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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

The Companies Bill 2012

A New Dawn for Companies in Ireland

The Companies Bill 2012 which was published by the Minister for Jobs, Enterprise and Innovation, Richard Bruton on 21 December 2012 will revolutionise company law as it is known today.  Currently drafted the bill contains 1,439 sections and is the largest piece of legislation in the history of the State.  The bill is largely based on the recommendations of the Company Law Review Group which is a statutory body set up by the government for ensuring that “Ireland should have an efficient world-class company law infrastructure”. It is anticipated that this bill will become law during the final quarter of 2013 but that it will not become operative until a later date subsequent to its enactment.  There will be a transitional period provided for companies that have been established under present company law.

When the bill becomes law, it will affect every company now in existence in Ireland.  All companies will be required to convert to a company recognised by the proposed new legislation.  Nine out of ten companies in Ireland are private companies limited by shares and will therefore need to convert to the new model of the private company limited by shares (commonly referred to as a “CLS”).  It is proposed that all companies established under the current regime would be obliged to convert to a company recognised by the bill within 18 months of the commencement date of the new legislation.

 

SOME FAQS

 

I am a director of a private company limited by shares with two members, how do I convert to a company limited by shares that is recognised by the bill?

It is suggested that there would be a simplified process of “opting in” to the new model private company whereby directors of a company would simply deliver a prescribed statement to the Companies Registration Office which would then issue a new “constitution” based on the existing memorandum and articles of association of the previous company.  Generally speaking the new constitution would incorporate the existing memorandum and articles of association of the company save for the objects clause.

 

What are the major changes to the existing private company limited by shares?

The new model private company provided for in the draft legislation includes the following features :_

1.   The CLS will be limited by shares only.

2.   The CLS will have a one-document constitution and the memorandum and articles of association of existing private limited companies will be replaced by this document.

3.   The CLS will have the same contractual capacity as a natural person. This will avoid the problems that arise where an activity carried on by a company is deemed to be illegal or ultra vires because it is not listed in the company’s Memorandum and Articles of Association.  It will also simplify the procedures surrounding commercial borrowing as banks will no longer need to require a company to establish that it is legally empowered to borrow money for a proposed venture or activity.   A company may retain its objects clause however such a company would be classified as a designated activity company and would be treated differently under the proposed legislation.

4.   It is possible for a CLS to have only one director.  The reduction in the statutory minimum number of directors from two to one is designed to increase accountability of those who govern a private company because there will be no need for a passive nominee director to make up the second director.

5.   A CLS meeting certain criteria will now be entitled to apply to the Circuit Court for examinership.

6.   The CLS will not be permitted to list any securities or to sell its shares or debt to the public.  This is to ensure that the model private company would be kept simple.  Other companies such as designated activity companies (DACs) and public limited companies will of course be entitled to list securities.

7.   The CLS will no longer be required to hold an Annual General Meeting each year.  This will be replaced by a written procedure to be completed by the directors.

8.   A new “summary approval procedure” would dispense with the requirement for companies to obtain High Court approval for certain transactions, including transactions with directors, financial assistance, capital reduction and solvent windings up.

9.   Offences created by the Bill have been categorised on a scale of 1 to 4 (where 1 is the most serious: punishable with a fine of up to €500,000.00 and/ or a term of 10 years imprisonment) and the punishment for those found guilty of each category is clearly specified.

10. The audit exemption will now be available for group companies and to certain dormant companies which were previously ineligible.

11. Private companies will be permitted to engage in domestic mergers and divisions.

12. Directors of certain companies will be obliged to ensure that the person appointed company secretary has certain necessary skills.  This is commonly referred to as the secretarial “qualification test”.

The publication of the bill is a welcome development although it will be interesting to see if all its proposals remain in place by the time it finally becomes law.  The scrapping of the requirement for companies to have at least two directors, and the abolition of the need to have an “objects clause” will have a major impact on how one transacts with companies in Ireland especially a banks which at present need to undertake comprehensive research into a company’s capacity to borrow.

Company directors will need to familiarise themselves with the relevant provisions of the proposed new legislation which imposes significant duties and obligations on such individuals.  Ignorance however innocent of the proposed law will be of no defence.  Watch this space!

 

Deirdre Farrell, Solicitor and AITI Chartered Tax Adviser (CTA), Amorys Solicitors, Suite 10, the Mall, Beacon Court, Sandyford, Dublin 18. Tel: 01 213 59 40

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It could be you!

Lotto Syndicate Agreements – Preparing for that big win written by Deirdre Farrell

It is not often appreciated by many lotto syndicate members  that a syndicate, whether formed with colleagues at work, acquaintances at a pub or family members and whether written or oral, is an agreement that is enforceable through the courts system. Should one member of a syndicate dispute a term of the agreement – for example a term relating to what share of the winnings that he or she is entitled – that member may be entitled to an order preventing the a lottery from paying out the prize winnings until the syndicate dispute is settled.  This could result in expensive legal proceedings and could mean that members of a syndicate would not receive their share of the winnings for a long time.  The costs of such proceedings could also have the effect of substantially depleting each member’s share of the winnings.

You may have read that the US lottery jackpot was recently won by an individual who scooped an incredible $590m!  The chance of winning this was 1 in 175 million.  Setting up a lotto syndicate however is a great way to increase one’s chances of winning lottery prizes.

It is sometimes not appreciated that there might be significant tax consequences for syndicate winners in the absence of sufficient evidence to show that a syndicate agreement did in fact exist between them.  Lottery winnings are received by syndicate winners tax free, however gifts from individuals to others are not and are subject to capital acquisitions tax which currently stands at 33% where the gift exceeds a tax free threshold particular to the relationship between the donor and the donee.

