Current Developments

Latest Developments in Examinership: 30th December 2010

Although the second half of the year finally saw a return to minimal growth in the Irish economy, 2010 as a whole will be remembered as a horrendously difficult year for business. However, despite a low rate of appointments, the examinership process enjoyed a remarkably successful year with the vast majority of petitions presented during the year resulting in enterprises and jobs being saved.

2010

Most industries were drawn into the extensive difficulties faced by the economy following the construction and banking collapse of 2008/2009. The year culminated in an undignified EU/ECB/IMF bailout, but other issues such as the two very severe cold snaps in January and December, rock bottom consumer confidence and rising unemployment for much of the year all added to the woes of the SME and large trading businesses of the nation. The challenges that an Icelandic volcano presented to an already beleaguered hospitality sector further tested the economy as the slow drip feed of bad news over the course of the year devastated Irish businesses that rely on consumer spending. The year was to end with the announcement of a general election within weeks of the year end.

Taking into account this negative background, surprisingly the utilisation of Ireland’s formal corporate recovery mechanism remained very low in 2010 with only a couple of dozen appointments over the course of the year from over 1,500 corporate insolvencies.

Low Take-up

Worryingly Irish companies continued to show a low propensity to enter into a formal restructuring process in 2010, by international standards. In the USA, 23% of insolvent businesses enter the equivalent process 'Chapter 11'; in the UK 16% of insolvencies result in the trading 'administration' process. In what should be a very similar type of market economy, Ireland struggles to reach figures of 2 per cent per annum. It appears that if Ireland adopted a similar approach to the USA perhaps 300 or more companies could have been saved in 2010. This gap is not made up by trading receiverships in Ireland; an analysis of the receiverships in Ireland in 2010 shows the majority related to property asset recovery exercises and very few were carried out which resulted in jobs and enterprises being saved. With the evidence confirming that a golden opportunity to save critical jobs continues to be lost, the question arises: why do Irish businesses not embrace the chance to restructure and survive?

Firstly, in the last 2 years there have been a number of very high profile unsuccessful examinership petitions for property development companies, which in all reality were inappropriate candidates for the process in the first place. The mooted cases in question were dismissed as quasi asset recovery exercises which did not meet with the job-saving purpose of the legislation as reiterated by Clarke J in the seminal Traffic Group judgement.

The failure of these petitions unfortunately brought negative connotations to the process in the media and in the mindset of directors and their advisors. Consequently even though the reality is that many fundamentally good trading companies may have been successful candidates for the process in 2010 had they sought court protection, petitioning rates remained low throughout 2010.

Secondly, a lack of awareness of how the process works continues throughout the Irish advisor community, and it is clear that this is very much a self perpetuating problem. The less the process is used, the less those advisors will feel comfortable in advising clients to use it due to a lack of experience of the benefits it can bring to a struggling business. This contrasts with the routine nature of providing Chapter 11 advice in the USA. Advisors in Ireland were happy throughout the years 1995 to 2008 to rarely be called upon to counsel struggling or insolvent businesses and the skillset to chart a course for clients through choppy economic water was lost in many professional firms.

Third is the perceived cost of the process resulting from the fact that examinership is associated with expensive High Court legal charges. However many advisors remain unaware that there is no requirement for funds to be in place 'up front' for an examination as the costs of the process are typically funded from investment or sale of assets at the end of the protection period. In addition real costs of examinership have continued to fall over 2010 and examinations have been carried out in Ireland in 2010 for as low as an all-in cost of €50k.

Finally, the continuing hostility of certain sections of the secured creditor community to the process has hindered it's more widespread development, as illustrated by the McInerney case in the final quarter of 2010. Perhaps understandably, certain banks have difficulty in accepting that their normally unassailable fixed charge security can in certain instances be compromised by an examiner's scheme of arrangement. Banks also fear the costs of the process, as these will rank ahead of a bank’s fixed charge. However, the 'cramming down' of secured debt (to use the rather inelegant Chapter 11 expression) remains almost unknown in Ireland from the hundreds of examinations that have taken place since 1990.

Nevertheless, taking into account the collapse of property prices, it seems likely that objections from secured creditors to compulsory write downs of their debt are likely to continue in cases in the future, as arguments will continue to be made that longer term ‘NAMA style’ receiverships may ultimately return a greater amount on foot of a bank’s security than an amount payable by cutting the bank out at the bottom of the current property market cycle.

Successes

Notwithstanding these reasons which go some way explain the low take up of the process, the successes of examinership continued unabated throughout 2010, with the saving of thousands of jobs around the country.

Examples included over 400 jobs in health services agency Servisource, the 200 jobs at the Jackie Skelly chain of fitness clubs, the 50 jobs in the Grand Hotel in Wicklow and over 300 jobs at the airline Aer Arann, to name only four.

The examinership of Aer Arann resulted in a prolonged confirmation hearing for the examiner's scheme arising from the objection of the Revenue Commissioners, who signalled a change in policy directly after that case.

Preferential Creditors

Against the backdrop of depleting government coffers, in recent weeks the Revenue have now officially communicated with examinership practitioners that their heretofore largely neutral stance in examinership cases may change going forward, in particular in relation to super preferential PRSI (employee PRSI deductions).

Revenue now insist that super preferential debt must be paid in full as part of any scheme of arrangement and that the scheme must also provide for a substantial preferential dividend. No definition of what a ‘substantial’ preferential dividend should be has been offered by Revenue. The Revenue has indicated that they will object to any scheme in the future that does not meet these criteria even if the scheme does not unfairly prejudice them in comparison to their recovery position in a winding up.

There appears to be two reasons for the Revenues change in policy. Firstly and quite obviously they wish to recover greater sums from insolvent companies with the continuing background pressure on government finances. Secondly, they wish to set an example across the economy that company directors must pay over fiduciary taxes deducted from employees; especially the employee 'super preferential' portion of PRSI.

Developments in Examinership: 8th January 2010

Neil Hughes is managing partner of Hughes Blake Chartered Accountants.
+353 1 66 99 999 www.hughesblake.ie  www.examinership.ie

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