What is Examinership?
An Examinership is a process whereby the protection of the High Court is obtained to assist the survival of a company. It allows a company to restructure and it is an alternative to winding up the company in financial difficulties.
The Examinership process was provided for in the Companies Act 1990 and can be a very effective tool in restructuring a struggling companies finances regardless of the reasons behind the financial difficulty.
Entering The Process Becomes Easier
On 22nd November 2012, Minister for Jobs, Enterprise and Innovation announced important changes to the Examinership process which should result in the process becoming substantially more accessible to small and medium enterprises.
These changes will affect small private companies, meaning companies that satisfy two out of the three following conditions will no longer have to apply to the High Court to avail of the protection of examinership:
- Balance sheet not exceeding €4.4million
- Turnover not exceeding €8.8million
- Number of employees not exceeding 50
Once these amendments become law during the latter stages of 2013, a distressed company will be able to apply directly to the Circuit Court for protection and thereafter the Circuit Court monitors the process as opposed to the High Court. The criteria for a successful examinership and approval thereof remain the same as outlined below.
- What Criteria Are Necessary For A Successful Examinership?
- Does the company have a reasonable prospect of survival?
- Does the company have investors ready to proceed with an immediate injection capital?
- Will the company have sufficient working capital to cover the period of Examinership?
- Are there sufficient assets in the company to cover the costs involved with an Examinership?
How Is An Examinership Approved?
- The Creditors of the company must agree to accept a Scheme of Arrangement which is usually to accept a percentage of the debt.
- If the Creditors of the company agree to accept the Scheme of Arrangement, the High Court must then approve the Scheme of Arrangement.
Examinership Outline Plan
Below is an outline plan in relation to an application for examinership and the examinership process itself. The outline plan below is based on a general discussion.
Step 1 – Once the directors have decided on the course of action, an Independent Expert’s Report (“IER”) is required to confirm that the Company has a ‘reasonable prospect of survival’. The IER typically can take one week to prepare and sets out the issues the company has faced and its prospects going forward if restructured. It confirms the employment that will be protected if the company goes into examinership. The preparation work typically is non-invasive but will likely involve an afternoon with the independent expert.
It is of critical importance that all relevant facts and information are disclosed as part of the IER as there is an obligation on a petitioner to make an examinership application with utmost good faith.
Step 2 – A solicitor and barrister are engaged by the Company. A petition and affidavit is then prepared to verify the information included in the IER and also to exhibit all relevant information.
Step 3 – The petition is filed in the Central Office of the High Court – from this time all debts of the Company owed at that time are frozen and no creditor (including a Bank or Revenue) can enforce against the Company. This is Day 1 of the protection period.
Step 4 – Usually on the same day the petition is filed, the Court hears the petition (on an ex parte basis) and gives directions in relation to advertising and parties to be put on notice. The Court will also confirm a date for the full hearing and may also appoint an Examiner on an interim basis.
Step 5 – The full hearing is held usually 7 -10 days after the petition is presented and any creditor is entitled to be heard at this hearing. The Court will then confirm or otherwise the appointment of the Examiner.
It is important to note that the directors retain full executive powers during the examination process.
Initial Stage – The focus during the initial stage will be as follows:
- Ensuring the Company continues to trade as normal
- Making contact with the key suppliers to the Company and arranging meetings where required
- Agreeing terms of trade for the protection period
- Agreeing the position on retention of title
- Meeting with Company employees if required
- Issue correspondence to all creditors
- Assessing the conditions set down in the IER
- Agreeing an investment process, if applicable
Formulating the Scheme of Arrangement – A scheme of arrangement will be required to pay a dividend to creditors to allow the company to emerge from the process having dealt with its legacy debt. This will also provide the mechanism to deal with the secured bank debt. The following will be undertaken as part of this stage.
- Reconciling all creditor balances
- Ascertain the level of funding for the Scheme of Arrangement (see below in relation to funding options)
- Examiner to decide classes of creditors
- Examiner to decide on treatment of each class of creditor
Funding options – in order to formulate a scheme of arrangement there is a requirement for funding to be available to meet the dividend payments to creditors.
The following represent the typical funding options.
- The surplus from trade generated during the breathing space afforded by the examinership;
- The sale of a non-core asset.
- New investment if possible from the existing promoters or by way of external investment from an unconnected third party.
- New bank finance.
Treatment of secured debt – Secured debt can be treated in a number of ways in a Scheme of Arrangement as follows.
- Repayment of the secured debt in full in accordance with existing facility. This does not require the secured creditor to consent.
- Repayment of the secured debt in full in a once off payment. This does not require the secured creditor to consent.
- Repayment of the secured debt at a reduced level over a number of years. This requires the consent of the secured creditor.
- A once off payment to the secured creditor equivalent to the value of its security. This does not require the consent of the secured creditor.
It should be noted that it is possible to compel a secured creditor to release its security against a company as part of a Scheme of Arrangement.
- Once an examiner is appointed there is a requirement to return to Court with a Scheme of Arrangement having already held the meetings of members and creditors within a period of 70 days.
- If at 70 days the examiner has not formulated a Scheme of Arrangement but is in a position to confirm to the Court that an extension of a further 30 days will enable him to do so the Court can extend the time period up to the 100 days.
Creditor meetings – Prior to returning to Court with the Scheme of Arrangement the Examiner must hold meetings of members and creditors.
- At least three days’ notice of the meetings must be provided to the members and creditors
- The creditors will be separated in different classes and a meeting will be held for each class – Example of classes – secured creditor, super preferential, preferential, unsecured, connected and litigation creditors.
- The vote is based on the creditors who participate at the meetings and for a class to vote in favour the creditors must vote in favour by number and value.
- In order to return to Court at least one class of creditor must have voted in favour.
In the case of a personal guarantee the creditor is not in a position to pursue this amount from the individual while the company is under the protection of the Court. Should the creditor wish to be in a position to pursue the amount after the examinership concludes it must follow a very specific procedure. In this regard, the Examiner is required to provide at least 3 days’ notice of the meeting of creditors (at the conclusion of the examinership when approval of the scheme of arrangement is sought) and on receipt of this notice the creditor has 48 hours to offer to transfer its vote to the individual providing the personal guarantee. I have included below the possible scenarios –
- The Company is placed in examinership and the process is not successful – the creditor is entitled to pursue the personal guarantee
- The Company is placed in examinership, the Examiner formulates a scheme of arrangement, the scheme is approved by the Court and the creditor does not comply with the procedures. The creditor is not entitled to pursue the personal guarantee
- The Company is placed in examinership, the Examiner formulates a scheme of arrangement, the scheme is approved by the Court and the creditor does comply with the procedures. The creditor is entitled to pursue the personal guarantee
Click to download : Examinership Outline Plan.pdf
How FM Accountants Can Help?
If you wish to discuss the Examinership process or corporate restructuring generally, please contact Cormac Mohan: firstname.lastname@example.org