Examinership
Given the major slowdown in economic activity in Ireland many companies are now facing financial difficulties and this has led to a significant increase in the number of troubled companies seeking to enter the examinership process. The process of examinership has received considerable media attention in recent months due to a number of high profile companies such as O’Brien’s Sandwich Bars, the Zoe Group, the Lynch Hotel Group and Smart Telecoms applying to the High Court to be placed in examinership.
Examinership is a process whereby the protection of the Court is obtained to assist the survival of a company. Essentially the process gives a company breathing space to deal with its debts and restructure its business. Once a company is placed in examinership, creditors cannot seek repayment of outstanding debts for a period up to 100 days.
The company’s directors, creditors or shareholders can apply to the Court to place the company in examinership. Typically it is the directors of the company who will make the application.
In order to obtain the protection of the Court, a company must illustrate, through an independent accountant’s report, that it has a reasonable prospect of survival as a going concern. Both the High Court and Supreme Court recently rejected the application by the Zoe Group, on the basis that the group did not illustrate that if it was placed in examinership it would have a reasonable prospect of survival.
If the Court is satisfied that a company has a reasonable prospect of survival it may appoint an examiner to that company and the period of Court protection will begin.
Once appointed, the examiner’s function is to literally “examine” the company and to formulate a new financial plan to secure the financial future of the company, known as a scheme of arrangement. Under the scheme of arrangement the examiner will seek to significantly write down the debts due to creditors. The level of the write down will vary from company to company.
The examiner usually tries to save the company by obtaining new investment in the company, selling a certain number of core assets of the company or attracting fresh borrowing. Given the current difficulties in obtaining funding from banks, most successful examinerships are due to investment by third parties.
The examiner must put the scheme of arrangements before a meeting of the creditors of the company for approval. The scheme of arrangement is approved by the creditors if the majority in number and value vote in favour of it. The Court must then ultimately approve the scheme of arrangements in order for it to become binding.
If the Court does not approve the scheme of arrangement or it is not successfully implemented, the protection of the Court is withdrawn and liquidation and/or receivership follows.
During the Celtic Tiger this process was seldom used, but since the deterioration in the economy the number of companies seeking to appoint an examiner has increased substantially.
While examinership can enable the survival of companies for the benefit of its employees and the economy as a whole, not all examinerships will be successful. Recent figures indicate that for every three companies which enter examinership only one will survive and the other two will go into liquidation. This marks a dramatic change in previous success rates. Between 2002 and 2006 approximately 95% of companies entering into examinership survived as viable entities.
Laura Fannin
lfannin@hayes-solicitors.ie