As creditors and companies continue to look for solutions to financial stresses in the current climate, we’re inevitably going to see more and more companies looking at the option of appointing an examiner.
However, two recent High Court decisions highlight the potential pitfalls with these applications, which companies and their advisors should consider.
A Court will appoint an examiner where it is shown that the Company is insolvent and unable to pay its debts as they fall due but that the Company also has a reasonable prospect of survival. The Company is placed under Court protection and the examiner is appointed and tasked with formulating a scheme with the objective of saving viable parts, or if possible, the whole company. The scheme, which usually involves new investment and a write down of debt, is then presented for approval to the creditors of the Company and then the High Court.
The hearing of a petition to appoint an examiner can be quite contentious and the High Court will hear from all parties who will be affected by such a measure. An examiner’s scheme will usually involve a significant write down of debt and this obviously has big implications for the Company’s creditors.
Lavelle Partners recently acted for St.Mary’s Centre in applying for the appointment of provisional liquidators to the Company which ran a nursing home and disability centre in Dublin.
The liquidators were appointed and began their work but certain creditors of the Company (including mainly employees and residents) subsequently brought a petition to have an examiner appointed to the Company.
The petition for the confirmation of the provisional liquidators as official liquidators was heard together with the petition to appoint an examiner. The application to appoint an examiner had a specific series of facts which make the case unique. For example, the company was run by a voluntary board and its long-term survival was in jeopardy. The Court took into account the long-term difficulties which the company anticipated in arriving at its decision and ultimately refused to appoint an examiner.
The case is interesting for many of the comments made by Mr Justice Quinn in a lengthy judgement, including the following:
“Examinership is a method in company law by which a company and all or part of its undertaking can be saved. Examinership is not the only method by which the undertaking or activity of a company can be preserved or continued. By contrast, a liquidation usually entails the cessation of the business and undertaking of a company followed by its ultimate dissolution. Not every liquidation results in the final cessation of the company’s activity. Liquidation can be used to facilitate a temporary continuance of a business pending an orderly winding up or a transfer of that activity to another company or an entity better placed to continue it.”
Mr Justice McDonald recently refused to appoint an examiner to New Look Retailers (Ireland) Ltd (New Look). One of the reasons for this refusal was the lack of engagement with landlords who were creditors of the company.
In refusing to appoint an examiner to New Look, Mr Justice McDonald found that the Company had acted prematurely in seeking to appoint an examiner and said it was inexplicable that the company did not take more proactive steps during the six months before the presentation of the examinership petition to resolve differences with landlords. Four of New Look’s landlords had opposed to appointment of an Examiner.
Clearly, engagement with creditors, employees and stakeholders is key when a Company is facing insolvency. The decision of Mr Justice McDonald indicates that the High Court will require evidence that a Company seeking the appointment of an examiner has engaged with affected parties and looked at and explored the various options before petitioning for the appointment of an examiner.
In light of these recent decisions, if a company is insolvent or approaching insolvency, the directors should ensure they engage with creditors, employees and other stakeholders to see if an arrangement can be reached through negotiation first and should take advice on the various insolvency options to ensure the correct decision is made.
Directors should also remember that examinership is not the only process by which an insolvent company can be saved. A Scheme of Arrangement, for example, is a process used by a company in financial difficulty to reach a binding agreement with its creditors to pay back all, or part, of its debts over an agreed timeline. Liquidation can also be used to save part or all of a Company.
About the author: Dermot McClean, Solicitor, Insolvency and Commercial Litigation.
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