As the Country begins to emerge from destructive recession, many small and medium sized enterprises are continuing to struggle to survive in circumstances where historical debt and pre-recession contracts (e.g. inappropriate upward only rent reviews, unaffordable rents, etc.) place an unsustainable burden on the company’s business. While an embattled company may very well be a viable business and, indeed, may otherwise have a positive future in the brightening economic environment, these debts and legacy issues act to prevent the resurgence of the company’s business.
As a result of the hangover of the recent boom and crash the fear is that, in the absence of suitable intervention, well managed Irish companies with good businesses will continue to fail in the years to come. If a company has a good business but is failing to thrive by reason of historical debt or legacy contracts, Examinership (and indeed Examinership lite) may well be the most suitable option to save the company.
Examinership is a process where the Court provides protection and oversight to a petitioning company to allow it, with the assistance of the appointed Examiner, to explore all options to save the company’s business so that it might thrive into the future. To date, the Examinership process has been underused by Irish companies.
There was a perception that Examinership was a prohibitively expensive High Court process reserved for large companies. While it is certainly the case that many high profile large companies have entered Examinership in recent years, Clarke Jeffers has successfully assisted several enterprises from the SME market through the High Court Examinership process.
On 24th December 2013, the President signed into law the Companies (Miscellaneous Provisions) Act, 2013 which provides for Examinership in the Circuit Court. This new departure has become known as “Examinership Lite”. It is hoped that this extension of jurisdiction will encourage insolvent small and medium sized companies whose core business remains viable to seek the protection and assistance of the Court by way of Examinership. It has been our experience that the High Court has been very supportive of suitable SME companies entering Examinership; we expect this sympathetic and encouraging attitude will be mirrored in proceedings in the Circuit Court under Examinership Lite.
A small and medium sized enterprise will be allowed to bring their Examinership application in the Circuit Court jurisdiction if it meets at least two of the following three conditions.
- The company’s balance sheet is less than €4.4 million.
- Turnover at the company is less than €8.8 million.
- The company has less than 50 employees.
In Examinership, Court protection is granted for an initial period of seventy days (which can be then extended by a further thirty days at the Courts discretion). During this time creditors (i.e. trade creditors, lending institutions, landlords, hire purchase and leasing companies, Revenue etc.) are prevented from enforcing debts against the company; a liquidator or receivers cannot be appointed to the company and no winding-up proceedings may be taken. Effectively the court’s protective shield provides “breathing space” to allow the Examiner, working with the company’s management, time to assess the position and to set about designing a scheme of arrangement with creditors which may involve the writing down of debt, the disclaimer of onerous leases or contracts, etc.
Under the process, management of the company remain in control. The Examiner assists the company through the Examinership process and, ultimately, his role is to try and formulate a scheme of arrangement to allow the company to survive and thrive into the future. At the heart of the process is the desire to save good businesses and the jobs they provide in the community. The process favours consensual “deals” with classes of creditors; however, if at the conclusion of the process, the Court forms the view that the Examiner’s scheme of arrangement is fair and that it provides a reasonable basis for the survival of the company, it may impose the terms of the scheme of arrangement on objecting creditors.
Clarke Jeffers & Co can advise on all aspects of corporate restructuring and advice on the options open to and suitable for you and your business.
1. What is Examinership Lite?Examinership Lite is a process whereby the Court provides protection to an insolvent company against its creditors for a period of up to 70 days (which may be extended by a further 30 days at the Courts discretion). During this time of protection the Insolvent Company will endeavour to attract new investment and negotiate a write down of its liabilities with its creditors in order to replace itself in a viable solvent position. Up until now this process was confined to the jurisdiction of the High Court but recently the Minister for Jobs Enterprise and Innovation Mr. Richard Burton signed into Law an extension to the jurisdiction of Examinership to allow smaller SME Companies who satisfy certain criteria to take their application for Court protection in their local Circuit Court. This process has become affectionately known as “Examinership Lite”. The idea behind this initiative is to make the process much more affordable to the smaller and medium size enterprise.
2. Who can avail of Examinership?Examinership (and Examinership Lite) are confined to companies. In order to avail of Examinership Lite you must be a corporate entity and you must be insolvent. If you can satisfy these criteria then you must satisfy two of the following three conditions.
