Examinership – Leinster Leader Article, Jan 2009

Q. I am a Company Director of a Steel Fabricating business. Due to the current difficult economic trading conditions the company has run into financial difficulties. We have a number of big contracts and the future for the company looks bright if we can get over the current difficult trading period. I have heard about a process called examinership but do not know what this procedure involves. Could it be used to help my company in the intervening period until we can get our cash flow going again?

What is Examinership?

Examinership is a process whereby the protection of the High Court is obtained to assist the survival of a company. It is a technical procedure and is not widely used. It allows a company to re-structure with the approval of the Court. The process usually results in creditor balances being reduced while the assets of the company are protected, investment obtained and in the short term at least Directors retaining control of the company. It is an option that is available to an insolvent company that enables it to explore all opportunities to provide for its survival. In the very short term the appointment of an Examiner to a company provides breathing space for the company where normal corporate recovery measures are not available. The examinership process facilitates the companies restructuring by making provision for the sanction of the High Court to a scheme of arrangement with the creditors of the company.

How is the Examiner appointed?

At the outset the company must be insolvent and unable to pay it’s debts in order to have an Examiner appointed. It has to be able to demonstrate that it also has a reasonable prospect of survival. If an official liquidator has been appointed or if a receiver has been acting for a period longer than three days an examiner will not be appointed. The statutory requirements are as follows:

The Company must obtain an independent Accountant’s report which will have to state that the company has a reasonable prospect of survival as a going concern and that the likely result of the process would be more advantageous to the creditors than a winding up.

The Accountant must confirm that there is no deficiency in the finances of the company that are not satisfactorily accounted for and that the company will have sufficient funds to trade throughout the period of protection.

The Accountant must furnish the High Court with necessary financial projections and a statement of affairs to prove the contents of his report.

The Directors and Shareholders of the company can apply to the High Court to have the Examiner appointed and creditors can also do so. In practice it is usually the Directors of the Company who apply as they have the requisite knowledge of the company’s internal affairs.

How long does the Examinership last?

The protection of the Court is initially for a period of 70 days which can be extended by application to the High Court to 100 days and further if there are exceptional circumstances. The Examiner’s duties are to conduct an examination of the company’s affairs with a view to preparing proposals for a scheme of arrangement, for presentation to meetings of the company’s shareholders and creditors for the ultimate approval of the Court. The Examiner will also have to try and seek out investment for the company. Once the Examiner is appointed he will immediately communicate with all creditors, customers and staff to explain his role and his affect on the company’s ongoing operations.

In preparation for the Scheme of Arrangement

The examiner must ensure that all creditors within a class are treated the same way. The Examiner must persuade at least one class of creditors to accept the scheme before it can be brought before the High Court for approval. The Examiner must divide the body of creditors into different classes and the formation of the scheme is the Examiner’s attempt to share out a limited fund usually following some form of investment, between competing claims of different classes of creditors. The key to having the scheme approved is to persuade the creditors that they will secure a more advantageous outcome for themselves by accepting the Examiner’s proposals that would not be the case should the company be wound up. Following the preparation of the scheme it must be put to a vote of both a meeting of shareholders and creditors. Once the shareholders and creditors have considered and voted on the scheme the Examiner must go back to the High Court with a report on the outcome of the meetings and any changes to the proposals adopted at the meeting.

The advantages of Examinership

An obvious advantage of an Examinership for any company is the avoidance of risks for the company to include:

• No goods may be seized or claimed by any creditor and no goods the subject of a retention of title clause can be repossessed without the consent of the Examiner.
• A receiver cannot be appointed while under the protection of the Court.
• A Petition cannot be presented to the High Court to have an official liquidator appointed during an examinership process.
• No other proceedings can be commenced against the company without consent of the High Court.
• Personal Guarantees cannot be enforced during the Examinership process.

In addition to the above as a company in examinership normally cannot fully cease to trade the company has the opportunity to retain the following:

• The customer base and existing Contracts.
• Goodwill
• Key staff
• Management.

When a company is in financial difficulties the Examinership process provides breathing space, a period of protection from Creditors and a chance to negotiate a compromise with existing creditors.

The Examinership process has been used effectively by a number of companies recently and it is becoming a procedure that is being used more and more often by companies in financial trouble.