Current Developments

Latest Developments in Examinership: 8th January 2010

The Zoe Group saga which dominated front pages over many months in the summer of 2009 brought Ireland’s formal corporate recovery mechanism into sharp focus.

Examination; or examinership as it has now become colloquially known, underwent formal legislative change in 1999 but now as it approaches twenty years on the statute books, the practice of examinership is still evolving rapidly due to developments in case law. It is clear that the 2009 decisions of Justice Clarke in refusing to confirm the high profile Laragan Developments scheme of arrangement and the refusal of both Justice Kelly and Justice Clarke to appoint an examiner to the Zoe Group “raised the bar” in relation to the process; from the point of view of both the types of company that will qualify for examinership and also the types of schemes that will be approved by the High Court. Perhaps the examinership process will never return to the 95% success rate enjoyed in the period 2004 to 2006. However it was reported in the first week of 2010 that following a drop in the success rate of examinerships at the onset of the recession in Ireland, a success rate of two-thirds was recorded overall for 2009.
This recent improvement in the success rate, taken together with a more rigourous approach of the judiciary should be hugely beneficial in the long run to restoring the faith of the economy in all of the positive aspects of the examinership process: the protection of an insolvent trading business with a reasonable prospect of survival, thereby allowing it to continue to trade and restructure, preserving employment, goodwill and work in progress, all the while delivering a better return to creditors than would be the case in a winding up.

The Purpose of Examinership

Examinership is not about maximising return in a quasi-asset recovery exercise. The protection of the High Court through examinations has been responsible for the saving of many thousands of jobs in Ireland in the past number of years and clearly, a credible and robust formal recovery mechanism has a crucial role to play in Ireland as the economy suffers in what appears may be a prolonged recession. In fact in the now seminal Traffic Group Case in 2008, Justice Clarke said: “It is clear that the principal focus of the legislation is to enable in an appropriate case, an enterprise to continue in existence for the benefit of the economy as a whole and, of equal, or indeed greater, importance to enable as many as possible of the jobs which may be at stake in such enterprise to be maintained for the benefit of the community in which the relevant employment is located. It is important both for the court and, indeed, for examiners, to keep in mind that such is the focus of the legislation. It is not designed to help shareholders whose investment has proved to be unsuccessful. It is to seek to save enterprise and jobs.”

Formal Developments: The Independent Accountant

The 1999 amendments to examinership legislation in Ireland had already raised the bar considerably in relation to the types of companies that qualify for the procedure. In particular these amendments introduced the Independent Accountants Report (“IAR”) which is now a necessary part of the proofs to appoint an examiner. The IAR evidence must demonstrate to the Court the “reasonable prospect of survival” of the company. Following the questioning of the role of the auditors in the preparation of the IAR by Justice Kelly in refusing the first Vantive / Zoe application in July 2009, it seems that the practice of a company’s own firm of auditors preparing the IAR is likely to become increasingly a thing of the past.

In the period 1990 to 1999, the information in what is now the IAR was included in the first report of the examiner to the Court, i.e. a report prepared by someone who had no prior professional relationship with the Company. Notwithstanding the provisions of the 1999 Act, a strong argument can always be made that the company’s own accountancy/audit firm is not completely independent when it comes to the petition. The reasons for this are clear: if the petition fails, at the very least that firm stands to lose their audit client and possibly whatever WIP they have accumulated in relation to ongoing work for the client. They therefore have a vested interest in the petition’s outcome and could be easily perceived to be conflicted.

SIP 19B

The Statement of Insolvency Practice 19B issued by the CCABI in January 2009 means the Independent Accountant now must approach the preparation of the IAR as a non-audit “assurance engagement”. Essentially, the CCABI responded to criticisms by Justice Kelly in late 2008 of standard “formulaic” type reports drawn from precedents in other cases and which offered no real insight into the company’s true prospects for survival.

