In these difficult and uncertain times companies will be taking a forensic look at all options available to them in order to maximize cash-flow for the purpose of continuing trade. Even where hard decisions are taken to keep the show on the road in the short term, some will look at the information gathered in their review and consider longer terms options to maintain the viability of their businesses. One of these options may be to place the Company into Examinership.
What is Examinership
Examinership is a corporate recovery process which allows a company that is in financial difficulty but which has a sound underlying business model to apply to the courts for an examiner to be appointed. If the courts approve the petition for examinership, the examiner is appointed to the company with a view to formulating a proposal to ensure the company’s survival. During the period of the examiner’s appointment, the company is protected from its creditors.
The Examinership Petition
In order to petition for examinership, the company must be insolvent but it must have a reasonable prospect of survival and sufficient cash flow to trade during the period of the examinership.
Application is made to the court on an ex parte basis, without any notice being given to creditors or other interested parties. Save in exceptional circumstances, application must be supported by an Independent Expert’s Report which sets out the conditions needed for the company’s survival and must state that in the expert’s opinion the company (or part of its undertaking) has a reasonable prospect of survival if these conditions are met.
If the court is satisfied that statutory tests for the appointment of an examiner have been met, it will fix a date for a hearing to confirm the appointment of the examiner. Notice of the confirmation hearing must be given to creditors and other stakeholders so that they may support or oppose the examiner’s appointment. The period of court protection begins on the date of the initial ex parte application and application can be made for the examiner to be appointed on an interim basis pending the confirmation hearing.
The Examinership Process
The protection of the court runs for 70 days initially and can be extended on application to 100 days (but no longer). During the period of examinership, the directors of the company remain in place and carry on the day to day running of the company’s business.
Once appointed, the examiner will review the company’s affairs with a view to formulating a scheme of arrangement whereby the debts of the Company are settled, usually with a write down of debts owed to certain classes of creditors. This may include negotiating rent reductions with landlords or, where reductions cannot be agreed, applying to the court to repudiate leases. In order for an examinership to be successful, the company will generally require fresh investment from existing shareholders or from a third party and the examiner will advertise seeking expressions of interest from investors.
Exiting Examinership
The examiner’s proposed scheme of arrangement must be approved by a majority in number representing a majority in value of one class of creditors and no class of creditors can be unfairly prejudiced (i.e. they must not receive less than they would in the event that the company were liquidated). If external investment has been secured an investment agreement will need to be prepared and executed.
Once approved by at least one class of creditor, the scheme of arrangement is presented to the court. If the court is satisfied it will make an order approving the scheme of arrangement and the examinership will end.
Key Considerations
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- A petition will be refused if a resolution to wind up the company has been passed, an order has been made for the winding up of the Company or a receiver has been appointed over any of the Company’s undertaking and assets and has been in place for three days prior to the petition being made.
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- The costs of applying for examinership are substantial. While most SMEs will meet the criteria for examinership through the Circuit Court, the costs of the Independent Expert’s Report and bringing the petition will be in the region of €15,000 – €20,000. Larger companies must petition the High Court with much higher associated costs. As a result, it is important to initiate the process at an early stage while the company still has sufficient cash available to fund the application.
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- In order to maintain cash flow during the protection period, and to secure the approval of the scheme of arrangement, the support of key customers and suppliers is vital if an examinership is to succeed.
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- An external investor will have a limited period of time in which to carry out due diligence on the company so work should commence immediately on gathering the relevant information that an investor is likely to require.
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- An external investor is likely to seek a substantial equity stake in the Company in return for their investment which can lead to the existing shareholders’ stake being effectively wiped out. As a result, it may be preferable for existing shareholders to source funds themselves and advance them to the company.
In J.W. O’Donovan we have both the experience and expertise across our various departments including Corporate and Commercial, Litigation and Property to guide you through the Examinership process from start to finish. Should you wish to discuss the process in more detail then please don’t hesitate to contact either John Sheehan or John Fuller of our Corporate Department, details for whom can be found on our website www.jwod.ie