Judges get tough on examinership hopefuls

EXAMINERSHIPS SEEM to be getting a bad name in some quarters. Last week, the High Court questioned and adjourned cases brought by two major companies – building and civil engineering group Pierse, and airline Aer Arann.

The two are at different stages of the process. Aer Arann, which owes its creditors €29 million, is asking the court to approve its rescue plan, but Ms Justice Finlay Geoghegan expressed “serious concerns” about the proposals on Friday following objections by the Revenue Commissioners, who argued that they were being treated unfairly.

Pierse is asking the court to confirm the appointment of an interim examiner, which would allow it to move ahead with the process of finalising a rescue plan, but Mr Justice Kelly adjourned the issue after creditors raised questions about the group’s inter-company loans.

None of this is to say that the two businesses involved will not get the orders they are seeking when they are back in court later this week, but judges do appear to be getting tougher on companies that come before them looking to be placed in examinership.

Earlier this month, Justice Kelly refused to appoint an interim examiner to one applicant, arguing that what has become a routine request is often unnecessary and expensive. While he granted the company court protection from its creditors, he held off appointing an interim examiner.

Lawyers and insolvency professionals say the courts have not turned against the process. Instead, they say, legislation, originally passed in 1990 and amended a decade later, has been tested rigorously by a variety of cases over the last two years, making it harder than previously to get an examiner appointed.

To qualify for examinership, companies must be insolvent – that is, unable to meet their debts as they fall due – but have a reasonable chance of survival. The process involves two basic steps: getting the High Court’s protection from their creditors, who then cannot enforce any existing debts until this is lifted, and getting the examiner, normally an accountant who specialises in insolvency, appointed.

The examiner, once appointed, has up to 100 days to put together a rescue plan, known as a “scheme of arrangement”. At least one group of creditors whose rights are compromised have to agree to the plan, and the court then approves it provided no other group of creditors can demonstrate that they would fare better in either a receivership or liquidation.

The process rests on the phrase “reasonable prospect of survival”, which was introduced when the Oireachtas amended the original law in 2000. It was designed to raise the bar to prevent undeserving companies from going into examinership, which critics said the 1990 Act allowed all too easily.

Last year, in a ruling on the first of the Liam Carroll-led Zoe Group’s two unsuccessful bids to be placed in examinership, Chief Justice John Murray said the onus was on the company applying to the court to demonstrate that it has a reasonable prospect of survival. Any judge who feels a company has not done this is not going to appoint an examiner.

Unsuccessful cases such as Zoe have tarnished the system’s image to a degree, says Neil Hughes, a partner with accountancy firm Hughes Blake. But, he argues, this should not prevent people from recognising that the legislation is there to save jobs in troubled companies that are worth rescuing.

Alongside high-profile failures such as Zoe and the Fleming construction group, a number of companies have successfully come through the system and survived, keeping many of their original jobs in the process, he notes.

Hughes was examiner of the restaurant chain Jo’ Burger, which is still in business after successfully emerging from examinership late last year. Similarly, Linen Supply of Ireland is now a viable business after it went through the system.

Hughes says that, by and large, the companies deserving to be saved are saved, while those using the system to stave off the inevitable are not rescued.

Of more than 1,000 insolvencies in the first nine months of this year, just eight went down the examinership route, even though many more could have availed of it and stayed in business. “An awful lot of jobs that could have been saved have been lost as a result,” he says.

The key issue for many of them is cost. The expense involved means it is virtually impossible for small companies to go into examinership, even though such firms account for the vast bulk of employment in the State.

While virtually every company applying to have an examiner appointed goes to the High Court, Hughes points out that the original legislation envisaged the Circuit Court would deal with far more cases.

The 1990 Act states that companies with liabilities of less than £250,000, now €370,000, could go to the lower and far less expensive court. However, in the current climate, very few companies’ liabilities are at this level. “Most small- and medium-sized businesses would have liabilities in the high hundreds of thousands,” Hughes says.

He argues that the solution is simple – raise the threshold for going to the High Court to

€1 million. As it would result in no material change to the law, Hughes believes this could be done by ministerial order rather than by amendment. “It could be done with the stroke of a pen,” he says.

David Baxter, a partner with Dublin commercial law firm, AL Goodbody, also favours cutting back on the expense and formality involved. He says that, instead of taking three months, most examinerships could be wrapped up in three weeks.

“The legislation allows for examinership to be done in an extremely short period of time – cases could be in and out in 20 days,” he says. This would drastically cut the cost of the process itself, leaving a bit more in the kitty for a settlement with creditors. It would also take a lot of strain off the business during the process.

While an examinership is taking three months to complete, companies continue trading, but their situation often makes it difficult to deal with suppliers and other issues.

Baxter points out that in many cases, companies going into examinership are likely to bring in new investment as part of their rescue plan. McInerney Homes, which is due back before the courts this week, has US private equity house, Oaktree Capital, waiting in the wings.

Baxter argues that working out a lot of the details before going into court would help to cut the time needed for its protection and for the examiner and his or her lawyers to put a rescue package together and get it approved.

From an investor’s point of view examinership is attractive, as it allows the company to deal with its debts and start again with a clean sheet. A number of businesses with money to invest are beginning to look at Ireland again, reasoning that there is now value to be had.

Liam Booth of stockbroking and corporate finance firm, NCB, says that both overseas and home-grown investors are shopping around for opportunities. Any system that helps troubled companies to get out of trouble can only help to stoke that interest.