(a) The company’s balance sheet must not exceed 4.4 million.
(b) Turnover of the company cannot exceed 8.8 million.
(c) The company cannot have more than 50 employees.
Finally, the company Petitioning the Court for protection must have a viable core business and a reasonable chance of survival.
Any company who satisfies the above has a right to apply for Examinership (or Examinership Lite).
3. What protections are afforded to a company when in Examinership (Examinership Lite)?When a company is under Court protection (i.e. In Examinership), creditors cannot act against the company or enforce any judgments which they have. The Revenue Commissioners are not entitled to take action on foot of Orders, leasing companies cannot seek the return of goods or assets on lease or hire purchase, creditors cannot petition the High Court for winding-up, liquidators or receivers cannot be appointed to the company. Essentially the process of Examinership provides protection to a company for a statutory period to allow that company breathing space in order to either restructure its debts or introduce freshen new capital, do deals with its creditors etc.
4. What is the test for Insolvency?Companies deemed to be unable to pay its debts when a creditor is owed in excess of €1,270 and served written demand on the company to pay the debt and the company has for 3 weeks failed to pay the sum due or when a creditor has obtained a judgment for a debt and has been unsuccessful in attempting to have it executed by the Sheriff or when it is otherwise proved to the satisfaction of the Court that the company is unable to pay its debts as they fall due.
5. How does the Court decide whether I am a viable business or not?As part of the Examinership process a company seeking to petition the Court for protection must produce an independent accountants report proving that the company’s core business is viable and that it will in fact benefit from Examinership if so granted. In other words the independent accountants report will show the Court that the company has a good and real prospect of survival if granted protection. The independent accountants report is therefore a key document which needs to be obtained in the first place. The companies own accountants or auditors are not permitted to produce this (as the name suggests the report must be independent of the Company).
6. Who controls my company in Examinership?The control of the company remains vested in the directors. The Examiner does not hold a directors function or a board function within the company during the process. The examiner is there to shepherd the company through the process and to assist in the restructuring of its debts and dealing with creditors etc. The process therefore greatly differs from other insolvency arrangements such as liquidation or receivership. The benefit here is that the companies own directors maintain control throughout the process.
7. What happens to my employees when my company is in Examinership?The company and the Examiner usually try to keep employees of the company informed during the Examinership. The primary goal of Examinership is the survival of the enterprise of the company and the retention of the most jobs possible in the community. Examinership is usually more advantageous to employees than either liquidation or receivership.
8. What are the consequences for creditors?In a successful Examinership, an unsecured creditor is likely to receive a significant percentage of its debt due from the company. More often than not, unsecured creditors usually support the company in Examinership and will vote for an examiner’s proposals for a scheme of arrangement in the hope that the future trading relationship with the restructured company will allow them to recoup their losses. However, if the Examinership is unsuccessful, in the resulting liquidation, the costs and expenses of the Examinership will be paid out ahead of debts owed to unsecured creditors.
Secured creditors are often less enthusiastic about Examinership. In liquidation or receivership, the secured creditor can rely on its security to recover its debt; however, in Examinership, the secured link between debt and asset can be compromised by the Court’s approval of a scheme of arrangement in the face of the secured creditor’s opposition. The Court will seek to be fair to all types of creditors; however, the court also looks to the wider circumstances including the prospect of saving jobs in the local community.
9. What are the powers of an Examiner?The Examiner is a range of powers which are set down in the Companies Amendment Act, 1990 to allow him or her to efficiently conduct the Examinership similar to that of an Auditor of the company. The Examiner can also apply to the court for the transfer to him of further more extensive powers (those of the directors or the conferral of the powers of a liquidator) in more unusual circumstances. In practice the Examinership is unlikely to succeed unless the company and its directors work and liaise closely with the Examiner and listen to the views of the Examiner.
10. How are my personal guarantees affected?Section 5(f) Companies (Amendment) Act, 1990 (‘the Act’) provides that any third party liable in respect of a debt owed by the Company in Examinership to a creditor, “whether under a guarantee or otherwise” is also the subject of protection during the period of Examinership.
The section establishes an effective moratorium on enforcement under the relevant contract of guarantee/indemnity (‘guarantee’) as against the guarantor during the currency of the Court’s protection in Examinership.
