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Examinership Explained

At present all applications for examinership must be made to the High Court.  With a view to reducing costs and providing greater accessibility for small private companies to the examinership process section 2 of the Companies (Miscellaneous Provisions) Act 2013 was enacted on 24thDecember 2013 and provides that a small to medium sized company may apply to the Circuit Court to instigate the examinership process. Section 2 is however subject to a ministerial commencement order which has not yet been passed.

 

Small companies are those that satisfy two out of the following three conditions:

1.         Balance sheet not exceeding €4.4million;

2.         Turnover not exceeding €8.8million; and

3.         Number of employees not exceeding 50;

 

What is examinership?

Examinership is a court supervised rescue process which is designed to help companies recover from insolvency. The principal rationale behind examinership is to allow a company that is experiencing financial difficulties a period of protection from creditor action during which a third party (the Examiner) has an opportunity to examine the affairs of the company and, if there is a reasonable prospect of the survival of the company and all or part of its undertaking as a going concern, to formulate proposals for a scheme of arrangement to facilitate such survival and save the jobs of its employees.

 

When will a court appoint an examiner to a company?

Briefly put, if satisfied that an insolvent company and the whole or any part of its undertaking has a reasonable prospect of survival as a going concern a court may appoint an examiner. The company must prove it is unable to pay its debts at the time of the application to appoint an Examiner.  The company does not however need to be insolvent to fulfil the necessary criteria, a court may take account of a future event which is likely to have an adverse effect on the company’s ability to discharge its debts.

An Examiner will not be appointed where a receiver stands appointed for a continuous period of three days or more.  Furthermore the existence of a winding up petition does not in itself prevent the appointment of an Examiner.

 

How does a company go about applying to the Court to appoint an examiner?

An Examiner is appointed to a company on foot of a petition brought before the High Court*. The petition must be supported by an affidavit (a written document sworn by the applicant on oath) and must be accompanied by an independent accountant’s report.  The independent accountant’s report must put basic information before the court to show whether or not proposals for a scheme of arrangement would offer a reasonable prospect of the survival of the company and all or part of its undertaking as a going concern.

* There is provision in the Companies (Miscellaneous Provisions) Act 2013 to permit a company to apply to the Circuit Court in the circuit of the company’s registered office but at the date of writing the relevant commencement order has not been signed by the Minister for Innovation, Trade and Employment.

 

Practically speaking what does “court protection” mean for the Company?

The practical effect of “court protection” for a company is that the company is effectively immune from creditor action. This means the following:-

No proceedings may be taken or resolution may be made to wind up the company during the period of protection;

  1. No receiver can be appointed over secured assets of the company;
  2. No steps may be taken to pursue a guarantor of that company’s debts during the protection period; and
  3. No steps can be taken to repossess goods of the company or to enforce a judgment of a court during that timeframe.

 

What is a Scheme of Arrangement?

As stated an Examiner’s main function is to arrange a formal scheme of arrangement between the company and its creditors and members which will facilitate the survival of the company and the whole or part of its undertaking as a going concern.

An Examiner is obliged to prepare a report outlining proposals for a scheme of arrangement and to convene a meeting of each class (see below) of creditors and shareholders to consider same.  The Examiner is obliged to convene the said meetings within 35 days of his or her appointment however typically this timeline is extended.

A scheme of arrangement frequently involves a new investor acquiring all or substantially all of the shareholding in the company together with a write down of the company’s debt across a range of classes of creditors. In certain circumstances, third party investment is not required.

In his report, the Examiner must divide the company’s creditors and members into various classes (e.g. unsecured creditors, leasing creditors, retention of title creditors, floating chargeholders, fixed chargeholders, Revenue Commissioners, contingent creditors, etc., preferential shareholders and ordinary shareholders) and treat each class equally.

I am a creditor of a company in examinership, will I be compelled to accept a Scheme of Arrangement ?

Provided that at least one class of creditor and member (see above) votes in favour of accepting the Examiner’s proposals, the Examiner may proceed to seek court approval sanctioning his scheme of arrangement thereby making it binding on dissenting creditors and members. The voting by creditors at their meetings is by a majority in number representing a majority in value of the claims represented at that meeting. (e.g. a secured creditor of €100,000 could have 100 votes and a secured creditor of €1000 could have 1 vote)

 

What does the board of directors need to consider before applying for examinership?

The overarching principal of examinership is to give an insolvent company some time during which it is uninhibited by creditor action to come to a scheme of arrangement which is agreed to by a majority of creditors (voting in number and value) which would be more beneficial to them then in a winding up or liquidation situation.  If the directors doe not believe that any scheme would be accepted by a majority of a class of creditors and members (see above) the directors should not proceed to examinership as to do so would significantly reduce the funds available to creditors.

If a scheme of arrangement is not agreed to by a class of  creditors or members or approved by the Court it is important to note that the company will most likely go into liquidation.  In this scenario the costs of examinership are paid in priority to all other debts of the company, thus minimising the amount available for the creditors.  Usually costs of the examinership process are significant and this could lead to there being no funds left to pay the creditors.

 

What happens if the Scheme of Arrangement is approved?

The company proceeds with business as per the scheme of arrangement.

 

When does Court Protection end?

The date on which the scheme of arrangement is approved or disapproved, as the case may be.  If at any stage the Examiner believes that there is no prospect for the survival of the company and all or part of its undertaking as a going concern, he or she must apply to be discharged and to have court protection terminated.

 

What happens if the examinership process fails?

If the examinership process fails the company will most likely be placed into liquidation or the company’s secured creditors will appoint receivers to the secured assets.

For more information on the above please contact Deirdre Farrell, solicitor and AITI Chartered Tax Advisor (CTA), Amorys solicitors, Suite 10, The Mall, Beacon Court, Sandyford, Dublin 18 Tel. No. 01-213 59 40

 

© February 2014