Having a written syndicate agreement in place should also be of concern to employers where syndicates are formed amongst employees.  Disputes between employee syndicate members could lead to a breakdown in important business relationships and could lead to disruption of business with consequent unnecessary loss to the employer.

There have been many publicised court disputes between syndicate members that could have been avoided if the agreement between the members had been reduced to writing.

Recently in March 2013 it emerged that members of a UK syndicate comprising 16 colleagues won GBP £1,000,000 in the Euromillions draw.  A dispute arose in relation to three members who did not contribute to the purchase price of the winning ticket.  History does not relate whether the remaining members of the syndicate covered the cost of the non-contributors’ share of the ticket purchase.  Notwithstanding this, the three colleagues in question argued that they were entitled to a share of the prize money.

Generally, lotto syndicate agreements provide for what happens when a member fails to contribute to a draw entered into on behalf of the syndicate.  A well drafted syndicate agreement should provide that failure by a member to contribute to the purchase price of a ticket for a certain number of consecutive draws would disentitle that member to a share of a syndicate’s win in any draw subsequent to the stipulated number of draws to which the member did not contribute.  The question also arises as to whether or not the member’s portion was paid for and by whom.  If it was paid for by the person who actually purchased the ticket, does this mean that they are also entitled to what would have been the non-contributing member’s share? There was no written lotto syndicate agreement between the members in this case however and a much publicised dispute ensued amongst the syndicate members.

The 16 individuals concerned all worked in the Driver and Vehicle Licensing Agency in Swansea where there were over 5,000 staff.  Senior Officials of the DVLA were engaged to resolve the dispute and there was major disruption of business as a result.  It was alleged that at one stage there was an altercation between a number of the syndicate member workers and that security had to be called to diffuse the tension.

It appears that the DVLA dispute may have been resolved but as the workers in question signed a confidentiality agreement, the exact outcome is unclear.  What is clear however is that the absence of a well drafted agreement resulted in very serious disruption to the business of the DVLA with inevitable knock-on cost.

As will be seen from the foregoing example, in order to ensure the seamless and immediate payment of tax free lotto winnings to syndicate members a formal agreement setting out all of the essential terms should be  put in place and signed by all syndicate participants.  Such an agreement should include the following terms:-

 

  1. The date of the agreement;
  2. The appointed manager’s name – the appointed manager is responsible for creating and maintaining the syndicate agreement, collecting funds from each player, keeping a record of payments, purchasing tickets, storing the tickets safely, checking the tickets to see if the syndicate has won and dividing the winnings amongst the members;
  3. The names of the members of the group;
  4. The games and numbers to be played;
  5. Which draws will be entered i.e. the National Lottery on Wednesday, Saturday or one or both of the twice weekly Euromillions draws or some other games;
  6. How much each member will pay per draw and when and how payment is to be made;
  7. Clarification that there is no “ownership” by a member of any particular line of numbers;
  8. How winnings will be split (for example, the manager may be entitled to an extra bonus by way of reward for assuming the responsibility of this role);
  9. What happens if a member fails to pay their contribution at any time;
  10. If the group has a big win, whether the members will agree to publicity or not;
  11. The agreement must be signed and dated by each member of the group and should be witnessed by, I suggest, a solicitor.  Copies should be given to each member and the original kept in a safe place.

Update:
On 15th May 2016 the Sunday Independent published Deirdre Farrell’s advice in relation to alleged interest charged on unpaid lotto winnings.

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Who owns the copyright in your computer software programs?

Many businesses outsource the development of their software to independent specialists. Whilst very often great care and attention is given to preparing and agreeing a software specification and the price or cost of the works to be undertaken. It frequently transpires that there are no other written terms of the agreement in existence.

This can lead to many legal problems but one of which the non-lawyer may not be aware is that, in the absence of a formal assignment in writing, ownership of the copyright in the resulting program will automatically be vested in the “author” of the program. The “author” is the person who “creates” or writes the software and that person’s copyright will not expire until 70 years after his/her death! The Copyright and Related Rights Act 2000 (“CRRA 2000”) incorporates the foregoing principles and also contains a definition of what are described as “acts restricted by copyright”. These acts include a restriction by anyone other than the copyright owner, who has the exclusive right, from :

  • coping the program and/or;
  • adapting the program.

Such restrictions could have very serious fiscal consequences for the user or “would be” owner of the software. The CRRA 2000 specifically provides that to be effective, a transfer or assignment of copyright must be in writing and signed by or on behalf of the owner. A properly drafted Software Development Contract should therefore contain a form of assignment of copyright consistent with the requirements of the legislation. Failure to address this issue at the very outset can give rise to very expensive and time consuming disputes and may lead to litigation.

Readers should also be aware that the CRRA 2000 provides not only that infringement of copyright is actionable by the owner for damages and for appropriate injunctive relief where necessary but that such an infringement may also constitute a criminal offence punishable on summary conviction by a fine of up to €1,905.00 and or 12 months imprisonment or, on conviction on indictment, to a fine of up to €127,000 and or 5 years imprisonment. Not to be taken lightly! Companies, partnership and individuals can all be the subject of a wide range of legal proceedings all of which could be avoided by taking timely legal advice in advance of concluding a contract.

An important point to note is that the CRRA 2000 clearly distinguishes the position of an employee who writes software in the course of “employment” from that and an independent contractor. In the former case the employer is the first owner of the copyright. In such circumstances however it would be prudent for the contract of employment to contain an appropriately worded clause to cover this point for the avoidance of any doubt.