Placing A Company In Examinership – The Legal Process

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Time-Frames

The time-frame of the legal process involved from the point where the solicitor initially meets with the Petitioner in the first instance to the point where the legal team and clients are present in the High Court presenting an Examinership Petition before a High Court judge can be very short indeed, a matter of weeks in some cases to a matter of days or hours in others. The time required to prepare the Company for an Examinership process often depends on the circumstances of the Company and the activity of its creditors in seeking to enforce other legal remedies to recover their debts.

For example, if a bank appoints a Receiver to manage the Company’s assets once it establishes that the Company is insolvent or that its security over the Company’s assets may be in some danger, a Petitioner has only a period of 3 days in which to petition the High Court to appoint an Examiner instead of the Receiver provided the Petitioner meets the minimum requirements to ask for the High Court’s protection for the company from its circling creditors.

If the company is placed in Examinership it will be protected by the Court for a period of at least 70 to 100 days which can be extended further by the Court if the Examiner requires more time to conclude a scheme of arrangement (which shall include a fresh investment of capital in the company in Examinership) or if there are other reasonable grounds for doing so.

Company must be ‘Insolvent’

It is important to note that only an ‘insolvent’ company can be placed under the protection from its creditors by the High Court in Examinership. An insolvent company is a company that cannot pay its debts as they are falling due and where there are insufficient assets in the Company to discharge its liabilities.

The Independent Accountant appointed to review the Company’s affairs and financial position must conclude that the company is in fact ‘insolvent’ before a Petition to have the Company placed in Examinership can be even considered.

Persons Entitled to Apply to the Court

Section 2 of the Companies (Amendment) Act 1990, as amended provides that the following parties have the legal capacity to petition the High Court to place an insolvent company into Examinership:

• the company itself;
• the directors of the company;
• a creditor, or contingent or prospective creditor (including an employee), of the company;
• members of the company holding at the date of the presentation of a petition under that section not less than one-tenth of such of the paid-up capital of the company as carries at that date the right of voting at general meetings of the company; or
• by all or any of the above parties, together or separately.

Legal Documentation

The initial application to place a company in Examinership is usually made on an “ex-parte” basis meaning that they are made without notice to any other party. At the directions hearing the Court will direct the Petitioning Company to place a variety of persons on ’notice’ of the application in advance of the full hearing on the Petition (which will usually include the Revenue Commissioners, the principal secured lenders and the largest trading creditors).

The following legal documentation will be required by the High Court to examine a Petition to place an insolvent Irish company under the protection of the Court by seeking to put the company into Examinership pursuant to the Companies (Amendment) Act 1990, as amended:

• Ex-Parte Application
• Petition from a person with standing to petition the High Court to seek to have the insolvent company placed under court protection (“the Petition”);
• Independent Accountant’s Report (“the IAR”);
• Verifying Affidavit from a director, creditor or other party confirming the contents of the Petition and the conclusions of the Independent Accountant’s Report (“the Verifying Affidavit”);
• Affidavit of Suitability to be sworn by a third party confirming the suitability of the nominated Examiner to be appointed as examiner and/or interim examiner of the Company (“the Affidavit of Suitability”); and
• Letter of Consent from the Nominated Examiner consenting to accept the appointment if the Court accepts the Petition and places the Company in Examinership.

Ex-Parte Hearing

The legal application process commences by way of an ex-parte application to the High Court for the following reliefs/orders from the Court:

1. An order admitting the insolvent company to the interim protection of the Court, together with an Order appointing the same insolvency practitioner as the Examiner to the company;
2. Directions as to the hearing of the Petition presented;
3. Directions as to parties on whom the Petition should be served and as to the mode and time of service;
4. Directions as to whether the Petition should be advertised and, if so, how it should be so advertised;
5. Such further or other orders on the Petition as the Court may seem appropriate; and
6. If the Court is satisfied that the forms have been met and that the Petitioning Company is a suitable subject of the Court’s protection the duty judge will set down a return date for a full hearing of the Petition and make certain orders that the main creditors of the Company are notified and that public adverts are placed in 2 daily newspapers and one local or regional newspaper circulating in the area where the Company carries on its main business. The period between the ex-parte application and the date of the full hearing of the Petition (10 to 14 days usually) is known as the “interim-period”. The Petitioner may ask the Court to appoint an “Interim Examiner” to the Company in this period. This is an exceptional order. The Petitioner will need to satisfy the duty judge that the appointment of an Interim Examiner is necessary in the particular circumstances of he Company and/or its undertaking. The Petitioner bears the onus of proof here and it is a fundamental error to assume that the appointment of an interim examiner is a foregone conclusion. If the particular circumstances of the Company warrant the appointment of an Interim Examiner, an application should be made on the day of presentation of the Petition for n order to appoint a nominated insolvency practitioner as the Interim Examiner until the full hearing of the Petition or such other date as the Court shall deem fit.

