Examining the options

Andrew Gill, banking and finance associate, LK Shields
Andrew Gill, banking and finance associate, LK Shields

Avoiding financial difficulties in 2009 will be very difficult for many companies but for those that do examinership is a valuable option, writes LK Shields' ANDREW GILL

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11 June 2009 | 0

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In the current economic climate, all businesses are increasingly likely to encounter unexpected difficulties. While no businesses will be immune from these difficulties, those that engage in appropriate forward planning and which have an awareness of all the available options are the most likely to successfully overcome these challenges. Opportunities may be lost if businesses wait until difficulties emerge before considering their options.

One challenge for all businesses in turbulent times is maintaining regular cash flows. Many businesses are confronting cash flow shortages as their customers, struggling with their own balance sheet difficulties, delay payments. Often compounding this are supply side difficulties, with businesses facing further pressures as suppliers tighten their terms, reduce credit limits and demand immediate payment for goods.

While businesses may once have been able to resort to bank overdrafts to fund such short term cash flow difficulties, this option is no longer available as banks have drastically reduced the funding they are willing to make to businesses.

This combination of factors can leave businesses exposed with little scope to absorb any unexpected difficulties. Businesses which are fundamentally sound can find that even small events can leave them teetering on the edge of collapse, as despite having solid order flows, their short term debts threaten to overwhelm them. Businesses faced with such circumstances need to assess the options which are available to them to help them to survive such temporary set backs.

Applying for breathing space

For companies, one valuable option is the possibility of making an application for the appointment of an examiner. Introduced by the Companies (Amendment) Act 1990, examinership is a process which is designed to provide companies that are viable but suffering from financial difficulties with breathing space to reorganise their affairs.

An application to place a company in examinership is made before the High Court and may be initiated by the company itself, its directors, its members or its creditors. In order to be successful, the applicant will need to demonstrate to the court that the company is unable to pay its debts as they fall due, that no resolution exists for the winding up of the company, and that there is a reasonable prospect of the survival of the company and the whole or part of its undertaking as a going concern.

It is the final criteria which is the most critical as this goes to the very rationale of the whole process. The applicant will need to persuade the court that despite its temporary difficulties, there exists a fundamentally viable business which is capable of surviving.  

All applications must also be accompanied by the report of an independent accountant. This report must contain an overview of the financial position of the company and details of its creditors. The report must also contain the independent accountant’s opinion as to whether the company has a reasonable prospect of survival. The work involved in preparing this report can be extensive and should not be underestimated. Companies which are considering the possibility of making an application should, as part of their initial planning, consider the need to prepare this report.

Protection from creditors

Should the court approve the appointment of an examiner, the company will receive protection from its creditors for an initial period of 70 days. This initial period can be extended where necessary on application to the court for an additional 30 days. During this period the company receives extensive protection from its creditors.

No actions may be brought by creditors to enforce any debts against the company and no attempts may be made to seize goods of the company. No applications may be brought for the winding up of the company and creditors are prevented from seeking to have receivers appointed. No new proceedings may be brought against the company and the court has the power to stay proceedings which have already commenced. Overall the effect is to impose a general standstill on the company’s creditors and tie their hands for the period.

The purpose of this period of protection is to afford the examiner an opportunity to investigate the position of the company and formulate proposals for a scheme of arrangement. A scheme of arrangement amounts to a compromise between the company and its creditors.

It is common for schemes of arrangement to involve creditors agreeing to take a lesser sum in satisfaction of their debts and often significant write downs are involved. While such write downs may be unpopular with creditors, pragmatism usually prevails as they recognise that the most likely alternative is the liquidation of the company which would further diminish the available pool of assets and delay any distribution they might receive.

Search for fresh funds

A simple reduction of the company’s debts may not be enough to ensure its viability and the examiner may need to secure additional funding. As part of the proposals for the scheme of arrangement, the examiner will often seek the injection of fresh capital into the company from outside investors. Such a move is likely to dilute existing shareholders, a necessary step to placate creditors who will be unlikely to accept any scheme of arrangement that appears to be unduly lenient on the company’s shareholders.

Once the examiner has formulated the scheme of arrangement he will convene meetings with the creditors and shareholders of the company. The shareholders and creditors are divided into classes to consider the proposals. The scheme needs the approval of at least one class of creditors before it can be put before the court for confirmation. The court will not approve any scheme unless it is satisfied that the proposals are fair and equitable and do not unfairly prejudice any one class of creditor.
Should the court confirm the proposals, they will come into effect at a date which is not more than 21 days after the confirmation hearing. At this point the company will re-emerge from the protection of the court.

Examinership can be a valuable tool for companies which are suffering from temporary difficulties, but it is vital that appropriate forward planning is made as the timing of an application is critical and delay may mean that the opportunity is lost.

Andrew Gill is banking and finance associate at LK Shields. Email: agill@lkshields.ie

 

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