Promoters retain control
A liquidation or receivership is marked by the director’s immediate loss of control of the company.
In most cases the promoters of a company are personally and financially linked with the company and most will do what they can to help ensure that the effect of the insolvency of the company will be mitigated to the extent possible on the staff, the customers, the suppliers to the company and indeed themselves.
In addition, normally the promoters of the company are the people most familiar with the company, likely investors, industry colleagues and other companies that may be interested in the opportunities presented by the examinership.
The process facilitates the promoters mining their knowledge of the industry to find a party to invest and thereby reduce the effect of the situation on those least able to protect themselves.
Protection of the company during the process
An obvious advantage of examinership for a company is the avoidance of numerous risks for the company, in particular:
- A receiver cannot be appointed by the company’s debenture holder while under the protection of the Court
- A petition cannot be presented to the Courts to have an official liquidator appointed
- No goods may be seized or claimed by any creditor through the Sheriff, no goods held under a lease or a hire purchase agreement may be repossessed by the leasing company and no goods the subject of retention of title can be repossessed without the consent of the examiner
- No other proceedings may be commenced against the company without the consent of the Court
- Personal guarantees cannot be enforced during the examinership process. In certain circumstances, a personal guarantee may not be valid following the approval of the Courts by the examiner’s proposals for a scheme of arrangement
Company maintains intangible assets
In an increasingly regulated market often one of the most difficult things for growing companies to achieve, are the regulatory approvals appropriate to the industry sector. Delays in granting approvals, planning permission, licenses etc., can often frustrate a company’s ability to expand or to take advantage of market conditions.
Once certain approvals are obtained, however they remain assets of the company, of use only to the company and are not transferable to third parties.
In addition to formal approvals required by statute, in many circumstances industries have further due diligence and key performance indicators between supplier and customer that extend beyond statutory requirements.
Typically for example, retailers that are large volume purchasers of items that may be prone to product liability claims will carry out research about manufacturing processes of supplier companies so as to ensure that the manufacturers supplying them do not expose them to third party claims. In these circumstances, vital supplier certification will issue to the manufacturer by the retailer.
The approved supplier certification is a non-transferable asset of the company and usually survives the examinership process intact, even following third party investment in the company. When presented with a company under the protection of the Court, an investor has an opportunity to avail of the ‘upside’ of that company: it’s licenses, customer audits, etc; while avoiding the downside: the company’s historical debt, which is discharged in the scheme of arrangement.
In addition to the above as the company in examinership normally cannot fully cease to trade the company can retain:
- The customer base and existing contracts
- The goodwill
- Key staff
Advantages for creditors
Maximisation of the value of assets and goodwill
The value of assets of a company on a winding up as opposed to on a going concern basis is fundamentally undermined by the very fact the company is in liquidation. Unless a company has significant unsecured assets, the reality is that unsecured creditors are more often than not unlikely to receive anything from a company that has gone into liquidation.
Probability of dividend
A successful examinership will always mean some form of dividend to the unsecured creditors and in practice the Examiner will prove that the dividend is better than could be expected on a winding up. Accordingly, where it is appropriate, even irate unsecured creditors should encourage companies entering the process.
Opportunity to continue to trade
Many creditors will support a company in examinership and vote for an examiner’s proposals for a scheme of arrangement, in the hope that future trade with the company may recoup some of the money lost from the circumstances that gave rise to the appointment of the examiner.