It is entirely within the Court’s discretion to appoint an Interim Examiner. Some of the suitable bases put forward for the appointment of an Interim Examiner are:

• The Interim Examiner should be appointed to continue / engage in immediate negotiations with the main lender.
• The Interim Examiner should be appointed to continue / engage in immediate negotiations with a landlord.
• The appointment of an Interim Examiner would have a material positive impact upon the attraction of further capital investment in the company.
• The risk of the extension of protection without the appointment of an identifiable interim examiner will result in instability of the supply of necessary deliveries of products to the company.
• The appointment of an Interim Examiner will benefit the employees of the company in some tangible way.
• Any other reason specific to the business and current position of the company that would lead the court to the conclusion that the appointment of an Interim Examiner for the interim period between the presentation of the Petition and the hearing return date would support the reasonable prospects of survival of the company and its undertaking.

Full Hearing

In advance of the full hearing (also known as the “second-return date”) of the Petition before the High Court, any notice party or creditor will have the opportunity to lodge a replying affidavit which the judge can examine in the context of the full hearing. Any objections to the Petition can be set out on affidavit and in some cases an alternative examiner may be nominated. .

In some cases a lender/bank will oppose the Petition on the second return date if it forms the view that the Examinership may be contrary to its interests which would be better served by way of the appointment of a Receiver / Manager pursuant to the rights likely contained in their debenture. This usually results in an adversarial contest where the interests of the secured creditor are set against the interests of the general body of creditors.

Counsel for the Petitioner must also satisfy the Court that all of the orders and directions given at the ex-parte hearing have been complied with and the Court will need to be satisfied that all of material considerations have been attended for the ‘examination’ of the company to continue.

The Court will hear submissions by Counsel for other notice parties or interested parties with standing. The Court may dismiss or accede to the Petition appoint the Examiner and make all such other appropriate orders as to the further conduct of the Examinership.

The Petition

The Petition is the foundation legal document which Counsel for the Petitioner will refer to when petitioning the Court to place the Company in Examinership. It usually contains the following material information:

• Background information to the Company’s demise and its trading history;
• Details of the company’s ownership and its directors information;
• The number of employees of the company and the number of jobs at stake;
• The impact that a winding up (or trading receivership) of the company would have on the employees and unsecured creditors of the Company if the Peition for Examinership fails;
• The prospect and likelihood of the survivial of company and its business if a scheme of arrangement can be established with its creditors; and
• A detailed analysis of the material information and conclusions drawn by the Independent Accountant as contained in the IAR (which is appended to the Petition).

The contents of the Petition are further verified by the Verifying Affidavit to be signed by the Petitioner or a representative of the Petitioner (see paragraph below entitled ‘The Verifying Affidavit’).

The Independent Accountant’s Report (IAR)

The likelihood of success or failure of the application is founded upon the evidence contained in the pre-petition report prepared by the Independent Accountant. The identity of the Independent Accountant is a matter for the Petitioner; however, in view of the vital importance of his report careful consideration should be given to retention of an experienced and knowledgeable insolvency practitioner. . The extension of protection of the High Court is a discretionary remedy and given that the High Court is burdened with a plethora of such applications, the Court examines critically the evidence and material submitted supporting the premise that there is a reasonable prospect of the (on-going) survival of Company.

The Petitioner must discharge its burden as to the onus of proof;

• that it is deserving of the extension of protection;
• that the extension of protection is necessary; and
• that it is reasonable to conclude that the company will emerge from the period of protection with the on-going prospect of survival.

