Examinership produces the best commercial and social outcomes of insolvency, but is prohibitively expensive for many potentially viable Irish companies

Directors realise company is insolvent

Liquidation

• Directors appoint liquidator OR Creditor petitions High Court

• All jobs lost• All assets sold• Goodwill disappears• Going concern value of business lost• Limited (if any) realisations to benefit of

creditors after liquidator costs paid• No dividend to unsecured creditors• No effective control of costs

Receivership

• Directors appoint receiver

• Creditors may appoint receivers to charged assets

• Can be done as part of a liquidation

• Secured creditor recovers to the value of the assets subject to receiver costs

• Typically jobs lost• Typically no dividend to trade creditors• Goodwill value often fatally

compromised• Trade deteriorates • No effective control of costs

Examinership

• Independent Accountant’s Report done with opinion on whether company will survive

• High court petition grounded on report

• If court agrees, examiner then appointed

• New investment• Dividend to creditors• Employment protected• Balance sheet repaired • No impact on goodwill• Scope for promoters to retain control• Issues compromising trade resolved• “Bounce” given to trade• Control of costs

Mechanism Result

• €0• €5,000 if

creditor appointment

• €0

• €20,000 to €350,000

Cost

Restructured Company Continues

Trading

Creditors Paid

High Court Reviews Proposal

Examiner Begins 70 Day Process

Directors & Creditors

Attend High Court

Examinership Advertised

Papers Filed With Central

Office of High Court

ExaminerHired

Independent Accountant’s Report Done

Directors Realise Company is

Insolvent

The complexity and legalistic nature of the current examinership process drive the high cost and opens the process to exploitation by well-resourced creditors

Accountant gives opinion of whether company can be successfully restructured

Judge decides whether or not to award protection to company

• Independent Accountant’s Report verified• Outline survival plan developed• New investor found & money deposited • Creditors met and vote on proposal• Creditors can and do involve the High Court in various

aspects of the process, adding to high legal costs

IF Judge decides to award protection

Company prepares High Court petition to be awarded examinership protection. Cost minimum €20k

The proposed changes to the examinership process are based on identifying specific existing failures and providing workable solutions to each

1. High Court proceedings incur high legal costs

• Move proceedings to the Circuit Court, as required• See accompanying memo for details

2. Automatic Court involvement drives up costs unnecessarily

• Where two independent financial experts’ (the independent accountant and the examiner) analysis indicate the company has a prospect of survival, it can enter a rescue process

• Remove Court involvement, save where creditors or contributories require court oversight, for example, where creditor appeals to Circuit Court on grounds of unfair prejudice

3. Secured creditor(s) force closure of viable business

• Examiner may impose lending conditions on secured lenders over 5 years based on minimum altered lending amount, to the value of underlying security plus 7% (creditor cannot impose ‘on demand’ repayment terms)

4. Landlord forces closure of viable business through upward-only rent clause

• Give examiner ability to impose changes to leases over 5 years, based on minimum term of market plus 7%

Proposed Change / SolutionExisting Process Failure

5. Creditor(s) seeks to drive up process costs through vexatious court appeals

• If a creditor engages in court proceedings for vexatious or frivolous reasons they are on risk of an order for the costs incurred by the examiner and/or the company in defending the application

6. Essential creditors refuse to trade without guarantees

• Examiner may give priority to certain essential creditors if creditors are refusing to supply without such priority

Restructured Company Continues

Trading

Examiner Begins 70 Day Process

ExaminerIssues

Protective Certificate

Independent Accountant’s Report Done

Directors Realise Company is

Insolvent

The proposed changes lead to a quicker, far less expensive process, whilst retaining court oversight and all advantages of the existing process

Accountant gives opinion of whether company can be successfully restructured, and examiner agrees with this opinion

Creditors may appeal to decision to the Circuit Court

• No Court involvement necessary, but available if agreement not possible

• Risk of costs orders if vexatious or frivolous court applications

• Examiner can take certain steps in new process that otherwise requires court approval

• Large reduction in costs (approx. 80% reduction) opens examinership process to many viable companies who cannot currently afford it

• Lower complexity makes process more attractive for all involved

• Viable businesses cannot be closed down due to a dominant creditor demanding payment (still gets paid, put over 5 years, with 7% annual return)

• Well-resourced creditors cannot close down process by clocking up legal costs for business in question

• Upward-only rent clauses cannot be used to shut down viable businesses

Advantages of Changes

The proposed changes would significantly reduce the required new funding required for viable business to continue trading post examinership

WORKED EXAMPLE

Creditors Amount Owed, € Value of Security Reclassification1 Dividend2 New Funding

1. Secured 400,000 250,000 250,000 100% 250,000

2. Preferential 150,000 - 150,000 20% 30,000

3. Unsecured 200,000 - 350,000 10% 35,000

Total 750,000 250,000 750,000 To Creditors 315,000

Examinership3 100,000

415,000

1. Current Legislation – Viable business requires €415k of immediate new funding to survive

Creditors Amount Owed, € Value of Security Reclassification Dividend New Funding

1. Secured 400,000 250,000 250,000 107% -4

2. Preferential 150,000 - 150,000 20% 30,000

3. Unsecured 200,000 - 350,000 10% 35,000

Total 750,000 250,000 750,000 To Creditors 65,000

Examinership 20,000

85,000

2. Under New Legislation– Viable business requires €85k of immediate new funding to survive

1. Assumes original value of asset has fallen from €400k to €250k, so remaining €150k now categorised as unsecured.2. Taking typical values from an examinership process in Ireland.3. Could be as high as €350k.4. Amount of 107% has to be repaid in five years, but not straight away, as is the case at present.