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| Financial Law Update | Back to article summary. |
| Examinership - preserving the core value of a business | ||
| Julie Murphy-O'Connor |
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| The recent increase in use of the Irish corporate rescue process is reflective of the recent global downturn in financial markets, with its inevitable knock-on effect on the Irish property market which is heavily reliant on bank funding. This increased use of the examinership process also reflects an increased awareness in the business community that traditional insolvency procedures such as liquidation and receivership do not always allow realisation of the potential value of the underlying business of an insolvent company, writes Julie Murphy-O'Connor | ||
So far 2008 has seen a considerable rise in the number of petitions to put companies into the examinership process. Official records show that the number of such petitions in 2005 was 4, rising to 8 in 2006, and with a dramatic increase to 25 in 2007. So far this year, as of 29 February 2008, 5 such petitions have been presented.
This recent increase in use of the Irish corporate rescue process is reflective of the recent global downturn in financial markets, with its inevitable knock-on effect on the Irish property market which is heavily reliant on bank funding. This increased use of the examinership process also reflects an increased awareness in the business community that traditional insolvency procedures such as liquidation and receivership do not always allow realisation of the potential value of the underlying business of an insolvent company. The process itself can be quite costly, and historically Ireland had a relatively limited number of companies large enough to bear the costs of the process. The Celtic Tiger has seen the emergence of a substantial number of companies with assets of a sufficient value to justify the use of examinership. Amongst recent examinerships have been some high profile cases, including Structured Credit Company and ISTC on the financial services side, and Maryborough Construction, HC Developments and McEnaney Construction on the construction side. Other examples include MobileAware, Iqon Technologies, Agcert and Toni & Guy Hairdressers. Many of these have attracted media comment, resulting in an increased awareness of the process amongst the business community. What is examinership? This procedure was introduced by the Companies (Amendment) Acts 1990 and 1999 to provide a mechanism for the rescue and return to health of ailing, but potentially viable, companies. Examinership allows a company a period of protection from its creditors, within which time the company and the examiner endeavour to find parties to put together a survival plan usually entailing fresh investment and the writing down of creditors’ claims. Although there are a number of differences, this process is similar in many respects to Chapter 11 in the US and, to a lesser extent, administration in the UK. During the protection period, although management stays in control of the company, the court appointed examiner is obliged to examine the financial situation of the company and endeavour to put together a package or scheme of arrangement which will be acceptable to the creditors, and to the court. If the scheme of arrangement is approved by the court, it becomes binding on all parties, even though not every class of creditor may have agreed to the proposals at the meetings of classes of creditors which the examiner is obliged to convene. The examiner's proposals usually entail fresh investment in the company, writing down creditors’ debt and sometimes changes to the company’s management structure. To approve the scheme, the court must be satisfied that the creditors will not fare worse under the proposed scheme than they would in a liquidation of the company. In order to succeed, firstly the company must have an underlying successful business and secondly, the examinership normally takes the full 100 day protection period allowed by the legislation, and in order to work, the company must be able to fund itself for that period (including paying suppliers, taxes, etc.). Comparison with the UK and the US While Irish examinership has certain similarities to the UK administration procedure there are nonetheless significant differences between the two procedures. It is perhaps closer in nature to the US Chapter 11 Bankruptcy procedure, embracing the concept of ‘debtor in possession’. In the UK, the administrator takes over the management of the company to the exclusion of the directors, and is appointed to manage the company’s affairs, business and property for the benefit of its creditors. In Ireland, on the other hand, the directors retain their powers of management and control (except in exceptional circumstances where the court orders otherwise). The examiner’s principal function is to formulate (in conjunction with the company) a scheme of arrangement to facilitate the survival of the company for approval by the High Court. In the US, the debtor in possession prepares the rescue plan, with exclusive rights to do so for the first four to six months of the work-out, whilst overseen by the court and subject to court approval. Whilst administration is the UK corporate rescue process, its objectives can either be to rescue the company as a going concern, or to realise the company’s property and achieve a better price for the company’s assets or otherwise realise their value more favourably for the creditors as a whole than would be likely if the company were wound up. It is seen as a more creditor-friendly process than the examinership process or the Chapter 11 process, which are seen as more debtor-friendly. The objective of the examinership process is purely to rescue the company and the whole or part of its business as a going concern, and in so doing to achieve at least as good an outcome for creditors as a whole as would be likely if the company were wound up. Examinership is a hybrid of the English and US corporate rescue systems, and influences from both regimes are apparent. How successful is the process? Having the pressure from creditors eased can allow a company the room to restructure, to renegotiate and to re-energise itself to such a point that it can stand on its own two feet again and continue trading. Over 80 per cent of Irish companies which enter the process end up doing just that. Of course, in order to be successful, the scheme of arrangement must have the support of a majority of at least one class of the company’s creditors to accept less than their full debt. However, given that the alternative is liquidation, in which case creditors will usually get less than they would under the proposed scheme, it is usually possible to obtain the requisite support. In addition, they can usually be paid more promptly than they would do in a liquidation, while still retaining a valuable trading partner. Overall, the examinership process in Ireland is working well. Whilst there were some teething problems in its initial stages in the early 1990s, many of these have now been ironed out by virtue of the 1999 Amendment Act, and the banks, which were once broadly opposed to the concept, have in our experience become more accepting of the procedure and have recognised that it can even work to their advantage once handled carefully by the appropriate advisors. An unsuccessful examinership will almost invariably end in liquidation. Whilst liquidation may be the end point, examinership has in the past represented an 80 per cent chance of staving off that particular eventuality, and this is something to consider as we enter into an uncertain period for Ireland’s economy in 2008. |
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Julie Murphy O’Connor is a partner in the Corporate Restructuring and Insolvency Group at Matheson Ormsby Prentice. She can be contacted by phone: +353 1 232 2000 or by email: julie.murphy-oconnor@mop.ie. Further information on the firm is available at www.mop.ie |
