Corporate Survival and Coronavirus in Ireland

stephenjosullivan.com/2020/06/02/corporate-survival-and-coronavirus-in-ireland/

stephenjosullivan June 2, 2020

There is considerable pressure on Irish companies

with Coronavirus. To add to this pressure, since
2008, many non-performing loans have been
acquired from Irish banks by Vulture Funds who
might be more aggressive in enforcement. There
are risks posed by Brexit, in particular on
companies that trade with the UK.
The UK and Australia have temporarily suspended
some corporate insolvency laws such as reckless
trading provisions, to ensure that directors don’t
rush to liquidation. Also, the time period for the
payment of debts has been extended there. In
Ireland, if a Company fails to pay a debt within 21
days of a letter of demand, it is deemed insolvent.
There have been calls for similar measures here. There have also been calls for an
extended period of Examinership beyond 100 days. See here.
As yet, no relevant amendments have been made to Irish law.
Reference to sections in this article are references to sections of the Company Act 2014.

The risk for directors of insolvent companies is that they may later be held personally
liable for reckless trading if they continue to incur debts after they knew that the
company was insolvent.
Liquidators of an insolvent company must apply to the Court to restrict the directors
unless exempted from doing so by the ODCE. Another risk is that directors often enter
personal guarantees for the debts of the company and so cannot let the company go into
liquidation without further exposure.

This article outlines some solutions available to companies if there are concerns about
insolvency.

The repeated guidance from experts is that directors should seek advice from an
accountant and/or a solicitor, with knowledge in this area, at the earliest possible stage.
This will give the directors more protection and more options if things do not improve.
Shareholder/Directors often add personal funds to a failing business to arrive at a point
later where there is no money left to get professional advice or to invest back into the
company as part of a formal restructure.

A liquidation normally marks the end of a Company’s activity. On liquidation, the order
of priorities is to pay debts in a certain order; fixed charge holders, liquidators fees and
expenses, preferential creditors (Revenue and employees), then floating charge holders
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(not crystallised before the winding-up and then unsecured creditors. By definition
there will be no money left for shareholders. In many cases, unsecured creditors will get
nothing or a small percentage of their debt. The liquidator will realise all assets which
could include property and goodwill and it may be difficult for the directors to establish
a new company from scratch after the process is complete, quite apart from the fact that
the Director might be restricted or disqualified for a period. Directors and shareholders
will have spent time and effort in developing the enterprise and for no reward more
than what was previously received.

Part of the reason there has not been a rush to liquidation and receivership applications
since February 2020 is the forebearance by banks, landlords and because employees
have access to social welfare and top-up payments. These helpful measures will not last
forever, and problems will arise if these measures are removed and the economy does
not return to its original capacity.

For larger companies that are required by law to have an audit each year (Section 352),
insolvency is and will be more conspicuous. The guidance in Ireland is that auditors
should address whether the company can operate as a going concern for the financial
year following the period audited and auditors may give an qualified opinion in relation
to this issue given the uncertainty around Coronavirus. See here.

Government support available

Some of the major banks in Ireland are currently offering a moratorium on repayments
of business loans.
For employees, there is the possibility of putting employees on temporary layoff and
those employees can claim the Covid 19 Payment. Alternatively, a wage subsidy is
available to keep employees on.
The Government has made various supports available to business including loans,
funding and guarantees depending on the type and size of the business. See here. There
are grants available to help design a Covid 19 business recovery plan. The advantage of
doing one is that it shows responsibility by the directors. Some commentators have
suggested that funding could be used to fund corporate survival.

1. Scheme of Arrangement outside of Examinership

Section 450 provides new rules for a Scheme of Arrangement to make it a more
streamlined process. It is a two-stage process.
First there must be a formulation of a Scheme and the approval of the Scheme by the
company’s members and creditors. The Scheme must be approved by at least 50% in
number and 75% in value within each class of creditors. It may not be enough to divide
creditors into secured, preferential and unsecured – there may be classes within those
categories. It may require putting different secured creditors into different classes based
on the strength of security held as per Re Alabama 1981 1981 Ch 213, or putting
ordinary unsecured creditors into a different class to ordinary unsecured creditors who
are also shareholders (See Re Pye Ireland Ltd. 1 March 1985)
Second, there must be an application to the High Court for sanction of the Scheme. If
the court sanctions the Scheme, it becomes binding on dissenters. The Scheme could
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propose solutions similar to what an Examinership might propose.
The major drawback is that the threshold for creditor approval is higher. In
Examinership it is pre- requisite to show only that one class of creditors approves. It
might be rare for a bank or the Revenue to agree to such a Scheme and effectively they
would hold a veto on it. They may be less incentivised to agree such a scheme than in an
Examinership where they will have to explain to a Court why they object to a scheme.
There is a sword of Damocles in Examinership, whereby if the Scheme is not sanctioned,
liquidation will follow.
Such a scheme of arrangement was approved by the High Court in Re Ballantyne Plc
[2019] IEHC 407, which was an Irish PLC reinsurance company with assets of $1.6B.
One creditor, which held a $5M bond, raised objections on various grounds but the
court sanctioned the scheme. However, it was far from a typical Irish Company and it
was far from the typical SME insolvency where the bank and revenue constitute the
major creditors.

