Examinership lite: a look at the changing examinership process and SMEs

May 2014 | LEGAL & REGULATORY | BANKRUPTCY & RESTRUCTURING

Financier Worldwide Magazine

John Donnelly once said, in an article in the Commercial Law Practitioner, that it is a tale as old as Methuselah that the appointment of an examiner leads to the company’s dissolution. Like the story of Methuselah, this is completely unsubstantiated. The reality is that by entering into examinership, far from waving the white flag, the company is in fact fighting for its survival. Hughes Blake, Chartered Accountants, in their index on examinership, have stated that over 832 jobs in Irish small and medium enterprises (SMEs) were saved in 2013 through examinership. Figures released by the Irish Court Service confirm that of 29 examinership applications in 2012 an examiner was appointed in 28 of these cases, which suggests that the Irish High Court is supportive of the examinership process.

What is examinership?

The process of examinership was introduced into Ireland by the Companies (Amendment) Act, 1990 (the 1990 Act), its aim being to rescue ailing companies where it could be demonstrated that they had a ‘reasonable prospect of survival’.

Section 2 of the 1990 Act (as amended), inter alia, states that where a company is unable to pay its debts as they fall due and no application has been made to wind up the company, the High Court can then appoint an examiner if it can be shown to the satisfaction of the High Court that the company has a ‘reasonable prospect of survival’. On entering examinership the company enjoys a moratorium on proceedings, execution and enforcement of secured and other rights against it for an initial period for 70 days which can be extended by a further 30 days.

Once an examiner is appointed, his primary objective is to formulate proposals for a scheme of arrangement (the Proposals). The Proposals (which will usually involve some form of write-down of creditor claims) must first be considered by the various classes of company creditors and, if approved by a majority in number representing a majority in value of those voting (by person or by proxy) at a meeting of at least one class of impaired creditors, the Proposals are then put before the Court for consideration. If the Court confirms the Proposals, the Proposals become binding on the relevant company, its members and creditors.

Examinership and SMEs

While there are many benefits to the examinership process, the perception persists that the process can be expensive and accordingly is more suited to large companies. This general negative perception, often perpetuated by the media, coupled with the inherent difficulties for smaller companies in accessing the Irish High Court (usually located in Dublin), is a likely reflection of the very low take up figures for examinership. As previously stated there were only 29 examinership applications in 2012; however, this is in contrast to 269 petitions for court liquidations during the same period.

‘Examinership lite’

According to the Department of Jobs, Enterprise and Innovation there are over 20,000 SMEs in Ireland, employing over 650,000 people. In an effort to make examinership more accessible to these companies the Companies (Miscellaneous Provisions) Act, 2013 (the 2013 Act) was signed into law on 24 December 2013. Although the provisions of section 2, which govern the proposed changes to the examinership regime, have not yet come into effect, we have been advised that this section will be introduced later in April or during May of this year.

Once in effect, it will be possible for the applicant to petition its local Circuit Court to place the relevant ‘small’ company into examinership, which will hopefully result in Circuit Court judges being instrumental in restructuring companies within their jurisdiction, thus preserving vital employment in that jurisdiction. This is the main amendment introduced by the 2013 Act. The aim is to establish a more cost effective process, facilitating greater access for SMEs. Otherwise, the process remains largely unchanged.

It is anticipated that by facilitating access by SMEs to the Circuit Court examinership will prove more accessible and attractive for SMEs. The High Court, however, still retains jurisdiction to deal with the examinership of a ‘small company’ if the relevant applicant so chooses to apply within this jurisdiction.

The 2013 Act prescribes the statutory criteria to be satisfied in order for a company to avail of the ‘examinership lite’ regime. The company must be a ‘small company’, which meets two or more of the following qualifying conditions with respect to the relevant year it enters examinership and the preceding year: (i) turnover does not exceed €8.8m; (ii) balance sheet total does not exceed €4.4m; and or (iii) average number of company employees does not exceed 50.

It is hoped that the introduction of the 2013 Act will encourage SMEs to apply for examinership. The records of the Irish Courts Service suggest that legal costs are 30 percent less in the Circuit Court than in the High Court; however, unlike other court procedures, the application costs in an examinership are not always the most significant cost. The fact that the examiner is obliged to stand appointed over the relevant company for the entire period of protection (usually 100 days) and must oversee the process including reporting to the Court at intervals, can lead to significant costs being incurred. These costs can, however, be reduced considerably if cooperation during the process is received from senior management and the Proposals are confirmed by the Court as soon as practicable during the protection period; the shorter the relevant period the less costly it proves. Further, it is conceivable that the Examiner’s costs for the new Circuit Court examinership regime will reduce over time due to market forces.

Conclusion

While the 2013 Act is to be welcomed as a positive step towards assisting struggling SMEs, it remains to be seen whether there will be a substantial increase in companies going down the ‘examinership lite’ route. If considering this option, potential applicants should be cognisant that while the new regime will hopefully reduce costs, for most companies some form of investment will be required and there is a possible risk of loss of control. While the High Court has always been supportive of examinerships (oftentimes to the exasperation of creditors), it remains to be seen whether Circuit Court judges, generally unfamiliar with the process, will show the same level of enthusiasm to this new regime that the High Court has shown to date. In any event it will be interesting to see how this new examinership tale unfolds following commencement of section 2 of the 2013 Act.

Ashling Walsh is a partner and Niamh O’Connor is a solicitor at Ronan Daly Jermyn. Ms Walsh can be contacted on +353 (0)21 4802 700 or by email: ashling.walsh@rdj.ie. Ms O’Connor can be contacted on +353 (0)21 4802 700 or by email: niamh.oconnor@rdj.ie.

Ashling Walsh and Niamh O’Connor

Ronan Daly Jermyn