By Harry Fehily, Managing Partner, Insolvency and Corporate Recovery Unit
What is Examinership?
Examinership has been the subject of sustained recent media scrutiny following the dramatic increase in the numbers of companies seeking to avail of the court protection provided by this process. Examinership is unique to Ireland having been introduced by the Companies (Amendment) Act 1990. It is a formal court-supervised corporate recovery process. It is designed to enable insolvent but potentially viable companies to explore all opportunities to provide for their survival. An examiner is appointed (usually a practising accountant) to review a company’s affairs, consider its viability for the future and, if feasible, formulate proposals for the company’s financial survival. The examiner must also confirm the availability of sufficient cash resources to trade during the period of examinership, which is an increasingly difficult proposition.
The underlying rationale behind the examinership process is that it is for the benefit of the economy as a whole for such enterprises to continue in existence, maintaining employment and providing revenue to the state. The examiner does not take over the day to day running of the company. The process extends court protection to a company which ensures that receivers cannot be appointed in respect of the troubled company and personal guarantees cannot be enforced during the period of examinership. Recently, we have advised a number of clients whose personal guarantees have been potentially compromised by the examinership process and it is essential that immediate advice be sought to protect these guarantees on hearing that a company has entered examinership. The suitability of a company to avail of court protection through examinership will often depend on the company’s underlying fundamental business or trade. Given the reluctance of banks to lend in the current environment most successful examinerships are now contingent upon investment from third parties.
The process involves a number of stages. A petition is presented to the High Court by the company, directors of the company, a creditor or by certain shareholders. An independent accountant’s report is prepared outlining the current financial position of the company and its prospect of survival on an objective basis. Under section 5(b) of the Companies (Amendment) (No. 2) Act 1999 (the “Act”), the court must decide that there is a reasonable prospect of the company’s survival to provide court protection to the company for a period of seventy days, and even then the decision to provide court protection will be subject to judicial discretion, an increasingly important consideration. The Act also provides for the possibility of an extension to one hundred days. Once the firm’s creditors have endorsed a scheme of approval in the manner required by the Act, it will then fall to the High Court to sanction the scheme. Generally, creditors will only approve the scheme if it offers them a better return than that they would receive by simply placing the company into liquidation.
For companies that survive the examinership process, the advantages include new investment, a write-down on money owed to the company’s creditors, retention of control of the ‘new’ company by the promoters in some cases, maintaining employment (albeit at a possibly reduced level), continued trade relations with creditors and a potential payment of dividend to creditors. The level of the write-down agreed on by creditors, as part of the scheme of arrangement, differs from company to company, and also depends on the category of creditor. For example, the Revenue Commissioners are generally treated as preferential creditors, as are employees of the troubled firm, so it is commonly the case that they will obtain their money, or at least a proportion of it, back first. According to the article ‘Examinership Runs Foul of Recession’ in Insolvency Journal, the average dividend for preferential creditors in 2008 was 23.5%. It further states that unsecured creditors, generally trade suppliers of goods and services to the company, usually do not fare as well, however; the average unsecured dividend is just 13.6%.
The cost of examinership is one of the main reasons directors and creditors may shy away from the process. For example, in the Residence examiership, Mr. Justice Peter Kelly was very critical of whether legal fees of €50,000 and examiner’s fees of €61,857 were acceptable in the current economic climate. Very often the costs involved in the process will adversely affect any prospect of survival for small companies and as a result examinerships have been perceived to be the preserve of the large corporation with significant levels of debt.
Examinerships do not guarantee the continued survival of a company, especially in circumstances where the necessary funding is not secured. Recent figures indicate that for every three companies which enter examinership, only one will come out the other side and two will go into liquidation. The deterioration in the prospects for companies emerging from examinerships has been attributed to a combination of inappropriate companies seeking to survive via examinership, as well as the difficulty in finding money to re-invest in the business.
By way of specific illustration of this point, the number of construction firms specifically seeking to survive via examinership has risen substantially in recent times due to the collapse of the property sector. This influx of applications for examinerships on behalf of construction companies has posed a challenge to the integrity of the examinership process. For example, the final appeal of the high profile refusal to grant court protection in the case of the Zoe group was described by the Supreme Court as an ‘abuse of process’. In addition, in the first six months of 2009, five other construction companies sought examinership, with only one successfully securing the protection of the court. Questions were also raised about the appropriateness of examinership in another high profile property development firm, the Fleming Group. The Supreme Court overturned a High Court decision approving schemes of arrangement. “A hope, more than an aspiration” was said to be required for the companies to survive as going concerns. Here the hope that the property market would recover in years to come and the companies would effectively act as holding companies until that time was held not to be sufficient to avail of examinership.
The extent to which companies entering examinership have failed to continue as going concerns has raised questions as to the effectiveness of the process; for example, Mr. Justice Kelly has recently stated that he was now “more and more reluctant” to afford protection to troubled companies, given that so many were “on life support with no prospect of survival”. In turn, if an examinership fails, then the company’s assets become even further depleted and the firm stands even closer to liquidation and extinction while the costs of examinership and professional fees have soaked up the funds which may otherwise have been used to pay creditors on liquidation. In such circumstances it is clear that the failure of the examinership process will have very detrimental implications for preferential creditors and unsecured creditors. Nevertheless, in appropriate circumstances, examinership remains an excellent option for companies facing financial difficulties given the significant benefits that accrue by virtue of court protection.
For more information on examinership contact our Insolvency and Corporate Recovery Unit.
Examinership enables insolvent but potentially viable companies to explore all opportunities to provide for their survival through a period of court protection from creditors.
Courts are more and more reluctant to provide the court protection of examinership to companies unless they have a real prospect of survival and usually this requires investment.
The high costs of examinership results in smaller companies being unable to use this form of protection.