The Future of Examinership in Ireland: An Analysis of the Evolution of Examinership and its Increased Importance Post COVID-19

THE FUTURE OF EXAMINERSHIP IN IRELAND: AN ANALYSIS OF THE EVOLUTION OF EXAMINERSHIP AND ITS INCREASED IMPORTANCE POST COVID-19

Mollie Downes

Introduction

The examinership procedure remains a critical mechanism in Irish corporate law. It provides ‘breathing space’1 to struggling businesses to restructure, seek new capital, preserve jobs and operations, as well as avoid liquidation or receivership. The attractive nature of the examinership process was highlighted by Clarke J who encouraged this restructuring mechanism as a process enabling ‘an enterprise to continue in existence for the benefit of the economy as a whole’.2 It allows a business to preserve jobs ‘which may be at stake’3 and to maintain a business ‘for the benefit of the community’.4 This essay aims to highlight the evolution of examinership through the development of legislation and significant case studies, as well as providing a focus on the evolving nature of examinership post COVID-19.

The Concept of Examinership and its Purpose Within Corporate Law

Examinership is the restructuring system in the EU that is most similar to Chapter 11 of the US Bankruptcy Code.5 The US Bankruptcy Code is widely regarded as the most powerful tool for US corporations. It has been greatly relied upon during the recent public health crisis where companies have suffered economic troubles due to COVID19.

Examinership was first introduced following the collapse of Goodman International caused by the outbreak of the First Gulf War. 6 This process of court protection was part of a series of procedures focused on updating and modernising the entire landscape of

1 Re Atlantic Magnetics Ltd [1993] 2 IR 561. 2 Re Traffic Group Limited [2008] IR 253. 3 ibid. 4 ibid. 5 US Bankruptcy Code, Chapter 11. 6 G. Brian Hutchinson, Keane on Company Law (5th edn, Bloomsbury Professional) [37.01]. 41

company law in the 1990s in order to attract investment from the US.7 It was first introduced in The Companies (Amendment) Act 1990.8

Some of the key provisions were strongly criticised from the outset by the Report of the Company Law Review Group 1994.9 It argued that although examinership appeared to be a useful mechanism which should be available in Irish company law, there should be limits to the availability of this process.10 Thus, the suggestions of the report were subsequently implemented by the Companies (Amendment) (No 2) Act 1999.11

The process of examinership was codified in Part 10 of the Companies Act 201412 which incorporated the previous Acts and included a new provision to allow an application to be made to the Circuit Court for the appointment of an examiner to improve access for small companies.13 The 2014 Act provides the necessary threshold that must be met in order to be suitable for the examinership process. Firstly, the company must be or likely to be unable to pay its debts.14 Secondly, there must be no winding up procedure currently taking place15 and finally, there must be a ‘reasonable prospect’16 of the survival of the company.17

The application for the appointment of an examiner may be petitioned by the company, directors, creditors, or members with 10% shareholding.18 This petition must be accompanied by the report of an independent expert to inform the court whether in the independent expert’s opinion, the company has a reasonable prospect of survival. Recommendations as to how the company will continue trading and return to viability

7 Irene Lynch Fannon, Jennifer LL Gant, ‘JCOERE Judicial Co-Operation in the European Union: Insolvency and Rescue’ in Jennifer L Gant (ed) Harmonisation of Insolvency and Restructuring Laws in the EU (INSOL Europe 2020) 107-119. 8 The Companies (Amendment) Act 1990. 9 First Report of the Company Law Review Group, December 1994. 10 ibid. 11 The Companies (Amendment) (No 2) Act 1999. 12 The Companies Act 2014, Part 10. 13 Companies (Miscellaneous Provisions) Act 2013. 14 The Companies Act 2014 Section 509(1)(a). 15 The Companies Act 2014, Section 509(1)(b). 16 Re Atlantic Magnetics Ltd (n 1). 17 The Companies Act 2014, Section 509(1)(c). 18 The Companies Act 2014, Section 510(1).

will also be proposed. Upon the court decision, the examinership is usually concluded on the basis that it was accepted or rejected by the court.19

Where the court appoints an examiner, the company is deemed to be under the protection of the court for a period of 70 days from the date of the presentation of the petition. This may be extended for a maximum of 30 days or subject to the Companies (Miscellaneous Provisions) (Covid-19) Act 2020 which has extended this period to 150 days if the insolvency is COVID-19 related. The effects of this protection period means that creditors are prevented from taking any action to enforce any security of the company.20 As well as this, no winding up procedures may commence21 a receiver cannot be appointed22 and there may be no attempt to repossess goods subject to hirepurchase clauses.23

It is clear that the legislation relating to examinership is extensive and has evolved greatly since its first introduction in 1990.

The Process of Examinership Today

From a European Union Law perspective, examinership has been considered as the main insolvency proceeding for the purpose of avoiding liquidation and receivership. However, it is important to note that the court has discretion over the suitability of a company for the examinership process. This discretion can prove difficult for some companies especially in recent times as the court has the power to refuse examinership for struggling companies.

In Re New Look Retailers24 the petition was brought forward when the company was not insolvent at the time of the application but was likely to become insolvent in the near future. Although the court found that the application fell within the scope of Section 509(1)(a)25McDonald J held that in the circumstances, it was ‘entirely premature to consider the appointment of an examiner’26, as the company had not considered less drastic options such as negotiations with the landlords. Similarly, in the case of Re Ina’s

19 Fannon and Gant (n 7). 20 The Companies Act 2014, Section 520(4)(d). 21 The Companies Act 2014, Section 520(4)(a). 22 The Companies Act 2014, Section 520(4)(b). 23 The Companies Act 2014, Section 520(4)(e). 24 Re New Look Retailers (Ireland) Limited [2020] IEHC 514. 25 The Companies Act 2014, Section 509(1)(a) 26 ibid.

