Approval Criteria

Reasonable Prospects

There must be a reasonable prospect of the survival of the company and the whole or part of its undertaking as a going concern.  A company may be a going concern, even if it has not actively traded in the very recent past because of financial constraints, provided that there is a prior trading record.

There must be a feasible plan and proposal.  This may involve new finance or an investor. In practice, it is unusual to have an outside investor committed to a significant extent, or at all at the initial stage.  However, there must be a realistic and substantial prospect of survival of all or part of the trade, at the very minimum.  This requires that, at least, some elements of the undertaking can proceed in a manner that produces an economic return.

The courts may require that there be binding agreements with incoming investors to ensure the viability of the scheme.  They will not be party to the court orders.  However, the existence and proof of the incoming financer may be critical, so that the court can see that the proposals are legally secured.

In a case where the investor proposed to provide an on-demand loan facility, it was objected that the investor could effectively liquidate its investments, with the debts written- down.  The court as a condition of approval of the scheme required that the facility provide for a loan for a term, which could not be demanded for a certain period.


Sustainable

The courts have become more watchful in recent years, in relation to the requirement that there be a realistic prospect of survival.  In the early days of the legislation, the primary emphasis appeared to be on saving jobs at all cost.

However, after a number of failed examinerships the courts have become more circumspect and critical in relation to proposals in examinership. The legislation does not permit the temporary saving of jobs on the basis of the write-off of debts.  The business as it continues must be fundamentally sound.

The Supreme Court rejected some examinership schemes which had been accepted by the High Court. They did not show medium to longer term sustainability but were based on the hope for the revival of the relevant sector (in most such cases, the construction sector) over the longer term.

The survival of the company must be a practical possibility.  The proposed scheme should leave the company solvent and capable of surviving.


Reduced Capital

The proposals may provide for a reduction in the company’s share capital. The court may confirm any such proposals, without following the separate procedures in the Companies Act for a reduction of capital.

Where a scheme involves the transfer of shares or a reduction in share capital, the substantive requirements of the Companies Act must be complied with.  This may necessitate a variation of the constitution.  It may be easier to provide for the issue of new shares and the cancellation of existing shares, in view of the rules for the protection of capital.

If the extent of the reduction of the company’s company capital would, having regard to the scale and nature of the business that the company carries on, and its likely liabilities on an on-going basis after the period of protection has expired, result in the company’s having an amount of company capital that is manifestly inadequate, it shall not confirm the proposals.

Where appropriate, the court may confirm the proposals subject to a modification that a lower reduction of the company’s company capital, than that proposed shall have effect under the scheme of arrangement.


Unfair Prejudice

The proposal must be fair and equitable to the unsecured creditors as a whole.  The issue tends to be less controversial, as unsecured creditors in Ireland tend to obtain very little after the payment of the costs of winding up, preferential and secured creditors.

Unfair prejudice may arise where one class is treated significantly more favourably than another. What is or is not unfair prejudice depends on the circumstances.  The test appears to be flexible. The key factor is whether and to what extent the creditor’s position varies from which would apply in a receivership or liquidation.

The examiner must specify in respect of each class of creditors, whether their interests are impaired.  The court must be satisfied that the proposals are fair and equitable in relation to each class of creditor and member. There must be equality within the class.  Classes commonly break down into secured creditors, unsecured creditors, preferential creditors, contingent creditors and landlords.

The proposal must be fair and equitable to the unsecured creditors as a whole.  The issue tends to be less controversial, as unsecured creditors in Ireland tend to obtain very little after the payment of the costs of winding up, preferential and secured creditors.

The Revenue and certain other State bodies may agree to the impairment of their debts.  There should not be a significant disparity between the treatment of the preferential creditors under the scheme relative to that applicable on a winding up.  The court may take into account of the fact or prospect that there may be a future benefit to the Revenue by the saving of jobs and a return to future sustainability.


Effect of Misleading

Where the court is deliberately misled in relation to the extent of deficits and/or the directors are motivated primarily by alleviating their own personal liability, this may be regarded as an abuse of process. There is an onus on the applicants to bring all information to the court. This is a continuing obligation which requires material changes to be notified and matters clarified where information later emerges.

The court may refuse to confirm a scheme where there have been breaches of company law, an absence of good faith or any element of abuse of the process. The court balances the wrongdoing or the absence of good faith against other considerations such as the prospect of preserving employment.

Minor breaches are unlikely to outweigh the prospect of saving the business of the company, whereas more serious breaches may do so.


Secured Creditors I

Secured creditors may be able to show unfair prejudice, by showing they would do significantly better under a receivership in the longer term than under the proposal. The secured creditor may have the option of receivership. If there is a disproportionate disparity between the positions, there may be unfair prejudice.

The courts have held that a scheme may cause the debt owed to a secured creditor to be reduced.  The position relative to what could be achieved if their security was realised, must be ascertained. In almost cases, the secured debts must not be reduced by below the level, for which they have fixed charge security.

The Supreme Court has held that it may be unfairly prejudicial to require a secured creditor to take an immediate crystallised loss, where there is otherwise a reasonable prospect of a better outcome for it without the scheme.


Secured Creditors II

In exceptional circumstances, the courts may approve schemes under which secured creditors do worse than under receivership and enforcement of their security. A receivership gives the option of managing the company for a while and deferring realisation. Examinership may require an immediate sale or other steps that reduce the options and cut across the security right that would otherwise apply.

Arrears of rents may be written down.  The amounts of (future) rent under the lease of land after the confirmation of the scheme, may not be reduced without landlord’s consent.  The landlord may not be restricted from exercising its rights if there was a failure to pay the rent due or comply with the lease, after the period of protection. The write-down of future rents is not permissible without the consent of the landlord.


