Recession
Raising the Bar: Current Developments in Examinership
By Neil Hughes, Hughes Blake
Jul 7, 2009 - 11:14:20 AM

The economic recession in Ireland has led to a sharp upturn in the number of companies availing of Ireland’s formal corporate recovery mechanism compared with previous years.

Examination; or examinership as it has now become colloquially known, was introduced by the Companies Amendment Act 1990 following the collapse of the Goodman group of companies which resulted from the Gulf War of 1990.  Since its introduction, examinership has undergone formal legislative change in 1999 but now as it approaches twenty years on the Statute books, the practice of examinership is evolving rapidly due to developing case law and judicial interpretation of the original legislative provisions. 

Following a reduction in the success rate of examinership in the last 12 months, it is clear that the bar has now being raised significantly in relation to the process; from the point of view of both the types of company that qualify for examinership and also the types of schemes that will be approved by the High Court.    This will be hugely beneficial in the long run to restoring the faith of firms in the positive aspects of the process: an insolvent business being able to continue to trade and restructure, thereby 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.  Examinations have been responsible for the saving of many thousands of jobs in Ireland in the past number of years.

Formal Developments

The 1999 amendments to examinership legislation in Ireland had already raised the bar considerably in relation to the type 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 must demonstrate to the Court the “reasonable prospects of survival” of the company.

SIP 19B

The recent Statement of Insolvency Practice 19B issued by the CCABI (Consultative Committee of Accountancy Bodies in Ireland) means the Independent Accountant now must approach the preparation of the report as a non-audit “assurance engagement” since January 2009.  Essentially, the CCABI responded to criticisms 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 has now gone from one to two days work to perhaps three to four days work or more.

Oral Evidence

For many years it was almost unheard of that oral evidence would be required at either the appointment stage or indeed at any of the subsequent hearings of an examinership case: the process is largely affidavit driven.  

However, in the Lullymore Developments case in August 2008, the managing director of the company was asked by Judge Kelly to give oral evidence to expand on the reasons for the company’s prospects for survival, following certain (well reasoned) queries raised by the Revenue Commissioners.  In January of this year, a director of Chartbusters Limited was asked to give oral evidence at the hearing of the petition for this case.  It appears that the sight of a company director in the witness box of Court 6 or Court 14 endeavouring to persuade a judge of a company’s prospects for survival could conceivably become a regular occurrence in the Four Courts in the coming months and years. 

In the Lullymore case, the appointment of an examiner went ahead and the company subsequently emerged from the process some months later with a dividend being paid of 10c in the euro to Revenue Commissioners and 5c in euro to unsecured creditors.  The Chartbusters case concluded with the same result.

The examiner is not immune from a requirement to give oral evidence.  In both the Ardmore Technologies and the Ely Medical Group cases, I was asked to give oral evidence in Court.  It seems probable that the independent accountant, the officers of the company and the examiner could more and more find themselves giving oral evidence at examinership hearings in the future, particularly where there are objections raised by creditors.

Personal Guarantees.

The recent Ely Medical Group case clarified matters to a large extent relating to personal guarantees in an examinership and in particular, the serving of a notice on a guarantor by creditors holding personal guarantees.

The significance of this is that under the rather draconian section 25A of the Companies Amendment Act 1990, creditors who hold personal guarantees cannot rely on those guarantees post-examinership if they do not transfer their rights to vote at creditors meetings to the guarantor prior to the creditors meeting.

In the Ely case, representations were made by a creditor to the Court at the confirmation hearing for the scheme of arrangement that very strenuous efforts had been made to serve a notice on the guarantor relating to personal guarantees for rents payable under a lease of one of the company’s premises.  The guarantor however, indicated to the Court that the notice transferring the creditors rights to vote at the Creditors Meeting simply had not been received by him prior to the Creditors Meeting being held. 

Judge Kelly ruled that good service had been effected on the guarantor in this case because of the evidence given to the Court of various attempts to serve the guarantor by fax, email, hand delivery at various locations and ordinary prepaid post, reinforced by numerous telephone calls, messages etc. 

Although each case in the future will obviously be decided on its own merits, the ruling of Judge Kelly would appear helpful in providing clarity in particular to secured creditors in their efforts to ensure their rights to rely on guarantees accepted in good faith remain intact post-examinership.  Perhaps it would be overly optimistic to hope that the developing tradition of directors disappearing or going to ground for three days prior to creditors meetings will now end. 

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. 

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 storm of 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.  In fact, in the Drogheda United examinership, the examiner had to further satisfy the Court regarding the Company’s positive cash flow projections for the 12 month period post-examination in addition to having cleared funds in escrow to finance the scheme.   

Now, it is a brave examiner that will bring a scheme before the High Court without at least the funds for the scheme safely lodged in their solicitor’s client account.  In fact, current practice is now developing that a Designated Trust Account (“DTA”) is now opened by the company or the examiner to ensure even greater certainty that examinership dividends will ultimately be paid out.  The Ashcoin case in mid-2008 caused great anger among certain creditors when their dividends (10c in the euro) that had been promised at the end of the 100 days were never actually paid to them when the company went into liquidation some 3 months after emerging from examination. 

Chapter 11 Distinguished

In many ways, Examinership is now becoming unrecognisable from the provisions of Chapter 11 of the US Company code from whence it was copied by Irish legislators in the summer of 1990 when the Companies Amendment Act was rushed through the Oireachtas. 

Section 2004 of Chapter 11 refers to the rights of a creditor of a bankrupt company to request an “examination” of the company’s affairs, by a US Trustee.  At the creditor’s meeting stage of the Chapter 11 procedure, a US Trustee is appointed to handle the administrative part of the meetings but in general no other independent examination of the insolvent company’s affairs takes place unless requested by a creditor at this final stage. 

Raising the Bar

Chapter 11 is largely a forms-driven process and is mainly managed by the directors of the business without independent scrutiny.  It appears that the consistent tightening of legislation, judicial interpretation and practice has now led to examinership in Ireland veering closer to being more ‘Birmingham than Boston’ as it begins to echo the UK administration process.  Unlike administration, the taking over of executive functions in the Company by the examiner remains rare; however, no longer can examinership carry the unofficial moniker of “the Irish Chapter 11”.