Kitchen Desserts Limited the company fell within the scope of section 509(1)(a).27 However, the petition was dismissed as one of the company’s main creditors, Starkane Limited, opposed the petition. Thus, examinership was found to be the inappropriate remedy due to these objections.

Additionally, the examinership process has continued to be criticised as the process is not easily available for small companies due to a number of factors such as the specific advice required, the abundance of necessary applications and also the extensive cost.28 There have been numerous suggestions to rectify these criticisms. For example, the Preventative Restructuring Directive (PRD)29 envisages a relaxation of court involvement where it is ‘necessary and appropriate to do so’30 while ‘ensuring the rights of any affected parties’31. Judicial discretion is often a key factor when applying the viability test under Irish law, thus this optional test under the PRD could improve the accessibility of the process for small and micro companies.

Secondly, The Companies (Rescue Process for Small and Micro Companies) Act 202132 introduces an administrative process which is designed to operate within minimal judicial oversight. This procedure represents an attempt to bring the benefits of the examinership process without the tedious application process. Furthermore, these aforementioned processes could be useful additions to Irish company law.

Examinership and COVID-19

COVID-19 has presented enormous challenges for previously thriving companies. The pandemic has ‘paralysed the whole economy’33 forcing countries around the world to take emergency responses. Though COVID-19 continues to negatively impact businesses, it should not result in the forced closure of an abundance of companies.34

27 The Companies Act 2014, Section 509(1)(a) 28 J. Ensor, R. Ambery, “COVID-19 and Examinership “What the Examiner Wants You to Know”” [May 2020] <https://www.dilloneustace.com/legal-updates/covid-19-andexaminership-what-the-examiner-wants-you-to-know> Accesssed March 11 2022. 29 Preventative Restructuring Directive 2022. 30Lynch Fannon and Grant (n 7). 31 Preventative Restructuring Directive 2022, Article 4(6). 32 The Companies (Rescue Process for Small and Micro Companies) Act 2021. 33 Ghio E and others, ‘Harmonizing Insolvency Law in the EU: New Thoughts on Old Ideas in The Wake Of The COVID-19 Pandemic’ [2021] 30 International Insolvency Review 34 A & L Goodbody, “Saving viable businesses- a look at restructuring options in the current environment” [2020] <https://www.algoodbody.com/files/uploads/news_insights_pub/COVID44

Furthermore, protective legislation has been introduced to assist companies in these testing times such as The Strategic Banking Corporation of Ireland Covid-19 Working Scheme35, The Covid-19 Business Loan from Microfinance Ireland, and the National Covid-19 Income Support Scheme36. Notably, the Companies Miscellaneous Provisions (Covid-19) Act 202037 has been introduced to allow examiners to apply to the court to extend the protection period up to 150 days from the current 100 days. This legislative addition to the examinership process has been a welcomed introduction for distressed companies in securing future viability and avoiding liquidation.

It is clear that the process has continued to be underutilised for numerous reasons.38 It could be said that businesses fail to receive adequate advice or exposure to examinership and thus, they are unaware of the beneficial effects that can emanate from this procedure. It could also be said that the corporate world has an issue with reaching out for help. Nevertheless, if there was an increased number of success stories, the process could perhaps be normalised. The corporate world could emphasise the idea that attempting to rescue a business first is more beneficial than immediately winding up a business even if at first glance it seems to be the easier solution.

Thus, it is unclear whether the COVID-19 pandemic has changed the examinership procedure forever. Perhaps the unprecedented times have changed consumer behaviour and the corporate world for good. It is unclear how consumers, the Government, the Revenue Commissioners, or the Banks will react to the economic effects that COVID19 has had on the businesses of Ireland. Therefore, companies’ circumstances will have to be assessed on a case-by-case basis to ascertain which insolvency mechanism is best suited to individual companies39 due to the ever-evolving nature of COVID-19.

19_Saving_viable_businesses_%E2%80%93_a_look_at_restructuring_options_in_the_current_ environment.pdf>Accessed11 March 2022. 35 The Strategic Banking Corporation of Ireland COVID-19 Working Scheme. 36 The National COVID-19 Income Support Scheme. 37 The Companies Miscellaneous Provisions (Covid-19) Act 2020. 38Ashling Walsh, Michael Quinlan and Mark Costello, ‘Examinership – an underutilised option for vulnerable but viable companies’ <www.rdj.ie/insights/examinership---an-underutilisedoption-for-vulnerable-but-viable-companies?s=0.717921850419> Accessed 7 March 2022. 39 ibid.

Conclusion

The COVID-19 pandemic has had a significant economic impact, and few are immune to this impact. Inevitably, this acute disruption has had a significant impact on businesses with many popular Irish retail chains going into liquidation. The economy of Ireland has faced challenges and obstacles over the last 20 years with the recession of 2008 and the recent COVID-19 pandemic leading to severe business interruption. It is clear that business owners have learned from these unprecedented times which will aid their future decisions in relation to their business. The examinership process as well as the introduction of new legislation has been a great relief for struggling businesses, and it certainly continues to be a ray of hope in these unprecedented times.