In practical terms, the SIP means that the preparation work required for the average report for even a small company has gone from one to two days work to perhaps three to four days work or even longer. The length of time taken to prepare the Vantive IAR was specifically questioned at the petition hearing.

Further developments to SIP19B are expected shortly.

The Funding of Schemes of Arrangement

Some of the most rapid developments in examinership have occurred in the funding of schemes of arrangement. The finding of fresh investment for the insolvent company is rightfully seen as a key part of the process. Indeed, it is common now at the initial petition stage of an examination for some form of evidence to be made available to assist the Court that at least one investor is considering investment to facilitate the company coming out of examination. Examinerships can also be funded from new borrowings such as invoice finance or the sale of non-core assets of the business.

Only a matter of a few years ago examiners would only satisfy themselves as to the availability of an investor’s funding by securing documentary proof from the investor that such funding was available. The collapse of the Antigen examinership and the litigation that followed altered very substantially the thinking of the judiciary in relation to the financing of schemes and now invariably at the final confirmation hearing questions will be asked of the examiner regarding the absolute certainty of funding.
Now, it is a brave examiner that will bring a scheme before the High Court without the necessary funds for the scheme safely squirreled away in their solicitor’s client account. In fact, current practice is now developing that a Designated Trust Account (“DTA”) is opened by the company or the examiner to ensure even greater certainty that the examinership dividends are ultimately paid out.

Re-assurance for Secured Creditors following Judgement in Tony Gray & Sons Limited Examinership

The judgement in November 2009 of Justice Clarke, confirming the scheme of arrangement in the successful Tony Gray & Sons Limited examinership will come as reassurance to the secured creditor community in Ireland. Because of the unusual circumstances that pertained in the case, the Court approved the examiner’s proposals only because the Scheme provided for its fixed charge secured debt to be paid in full, including interest. The decision came after an unsecured creditor fought a four-hearing battle to overturn the scheme and have the company put into liquidation. Tony Gray and Sons Limited have been trading for 51 years, building and selling truck bodies outside Enfield in County Meath. The background to the case was that the Company suffered a devastating fire and two break-ins in 2008 that led to the Company becoming insolvent. I was appointed examiner in August 2009. The secured creditor was owed €1.4m by the Company, secured with a fixed charge on the Company premises at Hill of Down. However, the premises were only valued at €700,000.

The Scheme of Arrangement was funded by the proceeds of an insurance claim. No new funds were introduced by the shareholders or directors. The Scheme of Arrangement allowed for repayments to commence on half of the secured debt immediately, with a two year moratorium on capital and interest payments on the second half of the debt; with euribor interest only accruing for 24 months on the second €700,000. However, critically the full €1.4m bank debt was to become payable by the Company with effect from January 2012.

In assessing the Scheme in the context of the unsecured creditor’s objections, Justice Clarke was concerned that the written down creditors of the Company were being unfairly prejudiced by the Scheme in light of the fact that the shareholders were to retain 100% of the Company shares post-examination and no new funds were being invested. However, the Court ruled that because the full secured bank debt would “kick in” in 2012, he held that the shareholders were not unduly profiting from the preferential and unsecured creditor write-downs. Justice Clark went on to approve the Scheme of Arrangement on that basis.

In light of the recent upturn in the number of examinerships in Ireland (129 in the past three years), secured creditors have become increasingly nervous of just how far their rights can be compromised by the Courts in examinership cases. Notwithstanding the unusual circumstances of the Tony Gray and Sons case, secured creditors should gain comfort from the fact that the reason given by the Court for the confirmation of the Tony Gray & Sons Scheme was that the Scheme provided for the secured bank debt to be paid in full.

Raising the Bar

A tightening of examinership practice that leads to increasing success statistics and the raising of the bar for companies to both qualify for and successfully emerge from examination should be hugely beneficial in the long run in restoring the confidence of Irish business people and secured creditors in all of the positive aspects of Irelands formal corporate recovery process.

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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