The viability of the examinership process is being undermined by the rise in company failures, writes FIONA REDDAN
THE HIGH Court’s refusal last week to appoint an examiner to the property development group controlled by Liam Carroll may sound the death knell not only for the property group, but it may also signal the beginning of the end for the examinership process.
The aim of giving court protection to troubled companies is to give them time to come up with a rescue plan, but as more and more companies either fail in their application to get this protection, or to attract new financing to ensure their survival during the examinership process, the relevancy of the procedure is increasingly being called into question.
The examinership process was first introduced in Ireland back in 1990 to help save the Goodman beef processing group. According to Neil Hughes, managing partner with Hughes Blake, the purpose of examinership is to “protect a fundamental group that finds itself insolvent but has a reasonable chance of survival”.
During the boom years, the process was seldom used, but since the deterioration of the Irish economy and the arrival of the credit crunch, the number of companies seeking to appoint an examiner has increased dramatically. In the first half of this year, examinerships were up by over 25 per cent on the same period last year, and of the 58 companies which have sought court protection, many read like a who’s who of the Irish business world.
OBrien’s sandwich bars, Danucci chocolates, Laragan Developments, Jo’Burger, Town Bar Grill, Chartbusters and the Lynch Hotel Group are just some of the companies which have entered into examinership, and the companies keep on coming. Most recently, telecommunications company Smart Telecom appointed an examiner.
For many, examinership is a last ditch effort to save the business. For others, such as Smart Telecom, which hopes to use the process to finalise an investment or merger with a third party, it is an opportunity to restructure.
Not all companies are suitable for examinership however, and in general, the suitability of a company depends on its underlying fundamental business or trade. To petition for examinership, a company must produce a report by an independent accountant, which states that a company has a reasonable chance of survival. Moreover, a company should have sufficient cash resources to trade during the period of examinership.
“The company has to argue that its business or brand is something to save,” says Paul McCann, a partner with Grant Thornton, and examiner of the O’Brien’s sandwich chain, “there is no point, for example, in a VHS manufacturer going into examinership as the market for the product no longer exists”.
If a court decides that a company is suitable, an examiner is appointed and the company is protected from any attempts made by the creditors to recover money owed to them. This protection lasts for up to 100 days, and during this time the company must find a way of turning things around, which usually happens in one of three ways.
“Normally a successful examinership is either a function of new investment, or a certain number of core assets are sold, or a company attracts fresh borrowing,” says Hughes.
Given the inability, or reluctance, of banks to lend in the current environment, most successful examinerships are now due to investment from third parties.
For example, Town Bar and Grill was saved when property developer Johnny Ronan and his business partner Richard Barrett stumped up €500,000 to keep the business alive, while Chartbusters entertainment stores got fresh investment from Dublin builder and property developer, John McCabe. Last week, it emerged that the O’Brien’s sandwich chain was likely to survive following investment from Graeme Beere, who runs the Abrakebabra, Gourmet Burger and Bagel Factory franchises, and Denis Desmond, founder of promoter MCD.
For those with cash in their pockets, an examinership can be an ideal time to invest, or re-invest in a company, as you can get a larger stake in the company for a smaller investment. According to Hughes, there are still investors out there, “who are looking for real value” and who come calling when a company runs into trouble. On a recent examinership for example, he received 19 unprompted expressions of interest in investing in the company.
For the company that does survive, the advantage of the examinership is that it will have received new investment, either debt or equity, and will have entered into a “scheme of arrangement” with creditors, whereby they would have agreed to take a certain write-down on monies owed to them.
Following this process, a new company emerges. The level of the write-down agreed on by creditors, as part of the scheme of arrangement, differs from company to company, and also depends on the category of creditor. According to Julie Murphy O’Connor, a partner in the corporate restructuring and insolvency group at Matheson Ormsby Prentice, the Revenue Commissioners are always treated as preferential creditors, as are employees of the troubled firm, so will get their money, or a proportion of it, back first. According to Insolvency Journal, the average dividend for preferential creditors in 2008 was 23.5 per cent.
Unsecured creditors usually don’t fare as well. Although by law creditors can’t be treated any worse in an examinership than they would in a liquidation, the average unsecured dividend is just 13.6 per cent, according to Insolvency Journal.
In the case of Town Bar and Grill for example, creditors recouped no more than 20 per cent of the money they were owed, while at Chartbusters, creditors got at most 10 per cent. Nevertheless, despite the possibility of repaying only a portion of what you owe, not all examinerships will be successful. Even if the High court had ruled in favour of Liam Carroll’s Zoe group, there would have been no guarantee that the group would have survived, with recent figures indicating that for every three companies which enter examinership, only one will come out the other side and two will go into liquidation.
This marks a dramatic change in previous success rates. Between 2002 and 2006 for example, approximately 95 per cent of companies entering into examinership survived as viable entities. However, success rates have unsurprisingly dropped significantly over the past two years and the outlook for companies which have gone into examinership has deteriorated significantly.
“It has become much more difficult. Last year 70 per cent of examinerships would have been successful, but this has now decreased to 30 per cent,” says McCann, and he points to a combination of inappropriate companies seeking to survive via examinership, as well as the difficulty in finding money to re-invest in the business as being key factors behind this decrease.
One of the more notable failures this year was that of the Thomas Read Group, which failed to get all creditors to agree on a scheme of arrangement, while last week Danucci, a gourmet chocolate manufacturer, was wound up with debts of €602,000, having failed to secure outside investment during the examinership process.
This increase in failures is leading some to question the viability of the examinership process going forward. Last February Justice Peter Kelly, who initially turned down the Zoe group’s petition for examinership, said he was becoming “more and more reluctant” to give the protection of the courts to troubled companies, given that so many were “on life support with no prospect of survival”.
The number of construction firms seeking to survive via examinership is also damaging the process. For example, apart from the high profile refusal in the case of the Zoe group, in the first six months of this year, five other construction companies sought examinership, with only one successfully securing the protection of the court. Moreover, there were questions about the appropriateness of another high profile property development firm, the Fleming Group, receiving court protection for some of its companies, due to doubts whether its business actually constituted a trade.
Another problem is the sheer cost of the process. As Murphy O’Connor points out, examinership can be very expensive.