Guarantors

In principle, a guarantee may be required to be released as part of a scheme. It has been claimed in some cases that this is necessary in order to free management of the risk of personal bankruptcy.  This objection has generally been rejected as an insufficient justification.

Unless the agreement otherwise provides, a guarantee is not affected by a scheme of arrangement in examinership. The definition of a contingent creditor itself includes a guarantor, because a guarantor on payment of his guarantee, may exercise his rights of subrogation and indemnity.  The potential liability to the guarantor may be included as a contingent liability of the company and may be written down.

Because of the guarantor’s rights of subrogation and indemnity against the company, there are particular obligations in relation to the rights of guaranteed creditors. A creditor who wishes to enforce a guarantee in respect of the company’s obligations must give prior notice, offering to transfer its rights to the guarantor at the creditors meeting.  If it fails to do so, the guarantee may not be enforced after the protection period.

Contingent and unquantified debts may be written down.  This may facilitate the introduction of an investor who may wish for certainty on these risks.  The examiner may compromise claims against the company under court direction.


Members

A scheme of arrangement will not be confirmed if it is unfairly prejudicial to the to the interests of shareholders/members. The court must be satisfied that it is not unfairly prejudicial to their interests or those of any other interested party.  The court must be satisfied that it is fair and equitable in relation to classes of members that have not accepted it and whose position is impaired.

Impairment includes a reduction of the value of the shareholding, dividend or other shareholding rights, a reduction in the number of shares or deprivation thereof.  If most cases, the matter will not be a significant issue, as the shareholders’ interest may have no value and have no prospect of recovery.

Schemes may make requirements in relation to shareholders including the complete transfer and extinguishment of their shares. The creditors may acquire the rights of the shareholders.

The scheme may provide for the amendment of the constitution.


Officers & Employees

There is no specific requirement that the arrangement should be fair and equitable to the directors and secretaries as such.  In many cases, they will also be shareholders and creditors, so that regard may be had to their interest as such.  The directors may also be employees so that their interests in this regard may be considered.

The scheme of arrangement may make provision for a change of management and direction.  This may require the resignation and removal of directors. In this case, the director should be permitted to make representations and submissions at the confirmation hearing.  A scheme of arrangement as confirmed is binding on directors and other officeholders.

Shareholders, directors and insiders may be in a position to leverage their knowledge of the company in the context of dealing with outside investors.  They may also be in a position to offer their management skills, experience and customer connection. A scheme may be accepted which allows them a return before payment of all creditors in particular circumstances, where the legislative criteria are satisfied, and their input is sufficiently valuable or is necessary for the survival of the company.

The maintenance of employment is a significant factor in a scheme of arrangement.  It may tip the balance in relation to an arrangement that would otherwise fail.  It is not necessarily determinative.  The court may consider the proposed investment arrangement.  It may not be approved if it fails to do enough by way of employment retention.


Pre-Packs

Pre-pack receiverships and examinerships in Ireland follow from the phenomenon of pre-pack administration in the United Kingdom.  United Kingdom administration is somewhat of a mid-point between receivership and examinership. It contemplates the restructuring of a company’s debt and /or capital structure where this offers a better outcome/solution than liquidation and /or realisation of assets.

A pre-pack receivership typically involves and identifies a new investor or purchaser. There must be sufficient funding to keep the business going during the restructuring process.

The debt may be sold and the benefit of the debenture transferred to the investors.  The investor may appoint a receiver who takes control of the business under the debenture. Provided that a receiver has been appointed for three days, it is not possible to appoint an examiner.

The due diligence is done in advance in the case of a pre-pack receivership. The existing management may or may not be involved.  Consideration must be given to all aspects of the acquisition including employment, Revenue, pension and trade issues.

The receiver is appointed and the sale of the business to the investor either takes place immediately or very shortly afterwards.


References and Sources

Primary References

Companies Act 2014 (Irish Statute Book)

Companies Act 2014: An Annotation (2015) Conroy

Law of Companies 4th Ed.  (2016)     Courtney

Keane on Company Law 5th Ed. (2016) Hutchinson

Other Irish Sources

Tables of Origins & Destinations Companies Act 2014 (2016) Bloomsbury

Introduction to Irish Company Law    4th Ed. (2015) Callanan

Bloomsbury’s Guide to the Companies Act 2015      Courtney & Ors

Company Law in Ireland 2nd Ed. (2015) Thuillier

Pre-2014 Legislation Editions

Modern Irish Company Law   2nd Ed. (2001) Ellis

Cases & Materials Company Law 2nd Ed. (1998) Forde

Company Law 4th Ed. (2008)  Forde & Kennedy

Corporations & Partnerships in Ireland (2010) Lynch-Fannon & Cuddihy

Companies Acts 1963-2012   (2012)  MacCann & Courtney

Constitutional Rights of Companies   (2007)  O’Neill

Court Applications Under the Companies Act (2013) Samad

Shorter Guides

Company Law – Nutshell 3rd Ed. (2013) McConville

Questions & Answers on Company Law (2008)        McGrath, N & Murphy

Make That Grade Irish Company Law 5th Ed. (2015) Murphy

Company Law BELR Series (2015)   O’Mahony

UK Sources

Companies Act 2006 (UK) (Legilsation.gov.uk)

Statute books Blackstone’s statutes on company law (OUP)

Gower Principles of Modern Company Law 10th Ed. (2016) P. and S. Worthington

Company Law in Context 2nd Ed. (2012) D Kershaw

Company Law (9th Ed.) OUP (2016) J Lowry and A Dignam

Cases and Materials in Company law 11th Ed (2016) Sealy and Worthington

 

UK Practitioners Services

Tolley’s Company Law Handbook

Gore Browne on Companies

Palmer’s Company Law