In the very short term, the appointment of an examiner to a company provides breathing space for the company, where normal corporate recovery measures are not available. The immediate advantage is the protection of the Court for the company against its creditors thereby enabling it to continue to trade and to attract investment on more favourable terms than would be the case where the threat of the immediate demise of the company is the only alternative.
In the medium to long term, the examinership process facilitates the company’s restructuring by making provision for investment and the sanction of the Courts to a scheme of arrangement with the creditors of the company.
The Start: How is an examiner appointed?
Candidates for examinership?
There are two criteria for determining whether a company is a candidate for examinership; the first being satisfying the tests set out in the Companies Acts, the second being commercial considerations.
At the outset, the company must be insolvent and unable to pay its debts in order to have an examiner appointed. It must also be able to demonstrate that it has a reasonable prospect of survival. In addition, no examiner can be appointed to a company if an official liquidator has been appointed, or where a receiver has been acting for a period longer than three days.
The statutory requirements can be summarised as follows:
1. The company commissions an independent expert’s report, who is typically an accountant. This report must contain certain specific information; most importantly that the company has a ‘reasonable prospect of survival’ as a going concern provided the examinership is successful, and that the likely result of the process would be more advantageous to the creditors than a winding up.
Further expansion on this crucial ‘reasonable prospect of survival’ point is required from the independent expert. Normally their report will point out that the company must secure investment sufficient to facilitate a compromise with its creditors, or scheme of arrangement, to be capable of survival.
2. The independent expert must confirm that there is no deficiency in the finances of the company that is not satisfactorily accounted for and that the company has sufficient funds to trade throughout the period of protection.
3. The independent accountant must supply the Court with the necessary cash flow projections and statements of affairs to vouch the conclusions drawn in his report.
Normally the directors or shareholders of a company petition the Courts to have an examiner appointed. However, creditors of the company, both actual and contingent (including the company’s employees) may also do so. In practice, it is rare for creditors of the company to have enough information about the affairs of the company to successfully petition to have an examiner appointed.
Whether the company is likely to attract investment is the key factor having regard to the examinership option. Among some of the questions that should be considered to determine whether the company is likely to attract investment and is a candidate for examinership are as follows:
- Is the company likely to survive in whole or in part as a going concern, or is the company ‘terminally insolvent’?
- What are the assets of the company?
- What are the liabilities of the company and how are these liabilities secured?
- Are the assets of the company easily sold?
- Are the assets of the company sufficiently large to justify the costs of examinership?
- What is the staffing position of the company (number of staff and length of service) and what will their reaction be to the likely changes following examinership?
- What is the regulatory position of the company including licenses, environmental matters, key customer audits, planning permissions, etc.
- What is the level of outside investment required to formulate a scheme of arrangement to be put to the creditors?
The process to petition to have an examiner appointed is a rigorous one and care must be taken to ensure that all of the statutory tests are met. In addition, it can be a costly exercise and the company must be prepared to commit resources to discharge the costs associated with it.
The Middle: What is the role of the examiner?
The Protection Period
The protection of the Court is offered for a period of 70 days, which can be extended by application to the Court to 100 days and further in exceptional circumstances. Typically, the examiner assumes his role at a time of crisis and of great uncertainty for the company, its creditors and employees.
The statutory duty of the examiner is set out in the Companies Acts. It is to conduct an examination of the company’s affairs with a view to formulating proposals for a scheme of arrangement, for presentation to meetings of the company’s shareholders and creditors, for the ultimate approval of the Court.
Although independent of the directors, in practice however, a significant amount of the examiner’s time will be dedicated to working with the directors of the company to restore confidence in the company and it’s trade where this has been lost.
To enable a company to trade in the protection period the examiner must successfully manage an inclusive process involving the company’s key customers, suppliers, management and staff. The process is inclusive of all aspects of the company’s business and is ‘management friendly’ and in that regard, must be distinguished from the unilateral nature of receivership and liquidation.
The examiner will also immediately communicate with all creditors, customers and staff to explain the process and it’s effect on the company’s ongoing operations.
Certain creditors and staff will often react badly to the news of an examiner’s appointment. It is common for disgruntled creditors with claims for retention of title to move to repossess their property. The company resists these claims with the protection afforded by the Court, thus forming a sound platform for the examiner to sell assets and/or attract investment to provide for the survival of the company.
A key power of the examiner is to ‘certify’ ongoing expenses of suppliers, with the effect that should these suppliers continue to supply the company on credit during the protection period, their post-petition certified accounts will enjoy priority over all other creditors except a fixed charge holder, should the examinership process prove unsuccessful and the company be wound up.
The examiner must carefully monitor the cash flow of the company throughout the protection period to ensure the company trades in accordance with the projections furnished to the Court at the petition stage.
It is important to note that although the examiner has a right to access all books and records of the company and a right to attend all board meetings, the examiner does not usually usurp the executive function of the board of directors. For example, it is unusual for the examiner to become a signatory on the company’s bank account.
The End: How does a Company successfully emerge from examinership?
The Formulation of a Scheme of Arrangement
For the Scheme of Arrangement (“the Scheme”) to be successful the examiner must persuade at least one class of creditors to accept the Scheme before it can be brought before the Courts for approval.
In addition, he must ensure that all creditors within a class are treated the same way. The formulation of the scheme will usually cause some degree of discontent in at least one of the classes of creditors identified by the examiner.
The first task of the examiner is to divide the body of creditors into different classes. The formulation of the Scheme is the examiner’s attempt to share out a limited fund usually following some form of investment, between competing claims of different classes of creditors.
The typical Scheme will involve a secured creditor receiving all the funds owing to them, but sometimes by way of instalments and at times will involve some writing off of interest. The preferential creditors will usually receive a substantial dividend on foot of their liabilities whereas the unsecured creditors will generally receive much less.
The key to having the examiner’s proposals for a Scheme approved by the creditors is to formulate and present the Scheme in such a way that the creditors will secure a more advantageous outcome for themselves by endorsing the examiners proposals, than would be the case should the company be wound up.
A central part of the process is for the examiner to predict the likely attitude of the different classes of creditors to his proposals and formulate the Scheme accordingly. It is often the case that those creditors who vote against the examiner’s proposals feel that they have been unfairly prejudiced by the Scheme and that they would be in a more favourable position if the company went into liquidation.
Following the formulation of the Scheme it must be put to the vote of both a meeting of shareholders and creditors. Once the shareholders and creditors meetings have considered and voted on the Scheme the examiner must revert to the Court with a report on the outcome of the meetings and any modifications of the proposals adopted at the meetings.
This report is designed to indicate to the Court the views of the various classes of the company’s creditors. Obviously the Court will be inclined to approve a Scheme where it enjoys considerable support.
An xxaminer is permitted to formulate only those proposals which make it likely that the company will survive as a going concern, in whole or in part.