Examinership Lite – FAQs
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.
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).
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.
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.
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).
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.
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.
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.
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.
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).
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.
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.
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.
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.
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.
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