Nature of Examinership I
Examinership seeks to save a fundamentally sound business which is insolvent, in a manner that is not unfair to other interested parties. A company may be insolvent where it is unable to pay its debts as they fall due or where its liabilities are greater than its assets, including contingent liabilities. It is deemed insolvent if it does not comply with a “statutory demand” notice, which requires the payment of a debt of at least €10,000 within 21 days.
The legislation focuses on rescuing the company, rather than the business or undertaking. 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. Several examinerships of development companies failed on this ground during the financial crisis, as they could not meet this requirement in the depressed property market.
Nature of Examinership II
The petitioner owes a duty of utmost good faith. Good faith does not necessarily mean that the petitioner cannot be optimistic. However, he must present all relevant information. If the petitioner fails to disclose material information, the examinership may be discontinued or rejected.
An examiner may be appointed over, or his powers may be extended to a related company. It is not clear but is implied that the other related company must also be insolvent. The Court must consider whether the making of the Order would be likely to facilitate the survival of the company or the related company or both or the whole or part of an undertaking as a going concern.
The court must be satisfied that there is a reasonable prospect of the survival of the related company and the part or whole of the undertaking as a going concern.
The survival of the company must be a practical possibility. 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.
At the initial stage, the court may find it difficult to assess the position, even with the assistance of the accountant’s report. There may be little evidence as to whether there is a reasonable prospect of survival. Much may depend on specific market and general economic factors, which are difficult to predict.
A secured creditor may claim that it is in a position to appoint a receiver and run the business as a going concern. However, the courts have taken the view that this does not necessarily give the same prospects of survival because the receiver’s primary concerns and duties are to the debenture holder.
The commencement of examinership creates a moratorium on insolvency proceedings and enforcement against the company. A receiver may not be appointed. If a receiver has been appointed for less than three days, he may be required to cease to act.
Proceedings relating to the company may be commenced or continued with court consent only. No action can be taken to enforce a judgment by way of attachment, execution, distress, sequestration or otherwise. Proceedings may not be taken against a guarantor or indemnifier of the company’s liabilities.
It appears that a demand under a guarantee may be served. Persons who have retained title may not recover the goods unless the examiner consents. A petition based on oppressive conduct under the Companies Act is restrained.
Pre-petition debts may not be paid unless the accountant’s report so recommends and the court sanctions the payment, on the application of the examiner, creditor or shareholder. The court must be satisfied the failure would reduce considerably, the prospects of the company or the whole or part of its undertaking, surviving as a going concern. Payment may be allowed, for example, to employees, essential service providers, and utility providers.
An order may be made directing that ongoing payments to preferential creditors need not be paid. They must first be given the opportunity to be heard in relation to the matter.
The examiner has the power to prevent or rectify the effects of any acts in relation to the income, assets, and liabilities of the company, taken by officers, employees, creditors and others in breach of the moratorium. The examiner must be satisfied that the matter would be to the detriment of the company, or other interested parties, including creditors. Persons who acquire assets in good faith for value in such circumstances are protected.
The appointment of an examiner may constitute the opening of insolvency proceedings under the EU Insolvency Regulation. Insolvency proceedings should be opened in the jurisdiction of the company’s centre of main interests. Secondary proceedings may be opened in the State where the company has an establishment in it, even though its centre of main interests are in another state.
The statutory moratorium against enforcement applies automatically to assets in another country. The company is bound, but it may not be possible to enforce against third parties in that country. Within the EU, the Insolvency Regulation requires the courts of other EU states to recognise the jurisdiction of the courts of the state of the company’s centre of main interests.
An independent accountant’s report must accompany the petition. It must inform the court whether the independent accountant’s investigation indicates that the company has a viable future and what steps, including possible arrangements with its creditors, are necessary to that end.
The report must include certain matters required by the legislation including
- names and addresses of officers including shadow directors;
- names of companies in which they are also directors;
- a statement of affairs of the company, giving details of assets, liabilities to the most recent date including prospective and contingent liabilities; and
- details of creditors and their security.
The court may dispense with the need for an independent accountant’s support in exceptional cases. Interim protection must be sought, and the court must be satisfied that because of exceptional circumstances outside of the control of the petitioner, an independent accountant’s report is not available and the petitioner could not reasonably have anticipated the circumstances. A temporary protection for up to 10 days may be allowed, in order to allow formulation of a report.
Report Requirements I
The report must set out the independent accountant’s opinion of whether the company as a whole or part of its undertaking, would have a reasonable prospect of survival as a going concern. It must set out the conditions essential to ensure survival. It must set out whether the formulation, acceptance, and confirmation of proposals or a compromise, would offer a reasonable prospect of survival of the whole or part of the undertaking, as a going concern.
The report must set out the independent accountant’s opinion as to whether an attempt to continue the whole or part of the undertaking would be likely to be more advantageous to the members as a whole and the creditors as a whole, than winding up.
It must contain proposals as to the course which the independent accountant recommends should be taken in relation to the company, including if appropriate draft proposals for a compromise or scheme of arrangement.
It must set out details of the required funding to enable the company to continue to trade during the period of protection. It must set out recommendations as to whether liabilities incurred prior to the petition, should be paid.
It must set out the independent accountant’s opinion as to whether the work of the examiner would be assisted by the direction of the court in relation to a creditors’ committee. It must set out such other matters as he considers relevant.
Report Requirements II
The accountant’s opinion must be based on evidence. It must not be overly optimistic. The more firmly the opinions are based on evidence, the more likely that they will be accepted. The independent accountant has a duty to act with the utmost good faith in the preparation of his reports. Failures to disclose information are likely to undermine confidence in the proposals.