The weight to be attached to the accountant’s opinion will depend on the degree and extent to which the author supports that opinion with his or her own objective reasoning and the appraisal of material or factors relied upon for reaching his or her conclusions. The presence of unsupported mere assertions in the IAR will likely lead to the refusal of the Petition.

Of specific importance for inclusion and robust analysis in the IAR are the following matters:

• The tax affairs of the company;
• The cost reduction plan(s);
• The turnover generation plan and any marketing initiatives to be employed;
• The previous dealings with the employees should be detailed in context of the reduction of the cost base as should the proposed future dealings with the employees. The IAR would benefit from a confirmation of the support of the employees for the ‘slimmed down’ business model and /or any proposed changes to the terms and conditions of the employees.
• A detailed treatment of the debt burden and dealings with the principal lender/bank;
• A detailed treatment of any leasehold burdens and dealings with the landlord(s);
• Outside investment: the IAR should address directly whether the Company will survive in the absence of the fresh capital or not. The Independent Accountant should provide his/her opinion, and the basis / assumptions for said opinion, as to the reasonable likelihood of the attraction of outside investment; and
• Creditor support for the Petition.

The Verifying Affidavit

Where a Company itself petitions the Court to place itself in Examinership, the contents of the written Petition made by the Company require verification by a suitable officer of the Company who can swear that the contents of the company’s Petition are true and accurate in all respects. Therefore, one or more of the directors of the company are best placed to swearing such an affidavit which will also be lodged with the Petition, the IAR and the other court documentation which is dealt with below.

The Affidavit of Suitability

This document should be sworn by an independent solicitor who knows the nominated Examiner and who can vouch for the ability of the nominated Examiner to conduct the examination of the relevant company in a professional and experienced manner. The form of wording typically found in such an affidavit includes the following averment on behalf of the deponent:
“I say and believe that [nominated examiner] has developed an expertise in insolvency matters over a long number of years in practice acting in examinership, liquidations, corporate recovery and general insolvency matters. From my previous dealings with him, I say that he is a suitably qualified person to act as Interim Examiner and/or Examiner of the above mentioned company should this Honourable Court so direct.”

Examiner’s Letter of Consent

Unless a formal signed letter of consent is presented to the Court from the nominated examiner consenting to act as the Examiner, he is unlikely to be appointed by the Court regardless of whether or not all of the other legal documentation is in order and the judge affords it the protection of the Court. Therefore it is important to ensure that such consent is available, particularly if a creditor wishes to appoint an alternative nominee Examiner for whatever reason.

Protection Period

The Court retains a close supervisory function during the period of protection. The Examiner is required to report regularly to the High Court.

From the date of the presentation of the Petition, an initial protection period of 70 days is given to the Company which means that no creditor can pursue any debts owned by the company during said period. If no scheme of arrangement has been finalised by the Examiner after 70 days then this period can be extended for a further 30 days bring the total protection period to 100 days. In special circumstances, and provided that the Court is satisfied with the Examiner’s explanations for a further extension, the 100 day protection period may be extended even further, however, this is more the exception than the rule.

If no scheme of arrangement can be formulated by the Examiner or a scheme is proposed but rejected by the majority of the creditors and/or the Court declines to approve same, then it is likely that a Receiver or a Liquidator will be appointed to the insolvent company at that juncture and the protection of the Court will lapse.

Circuit Court Examinerships

The Examinership process has saved numerous enterprises and the jobs they provide to their communities particularly in the last five years.. The process is complex, specialised and requires the input of suitably experienced professionals to deal with complicated matters in a time pressured environment. The substantial cost associated with such a process has been the subject of well-founded criticism as this cost burden may serve to exclude suitable SME enterprises from the process.

Legislation is to be enacted in the very near future providing for Examinership at Circuit Court level. This welcome initiative is designed to be more flexible and economical for SME companies seeking temporary protection to allow the restructuring of their business and to maintain badly needed employment in the Irish SME economy.

Conclusion

If you have any queries whatsoever regarding the Examinership legal process then please do not hesitate to contact Edward Johnston directly at ejohnston@gjs.ie.