The default position under Examinership is that the liability of the guarantor should not be impacted by the write down of the Company’s liabilities as part of a successful Scheme of Arrangement. However, a creditor of a Company under the Court’s protection whose contract debt with the Company is the subject of a contract of guarantee should be careful of the requirements of section 25A of the Act. Failure on the part of the guaranteed creditor to abide by the notice requirements in section 25A may render the contract of guarantee permanently unenforceable.
Essentially, section 25A provides that the guaranteed creditor who wishes to maintain his rights of enforcement as against the third party guarantor should serve a notice on the guarantor offering to transfer to the guarantor the creditor’s rights to vote upon the Examiner’s proposals at the creditors meeting. The guaranteed creditor must also provide adequate notice of the section 23 meeting to the guarantor.
Speaking practically, as matters move towards the end of the period of protection of Examinership, events tend to develop quickly where Creditors are often given short notice of the section 23 meeting. If the Creditor receives less than 14 days’ notice of the section 23 meeting of creditors, he or she should serve this notice of the meeting and the offer to transfer his or her rights to the third party guarantor within 48 hours of receiving the notice of the meeting (prudently by way of personal service) and to be in a position to swear to the reasonable attempts undertaken to make such service.
If the Creditor fails to provide adequate notice of the meeting and of his or her offer to transfer rights as a creditor of the Company in Examinership to the guarantor within the statutory time limits, then the contract of guarantee may be rendered unenforceable.
If a guarantor is called upon to pay the Creditor on foot of the guarantee he or she has the right to be indemnified by the Company in respect of the full amount actually paid (even though the debt may have been reduced as between the Company and the guaranteed creditor) unless the Guarantor’s rights as a “contingent creditor” have similarly been the subject of reduction as part of the Scheme of Arrangement (which is often the case).
11. Do my creditors have to deal with me?The principals of consensus and a common sense approach lie at the heart of the Examinership process. The Court will not compel a creditor to deal with a company in Examinership. It is our experience that most trade creditors continue to deal with a company in Examinership albeit on different credit terms during the process. Towards the conclusion of the process, the Examiner will present and explain the scheme of arrangement to the various classes of creditors and each class will be afforded the opportunity to vote upon the scheme. Creditors have a right to be heard by the Court during the Examinership process; the Court will seek to ensure fairness and reasonableness to all parties while balancing the benefit of the potential survival of the Company to its employees and to the wider community.
12. What is a Pre-Pack Examinership?The term “Pre-pack Examinership” describes a process whereby a company facing financial difficulty but with a good and viable underlying business prepares to enter Examinership well ahead of the date of the application to the Court. The Pre-Pack preparation involves the carrying out of significant due diligence on the company by the company which is then set down in a document (“Examinership Prospectus”). In addition to all company information usually provided as part of a merger or acquisition due diligence, the document will address the Examinership process and the potential outcomes. The key benefit of this approach is that it allows for the early engagement with potential third party investors were third party investment is usually the necessary catalyst for a successful Examinership. In addition this approach usually results in superior information to be made available to the Court earlier in the process which reduces uncertainty, business disruption to both the Company and its Trade and other Creditors.
Unfortunately, Pre-Pack examination is a relative rarity. Company directors faced with looming insolvency and corporate destruction often leave it too late to put in place a Pre-pack system. In addition, there is a widely held misconception that this more sophisticated approach to Examinership is only available to larger companies. It is our experience, having worked closely with the P&A Partnership over a period of several years successfully bringing SME companies through the previous High Court Examinership process, that investors can be sourced for good SME companies if sufficient time is allowed.
13. Does Examinership protect against the appointment of a Receiver.If a receiver is appointed to a company, the company has three days in order to apply for Examinership (it should be noted that the period of three days includes the day of appointment of the receiver and that Saturdays and Sundays qualify to be counted in the period); hence, the practice of appointing a Receiver on Friday afternoons. If a receiver stands appointed to a company for more than three days the company is generally preclude from applying for Examinership.
A receiver may not be appointed after the presentation of the application for Examinership. If the Examinership process is successful the scheme of arrangement will provide for treatment of the secured debt. If the Examinership is unsuccessful, the debenture holder may appoint a receiver on the exit of the company from the court’s protection.