The report is supplied to the company and any interested person on an application to the independent accountant. The court may direct that the information be redacted, if its inclusion would be likely to prejudice the survival of the company as a whole or as to part of its undertaking, as a going concern.
The report must identify whether, in the opinion of the independent accountant, there is any deficiency between the assets and liabilities which has not been satisfactorily accounted for, or whether there is evidence of disappearance of property that is not accounted for. It should set out whether facts disclosed would warrant further enquiries in relation to fraudulent or reckless trading.
Powers of Examiner I
An examiner has the same powers as the auditor of the company in relation to access to information and documents for the purpose of formulating proposals. The court may give him further powers, such as by vesting the powers of the directors in him and allowing him to borrow.
The examiner is an officer of the court in the exercise of his powers. Generally, he requires the leave of the court before initiating proceedings or taking any significant action or transaction.
The examiner may apply to the court for directions in relation to any matter affecting the exercise of his powers. Provided that he acts bona fide in accordance with the directions, he will not have any liability.
Powers of Examiner II
The examiner may certify liabilities incurred by the company. They enjoy preferential status and subject to the court’s sanction, they may be paid in preference to other creditors. They must be certified as being necessary for the survival of the company as a going concern such that otherwise, it would be seriously prejudiced.
The power applies only to new post-presentation of petition liabilities. The approved liabilities may be paid before the claim of floating charge holders, but not before the claim of fixed charge holders to the charged assets.
An application may be made to have the powers of the company vested in the examiner. This may be done voluntarily, and the company may resolve to do so. The examiner may apply to the court and show that the affairs of the company are being conducted in a manner likely to prejudice the interest of the company, employee or creditor as a whole and that it is expedient that the powers be vested in him.
The examiner may convene meetings of the directors and shareholders. He is given significant powers in relation to such meetings.
Approval of Proposals
Meetings must be convened of each class of members and creditors to consider any proposals that are formulated. At least three days’ notice must be given. Proxy voting must be allowed. A statement must accompany the proposal, setting out certain matters.
The examiner chairs the meeting. At least two members or creditors must have attended each meeting. The examiner conducts the meetings, keeps records and signs minutes.
The various classes vote on the proposals. The examiner may modify the proposals. A majority in value and number of creditors is required. If the proposals are confirmed, they are put to the court for confirmation.
In order to enforce a guarantee, the creditor must give notice to the guarantor in advance and offer to transfer voting rights in respect of the scheme to it. If this is not done, the creditor may not enforce the guarantee.
The report on the proposals and meetings must be lodged within 35 days of appointment or such further period, up to 70 days and ultimately 100 days, as may be sanctioned. At the confirmation hearing, any creditor or shareholder whose interests have been impaired may be heard.
Where the court approves the scheme, it takes effect within 21 days or at such other date as the court confirms. It becomes binding on all creditors affected by the proposal. Certain filing obligations apply.
The court may approve the examiner’s remuneration and expenses. The examiner may certify liabilities necessary for the examinership. The sums approved are payable from the company’s assets when realised.
Examiner’s remuneration, cost and expenses must be paid before other claims of the company, whether secured or not, approved. Certified expenses have priority except over, fixed charge holders.
If the confirmation is procured by fraud, an application may be made to have it revoked within 180 days.
Creditors or shareholders whose interests are or may be impaired by the proposals may appear and be heard in court. They may object on the basis of
- a material irregularity in the meetings and proceedings;
- an improper preparation of the proposal;
- an improper purpose; or
- that the proposal unfairly prejudices the interests of the objectors.
In the case of a member or creditor who has voted in favour of the proposal, an objection may be made on the basis that there was an irregularity in the proceedings or the proposals are for an improper purpose.
Creditors and shareholders who have voted against the proposals may object on the ground that the proposals unfairly prejudice their interests.The proposals must be equal within particular classes of creditors and relative to other classes. One set of creditors should not be expected to bear an undue proportion of the reduction in entitlements.
Just because a creditor may do worse under a scheme than on a winding up, does not mean that he has been unfairly prejudiced. However, if there is an extreme and disproportionate disparity between the two positions, this may suffice.
Failure of Scheme
An examinership may fail if it is not approved by the court. The court itself may not accept proposals accepted by the creditors.
An application may be made by the company or another interested party within six months of confirmation, to revoke it on the basis that it was procured by fraud. The courts seek to protect the interests of persons who have acted in good faith in reliance on it.
If the scheme is not approved, the court may order that the company be wound up, if it is just and equitable to do so. It may appoint a liquidator. The court may make such orders as it sees fit for that purpose.
Recent Reforms I
The OCDE is given an enhanced role during examinership by the Companies Act, 2014. It must be furnished with copies of certain key documents, including the proposals for a compromise or scheme of arrangement. It must be served with a copy of the order confirming or revoking the examinership on the ground that it was procured by fraud.
The professional qualifications requirements applicable to liquidators under the 2014 Act also apply to the examiner. A person may not act as an examiner unless he would be qualified as a liquidator.
Recent Reforms II
The 2014 Act allows for a reduction of capital in examinership. This feature was not present in the earlier legislation.
The publicity requirements are updated. The company website must set down the confirmation that the company is in examinership.
There is a requirement to give prior notice to NAMA since 2009, where the company or a related company has loans which are held by NAMA. This obligation also applies, where a related company’s security is held by NAMA. In each case, a notice must be served on NAMA and NAMA is entitled to be heard in relation to the application.
References and Sources
Companies Act 2014 S.508- S. 558 (Irish Statute Book)
Companies Act 2014: An Annotation (2015) Conroy
Law of Companies 4th Ed. (2016) Ch. 23 Courtney
Keane on Company Law 5th Ed. (2016) Ch. 37 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
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
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