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Preventive Restructuring Directive Modifies Examinership Procedure

  • Ireland
  • Corporate secretarial services
  • Employment law
  • Restructuring and redundancy

19-08-2022

The existing examinership regime has been recently updated by the European Union (Preventive Restructuring) Regulations 2022 (the “Regulations”). The Regulations amended parts 5, 10 and 11 of the Companies Act 2014 (the “2014 Act”) and transposed Directive (EU) 2019/1023, which sets down minimum rules for restructuring processes within Member States.

The key changes to the examinership regime are set out below:

Early Warning System

The Regulations provide for an Early Warning System, which is designed to assist directors in their decision making when a company is in danger of becoming insolvent. This Early Warning System will be published by the newly established Companies Enforcement Authority and will set out the circumstances that could indicate:

a) a likelihood that the company is or will be unable to pay its debt; and

b) the steps directors should take at an early stage to avoid or overcome insolvency.

Experience and Expertise of Examiners

Regulation 9 sets out that in cases that include cross-border elements, the court is now required to take into account whether the proposed examiner has ‘sufficient experience to perform the role, having due regard to the examiner’s experience and to the specific features of the case.’

Previously there was no requirement for the court to consider the proposed examiner’s experience. There is no guidance yet as to what level of detail will be required of an examiner or how the court may assess their expertise.

Directors Duties

Regulation 4 now explicitly sets out a statutory duty on directors to consider the interests of the creditors of the company where there is a likelihood of insolvency. This was previously only a common law duty.

Regulation 6 sets out that where a director is in breach of such duties to creditors, they will be liable to account for any gain they have made and indemnify the company for any loss or damage resulting from that breach.

Best-Interest-of-Creditors Test

Previously the examinership legislation required that the independent expert state whether, in their expert opinion, the continuing of the whole or part of the undertaking would likely be more advantageous to the members and the creditors as a whole than the winding up of the company.

Regulation 10 amends s511(3)(g) of the 2014 Act and now requires the independent expert to state whether, in their opinion, an attempt to continue the whole or part of the undertaking meets the ‘best-interest-of-creditors’ test. This test requires the independent expert to consider ‘if no dissenting creditor would be worse off under a restructuring plan than such a creditor would be if the normal ranking of liquidation priorities were applied, whether piecemeal or by sale as a going concern.

In simple terms, the independent expert is now required to confirm that in their opinion a creditor would not fare worse in an examinership than in a liquidation.

The court must also confirm that the proposals satisfy the best-interest-of-creditors test when confirming a scheme of arrangement where there are dissenting creditors.

Employees Claims

Regulation 11 inserts s520(5A) into the 2014 Act and gives, for the first time, express protection to employees who wish to bring claims against the company in examinership. This sets out that employee claims against the company are excluded from the stay on all proceedings against the company during the period of protection.

The Regulations amend the previous situation where a company in examinership was granted complete protection against all proceedings during the period of examinership.

Maximum Length of Stay

Regulation 14 provides for an explicit 12 month cap on the total duration of the stay on proceedings being brought against the company.

Impaired Creditors

Previously, under s534 of the 2014 Act, the examiner was required to convene and preside over a meeting of such creditors and members as he thought proper to consider a proposed scheme of arrangement.

Under the new s534(aa), the examiner is now required to also invite all creditors or members, or class of members or creditors, whose interests or claims will be impaired by the proposed scheme of arrangement to a meeting to approve the scheme. Any creditor who is not invited to such a meeting cannot be impaired by the scheme.

Voting Threshold and Cross-Class Cram Down

S540(4) sets out that the proposals will be deemed to be accepted when a majority in number of impaired creditors, representing a majority in value of the claims that would be impaired have approved the proposals. Where such a majority has voted in favour, the court can approve the scheme under s541(3A).

S540(4A) specifies that creditors whose interests will not be impaired shall not have voting rights on the approval of the scheme and shall not be counted when calculating the majority.

The new s541(3B) sets out that where proposals have not been approved by the creditors under s540 above, on application by the examiner, the court can confirm the scheme of arrangement if they have been accepted by:

a) a majority of the voting classes of creditors whose interests or claims would be impaired by the proposals, provided at least one of those classes is a class of secured creditors or is senior to the class of ordinary unsecured creditors; or

b) at least one voting class of creditors whose interests would be impaired by the proposals, other than a class of creditors which would not receive any payment or could be reasonably presumed not to receive any payment if the normal ranking of liquidation priorities were applied.

This restricts the flexibility previously afforded to an examiner where they could rely on the approval of a class of creditor who would likely receive nothing in a liquidation but who will receive some payment under an examiner’s scheme. The examiner must now seek the approval of creditors who would be entitled to receive some payment in a liquidation.

Restriction on Certain Contracts

Regulation 12 introduces s520A which explicitly prevents creditors from withholding the performance of, terminating, accelerating or in any other way modifying an executory contract to the detriment of the company solely because the company has commenced an examinership, notwithstanding any contractual clause to the contrary. This creates greater certainty for the company and debtors.

Proposed Scheme of Arrangement

Regulation 15 amends s539 and requires the proposed scheme of arrangement to also specifically include certain additional information including:

a) The identity of the company;

b) the identity of the examiner; and

c) the terms of the proposals including any proposed restructuring measures, the proposed duration of such measures, the arrangements for informing and consulting employees, the overall consequences to employees, any new financing anticipated and a statement of reasons why there is a reasonably prospect of the survival of the company with the scheme.

Certification of Liabilities

Previously, the examiner had discretion to certify liabilities which were incurred by the company during the protection period where, in the opinion of the examiner, the survival of the company as a going concern would otherwise be seriously prejudiced.

Regulation 13 amends this discretion and now requires the examiner to certify at least the following liabilities incurred during the protection period where in the examiner’s opinion the survival of the company as a going concern would otherwise be seriously prejudiced:

a) the payment of fees for and costs of negotiating or confirming a scheme of arrangement;

b) the payment of fees for and costs of seeking professional advice connected with the examinership;

c) without prejudice to other protections provided in any other enactment, the payment of employees’ wages for work already carried out;

d) any other payments and disbursements made in the ordinary course of business.

Regulation 13 also inserts s529(2A) which provides if there is a subsequent winding up after the period of protection, liabilities incurred during the examinership will not be declared void, voidable or unenforceable if they were reasonable and immediately necessary to the negotiation of the scheme of arrangement.

Conclusion

The new Regulations have brought some welcomed additional protections for the company such as the contractual obligation on creditors to continue the performance of executory contracts and the extension of the period of protection. These amendments have been balanced by new provisions specifying additional duties on directors to creditors and enhancing the rights of employees to bring claims during the examinership period.

However, it remains to be seen how the new voting requirements for the approval of a scheme of arrangement will work in practice. In particular, a question remains as to whether these enhanced voting thresholds will stymy the voting regime to an unworkable degree or whether it will facilitate more rational compromises from creditors.

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