14. What options do I have if I feel that my insolvent company is not viable?If the business of the company is not viable and the company is insolvent it is prudent, having taking appropriate professional advice, to place the company in liquidation. Examinership is appropriate only if the underlying business of the company has a reasonable prospect of survival after the restructuring inherent in the Examinership process. If the business of the company is viable, Examinership offers the best opportunity to the company to gain critical breathing space to work with the Examiner to formulate a scheme of arrangement with the company’s Creditors and to attract third party investment in the business. Experienced Examiners usually have access to Angel investor networks (for example) which may provide the much-needed finance to restructure the company to allow it to trade successfully from an appropriate capital base.
15. I am a creditor of a company in Examinership, what is the status of my debt?If you are an unsecured creditor of a company in Examinership you are prevented from enforcing your debt during the period of the court’s protection. However, how you choose to deal with the company on a day-to-day basis is a matter for you. Usually, the body of unsecured creditors tend to do better in a successful Examinership than they would in liquidation.
Clarke Jeffers & Company Corporate and restructuring team, headed by managing Partner Victor Clarke, specialise in corporate recovery, restructuring and rescue. The team are experienced in assisting SME companies through the Examinership process and advising on all forms of restructure. We are happy to answer any queries or questions that you have. In order to try and make this process easier we have identified a number of frequently asked questions and provided answers which we hope deal with all the main issues arising for any insolvent company considering its future.
Victor is the Managing Partner of the Firm and also the Partner in charge of the Insolvency and corporate restructuring team. Victor has extensive experience and expertise in Examinerships, receiverships, liquidations, schemes of arrangement and corporate restructuring. Victor has acted for State bodies, Banks, Private companies and Insolvency professionals.
Contact Victor directly at email@example.com
Sandra has been a key part of the Firms corporate insolvency and rescue team for the past 5 years. Sandra has extensive experience and expertise in Liquidations, Examinerships, receiverships and corporate restructuring.
Contact Sandra directly at firstname.lastname@example.org
P&A Insolvency services is a market leader in the provision of insolvency services in Ireland. We demand that all our professionals have the highest form of expertise and experience in the commercial sector. We have employed Clarke Jeffers & Co in Liquidations, Company restructures and Examinerships. Their knowledge of the sector and expertise in insolvency matters is hugely impressive. Most impressive however is their ability to turn problems into solutions. Victor and his team are an easy choice for us.
An owner managed public house and restaurant in a provincial town had seen its revenue and profitability decline significantly in the last number of years due to the recession. Like many similar operations thorough the country the owners had expanded the operation during the Celtic tiger years to cater for the increased demand. This necessitated additional borrowings for refurbishment and construction.
Arising from the down turn the business saw revenue reduce significantly and profits turn into losses. The business did not have the cash flow available to allow it continue to make the payments to its banks and suppliers.
The acting Examiners over the 100 day period assisted the owners with a refinancing plan that included:
• Cost reduction programme
• De vestment of noncore assets
• Balance sheet restructure to reduce liabilities by in the region of €600,000
• Agreed revised bank repayment plan to fit the profile of the cash flow generated by the business
• Securing the local jobs of the employees
The public house is now trading successfully and is back in a solvent position
An Entrepreneurial medical device start up was facing liquidation. The business was less than 3 years in existence and had developed some very unique and exciting technology in the medical device sector. As is usual in many early start ups the business was undercapitalised and the projected revenue lines were lower than expected and took longer to deliver. In addition the cost base was greater than projected. So the business found itself running out of cash flow and unable to pay historical debts and at the same time continue to trade forward.
In order to have breathing space to properly assess the commercial option open to the business and owners ,Examiners were called in and worked with the board and local management to finally deliver
• A multinational investment partner that identified the value in a technology combination
• A four way bidding contest for the company ( which originally was facing liquidation)
• Investment of in excess €1m
• Job retention / transfer
• Customer retention
• Company restructured balance sheet
We recognise the fact that if your business is struggling then it can be hard to get the time to visit a Solicitor or seek help. We are therefore taking the proactive approach of offering a free online consultation with our expert team. If you would be interested in this then please fill out the form below and click submit. One of the team will contact you and set up a convenient time to chat.
Free online consultation