These are hard times for business. In an era of falling asset values and tight trading conditions, some firms may be facing paper losses or technical insolvency. In the fight for survival, applying for examinership is one way they can avoid being forced into a 'fire sale' of their assets. But, as Andrew Gill explains, timing is critical.
As the fallout from the credit crunch persists, the effects continue to be felt across the global markets. Those companies that have borrowed heavily to fund their asset purchases are now facing a stark reality. Due to decreasing asset values, many of them are flirting with technical insolvency, as the book value of their assets now approaches the equivalent value of their liabilities.
With defaults looming as a realistic possibility, many of these companies are now contemplating the forced liquidation of their assets by counterparties, with little hope of achieving more than fire-sale values. Companies such as these need to carefully assess their options for survival.
One possibility is to make an application for examinership under the Companies (Amendment) Act 1990. The process is designed to give fundamentally viable companies a period of refuge from their creditors and an opportunity to reorganise their affairs. Crucially, what it can offer to companies is time. While under the protection of the court, companies can negotiate schemes of arrangement with their creditors, with a view to agreeing compromises to facilitate their survival.
The timing of an application for examinership is critical, with a limited window available in which it may be usefully employed. A premature application for examinership by a company is likely to trigger a default under its financing arrangements, giving its counterparties the right to close out financing transactions and realise their security. This would hasten a fire-sale of the company's assets and crystallise the decreases in asset values. However, examinership may be a useful device where default is imminent or has just occurred.
In order to ensure a successful application for examinership, it is first necessary to demonstrate that:
- The company is or is likely to be unable to pay its debts
- No resolution subsists for the winding-up of the company, and
- No order has been granted for the winding-up of the company.
In situations where a default is imminent, there is unlikely to be any difficulty in demonstrating that the company is unable to pay its debts. Managing the timing of an application for examinership will be critical in satisfying the other requirements set out above.
The key obstacle to a successful application for examinership is contained in section 2(2) of the Act. This section provides that the court shall not make an order unless it is satisfied that there is a reasonable prospect of the survival of the company and the whole or any part of its undertaking, as a going concern. It is not sufficient to demonstrate that an examinership would allow a more advantageous realisation of the company's assets.
The first step is to demonstrate that the company constitutes a 'going concern'. The more difficult condition to fulfil is that there is a reasonable prospect of the survival of the undertaking. While the prospects for each company will turn on their own particular circumstances, securing fresh investment for the company will certainly make this condition easier to satisfy.
Under section 3(A) of the Act, a petition for examinership must be accompanied by the report of an independent accountant. This report must contain, among other things, a statement of the affairs of the company and the opinion of the accountant as to whether there is a reasonable prospect of the company's survival. Only in exceptional circumstances will the court hear an application that is not accompanied by an independent accountant's report. Given the extensive information that must appear in this report, companies considering examinership should begin the process of compiling this report in advance of making an application.
In dealing with these unprecedented conditions, companies need to consider all of their available options critically. Examinership can be a useful mechanism for asset preservation, but companies should ensure that they are fully prepared to act when the window opens.