2. Receivership
A receivership is where a creditor (usually a bank), which holds a charge on the assets of
a company as security for it’s debts, appoints a Receiver to recover the money due to it.
Usually this is done without the necessity for court appointment. It is common for
companies to seek the removal of a Receiver on the basis that the Receiver acted outside
the terms of the loan contract. It is also common for the Receiver to apply to court to
stop the directors interfering with the performance of his duties.
The function of a Receiver is to take possession of the assets, then realise those assets
and pay off the creditor. However, depending on the terms of the appointment and the
desire of the creditor, the Receiver might continue trading with a view to increasing the
value of the company’s assets. The Receiver might have a more limited role, only
collecting rents to discharge the debt leaving the company in possession of the property
(Rent Receiver).
The most common form of receivership is that of a receiver-manager appointed by a
bank pursuant to a debenture document that creates a floating charge over all the
company’s assets.
A Pre-Pack Receivership can be used to implement a management buyout of the
underlying business and/or assets. It would require agreeing with all creditors for this
course and might be best suited to where there is one main creditor affected, with
agreement of that creditor.

3. An arrangement during a Creditors Voluntary Winding-up (CVW)

A liquidator can agree a binding arrangement or compromise with the creditors and
members of the company, once passed by 75% of the members and by 75% of the
creditors in number and value (s.676). The arrangement could involve selling the
business assets to a third party or establishing a new company where the creditors take
shares in same in exchange for writing off part or all of their debt. The arrangement
agreed can be appealed by a creditor to the High Court within 21 days. It is likely that
such a creditor would need to show, among other things, that it would do better in a
liquidation than under the scheme to upset the arrangement.
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Such an arrangement is experienced rarely by those in practice. A major obstacle is that
a creditor in a CVW usually chooses the liquidator and that liquidator might not be
equipped, motivated or inclined to seek out such an arrangement.

4. Examinership
Examinership is where the company seeks protection of the Court from litigation to
assist the survival of a company, allowing a company to restructure with the approval of
the High Court.
It is seen as the best method of corporate survival if the conditions are right. It is a
proactive move. Creditors, and in particular banks, do not generally accept a write down
of debt voluntarily. Creditors often choose to park debt, roll up debt, convert overdrafts
to term loans etc. but will rarely write off debt. Examinership brings matters to a head.
Examinership provides a maximum 100 day protection period to allow the Court
appointed official, the Examiner, to come up with a Scheme of Arrangement.
The application is by petition and you must show that there no order for winding-up
has been made and a receiver has not been acting for more than 3 days (anecdotally, a
lot of Receivers are appointed on Friday to create even more time pressure). Ideally the
option is considered long before a Receiver is appointed or a petition for liquidation is
issued because of the short time-lines.
The petition is accompanied by a report in relation by an “independent accountant” to
say he/she believes that there is “reasonable prospect of the survival of the company on
the whole or any part of it’s undertaking as a going concern”.
The Examiner will formulate proposals for a compromise or Scheme of Arrangement, to
facilitate the survival of the company. The Court can confirm the proposals only if it has
been accepted by at least one class of creditors effected, it is fair and equitable having
regard to the rights of all classes of creditor and it is not contrary to the interests of any
interested party. The Examiner’s report will set out how much each class of creditor
would be paid under the Scheme of Arrangement versus how much they would be paid
on liquidation. The creditor will generally need to must show that he would fare better
on a liquidation, which is rarely the case.
If the Court confirms the Scheme, it becomes binding on all creditors and their rights
are accordingly modified.
Since 2013, the application can be brought to the Circuit Court for a SME company
which is in broad terms defined as a company with a turnover of less than €12 million, a
balance sheet total of less than €6 million; and an average number of employees less
than 50 (2 of these 3 things is sufficient).
The Examiner may, with the approval of the court, repudiate any contract under which
some element of performance, other than payment, remains to be rendered by both
parties. That creditor becomes an unsecured creditor in the Examinership and the court
may assess the value of his loss. This provision is often availed of by tenant companies
to repudiate expensive leases. Alternatively, the Examiner might agree with the landlord
to renegotiate expensive upward only rent agreements. Also, a company with a large
number of contracts could disclaim a loss making contract and retain the profit making
contracts.
Typically, the scheme of arrangement will provide for additional investor funding (often
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from existing shareholders and/or a White Knight investor and sometimes with the help
of additional bank funding) and a write-down of creditor debt. According to Insolvency
Journal, the average dividend for preferential creditors in 2008 was 23.5% and for
unsecured creditors it was 13.6%. A fixed charge on a property could be reduced to
reflect a realistic market valuation.
The percentage of insolvent companies that apply for Examinership might be as low as
2% or lower, so Examinership is seen as underutilised compared in particular to
Chapter 11 Backruptcy in the US. Another article says that as at 2017, 56% of companies
that had an Examiner appointed between 2007 and 2016 were still trading in 2017,
which is a testament to it’s success.
The court is keen to see that Revenue and Employees are treated favourably. Revenue
normally require that ongoing debts continue to be paid during the Examinership
period. The court favours companies that have a good number of employees rather than
investments companies. Following the recession in 2008, the Courts did not approve
Examinership for property holding companies such as Zoe Developments. The costs of
the Examinership are usually met by the investor.

Given that many viable companies may face insolvency due to Coronavirus interruption,
now might present the perfect conditions to successfully avail of the process. As against
that, the Examiner might have difficulty in estimating the prospects of survival at this
time, when the length and depth of interruption of demand is uncertain and may
depend on the success of the lifting of restrictions and future macro-economic data.

Stephen O’Sullivan, Barrister

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