to the pro-active self-help provisions of U.S Chapter 11 type protection afforded to companies.

Process in High Court

The appointment of an examiner is done by way of Petition to the Courts.  It is a public process with a public hearing, and at the initial application, if the Court deems it necessary, it may make an appointment of an interim examiner, so as to allow the examiner to begin work immediately.

The Court may appoint an examiner if it appears to the Court that the company is or is likely to be unable to pay its debts. The directors, members or the company itself may make the application to Court, and an Independent Expert must have formed the view that the company is or is likely to be unable to pay its debts as they fall due, and as such is insolvent. 

The company will come under the protection of the Court for a maximum of 70 days immediately upon the presentation of the petition at the Courts Office. This period of protection may be extended should the examiner apply for a maximum additional 30 days to finalise their proposal, present it and report back to the Court. Additionally, the Court may, of its own volition or on the application of the examiner, extend the period of protection for as long as the Court deems necessary to enable the Court reach its decision.

If the Court does not grant the application to appoint examiner, the consequence is that the company will likely have to go into liquidation: the directors or the members having formed the view that the company was insolvent. To do otherwise would be to expose the directors to a claim for reckless trading.

The Court will not make an order to appoint an examiner unless the Court is satisfied that there is a “reasonable prospect of survival” for the company. The focus is on saving not the company, but the jobs of its employees. 

The petition to appoint an examiner is accompanied by an affidavit. There must be an independent expert’s report which will set out the assets and liabilities and the expert must conclude that the company is insolvent, and that there is a reasonable prospect of the company surviving if the company’s debts are restructured.

Assuming that the Court appoints an examiner, the examiner then prepares a report for the Court setting out proposals in relation to compromising claims with creditors and proposals for investment in the company.

When an examiner is putting forward its Scheme of Arrangement, it also must set out what the consequences are for members and creditors if the Scheme of Arrangement is not approved and the company is liquidated. For the Scheme of Arrangement to be successful, the examiner must persuade at least one class of creditors to accept the Scheme before it can be brought before the Courts for approval.

If an examiner cannot put forward a Scheme of Arrangement, the matter must be brought before the Court and the Court protection will end and the consequence for the company is that it will have to be placed in liquidation.

The company’s creditors are entitled to attend Court to object to the appointment of the examiner or to object to the Court approving the Scheme of Arrangement.

Commercial considerations

The ability to attract investment is a key factor for a company to consider before availing of the examinership option. A candidate for examinership needs to consider the following:

  1. Is the company likely to survive in whole or in part as a going concern, or is the company ‘terminally insolvent’?
  2. What are the assets of the company?
  3. What are the liabilities of the company and how are these liabilities secured?
  4. How easily can the assets of the company be sold if required?
  5. Do the assets of the company justify the costs of examinership?
  6. How many employees does the company have and how will their employment be affected by likely changes to the company following examinership?
  7. Does the company need to engage with a regulator?
  8. What is the level of outside investment required to formulate a scheme of arrangement to be put to the creditors?

Examinership in the Circuit Court

While examinership is available to all companies, the commercial reality of the associated costs means it is typically utilised by medium and large companies. To address this, in 2017 the Companies Act was amended to allow small companies to make an application to the Circuit Court to have an examiner appointed.

A small company is defined in the Companies Act as meaning a company that satisfies two of the following three criteria:

  1. Annual turnover of up to €12 million;
  2. A balance sheet total of up to €6 million;
  3. Up to 50 employees

 A Circuit Court examinership is intended to be a comparatively low cost and simple process, in contrast to a High Court examinership.

However, the Company Law Review Group observed in October 2020 that there has, to date, been a low uptake in small companies proceeding with a Circuit Court examinership, compared with the incidence of insolvencies, and the consequent pursuit of alternative insolvency processes such as voluntarily liquidation.

Examinership and COVID-19

In response to the COVID-19 pandemic, the Oireachtas (Irish Parliament) enacted emergency legislation, which included temporary changes to the examinership regime which are due to expire on 20 June 2021. If a company goes into examinership during this period, the examiner has up to 70 days to present a report to the court. As explained above, an examiner can seek an extension of 30 days. This emergency measure provides an additional extension of 50 days (i.e. 150 days protection in total) to be granted by the court in exceptional circumstances. Such exceptional circumstances may include but are not limited to the impact of COVID-19 on the company.

Summary Rescue Process

Recognising that the existing insolvency and examinership process has proven to be inaccessibly expensive for small and micro companies, on 8 February 2021 the Irish Department of Enterprise, Trade Employment launched a public consultation seeking views on a proposed ‘Summary Rescue Process’, which is to be a simplified standalone process, separate from examinership but mirroring key elements of the examinership legislation.

Small and micro companies represent 98% of companies in Ireland.

A micro company means a company that, in its most recent financial year fulfils 2 or more of the following requirements:

  1. turnover of the company does not exceed €700,000.
  2. balance sheet total of the company does not exceed €350,000.
  3. average number of employees does not exceed 10.

Notable features in a Summary Rescue Process include:

  1. The commencement by a company resolution of the directors, rather than by application to Court.
  2. Shorter periods of protection than examinership.
  3. Overseen and assisted by insolvency practitioners.
  4. Requirement for a rescue plan to be approved by a simple majority of creditors in value.
  5. Provision of a format for a cross-class cram-down of debts with a view to reducing costs by binding creditors to a restructuring plan.
  6. Safeguards against irresponsible and dishonest director behaviour.

The aim of these reforms is to reduce the associated costs and regulatory burden for smaller companies whilst also maintaining appropriate safeguards for creditors.    

Conclusion

Currently, the examinership process presents one of the most commonly used frameworks in which corporate rescue and restructuring takes place. In the short term, the appointment of an examiner to a company provides valuable breathing space in protecting the company from its creditors, enabling the company to continue trading, to restructure their debts and liabilities and to attract investment on more favourable terms that would otherwise be the case.

In the medium to long term, examinership can allow a company to restructure by making provision for investment and the Order of the Court to a Scheme of Arrangement with the creditors of the company.

It is expected that there will be a wave of examinership applications brought before the Courts in 2021, as the effects of Brexit and COVID-19 hits the economy.