As we are all well aware, there has been a major slowdown in economic activity in Ireland with many businesses now facing an uncertain future. A combination of factors has led to a tightening of purse strings which has placed many businesses under severe financial pressure.
The Thomas Read Group (which had control over various bars, restaurants and clubs) is one example of how badly the hospitality industry has been affected. In order to attempt to facilitate its survival, the company was placed in examinership. However, a Receiver was subsequently put in place by its largest creditor, ACC Bank as the examinership process had not been able to rescue the company.
Where a company finds that it is in financial difficulties, it needs to carefully assess its options for survival.
This article will provide an overview of:
- The Examinership process
- The Receivership process
- A recent high profile examinership (i.e. The Thomas Read Group)
The Examinership Process
Examinership is a process whereby the protection of the court is sought to assist the survival of a company. Essentially it allows a company to restructure with the approval of the High Court and the agreement of its creditors.
The directors normally apply to the court to put the company into examinership. However, the company itself, shareholders holding not less than 10% of the issued share capital or any creditor may also apply.
To secure protection, a company must demonstrate to the court, through an independent accountant's report, that it has a reasonable chance of survival. The report is extremely important and must contain a statement of affairs of the Company and the opinion of the accountant as to whether there is a reasonable prospect of the Company's survival.
If the court grants protection, the company can be given up to 100 days to seek to trade through its difficulties.
If successful, the process usually results in creditor balances being reduced, while intangible company assets are protected and investment is obtained.
Once the Company is under the protection of the court, the role of the examiner is to 'examine' the company's affairs and formulate a compromise or scheme of arrangement in respect of the Company and to try and reach agreement on his scheme with the Company's creditors. The court must ultimately approve the scheme of arrangement in order for it to become binding - even where a scheme is accepted by a majority of creditors.
If the scheme of arrangement is not approved by the High Court or not successfully implemented, the protection of the court is withdrawn and liquidation and/or receivership invariably follow.
Examinerships differ from liquidations in that the process provides a business with a period of time within which to deal with its debts and seek to reorganise its financial structure going forward. Liquidation is the end of the road for the Company leading to a realisation and disposal of its assets in an attempt to discharge sums due to its creditors.
High profile companies which have successfully emerged from the examinership process include Shamrock Rovers Football Club and Chorus Communications.
However, the courts are refusing an increasing number of petitions for examinerships. Mr Justice Peter Kelly recently stated that he is becoming more reluctant to grant court protection to companies given the high failure rate of examinerships due primarily to their failure to attract the necessary investment.
Last year, examiners were appointed to approximately 70 companies. This is more than double the number of appointments granted in 2007. Fewer than a third of all companies that have entered examinership since the start of 2007 are still in business. These statistics demonstrate that a worrying trend is beginning to emerge in that many ''unsuitable companies'' are now seeking to use the examinership process as their final lifeline.
Many believe that the most favourable option is already available - receivership.
The Receivership Process
A Receiver, as the name implies, is a person who is granted the legal right to receive and dispose of property belonging to others for the benefit of the secured creditor. A Receiver and Manager has the additional power to manage and trade with the company's charged assets. Although there are different types of Receivership, the most common type is one that is appointed by a secured creditor, usually a lending institution, under the powers contained in the debenture/loan document.
Powers, duties, functions of a receiver.
On the appointment of a receiver he or she will take possession of the charged assets, realise those assets and discharge the debt owing to the debenture holder. However, depending on the terms of his appointment a receiver may continue the business with a view to maintaining or maximising the value of the company's assets and seek to sell the business as a going concern.
There has been a surge in the number of receivers being appointed in recent times as banks and other secured creditors take a more aggressive approach to securing their debts. The number of receiverships over the last few years speak for themselves: 11 companies were placed in receivership in 2007, 57 companies in 2008 and as of 1 March 2009, a staggering 45 companies have been placed in receivership.
The Thomas Read Group
A petition for the examinership of the group was brought to the High Court in November 2008 by the parent company of the group. At that stage, there was an investor interested in becoming involved in the group. ACC Bank, which was owed €15.5 million by the group, opposed the examiner's plan and asked that its proposals for survival be approved instead.
ACC wanted the Thomas Read group placed into receivership and were contesting a valuation put on the premises by the Examiner. In another recent high profile examinership (i.e. Birchport Ltd), as part of that scheme of arrangement, ACC Bank had agreed to a reduction in the value of its security and the Examiner's Scheme of Arrangement was approved by the High Court.
However, in the Thomas Read examinership, ACC was not prepared to agree a reduction in its security.
It subsequently transpired that the single investor was no longer prepared to be involved in the Thomas Read group. A meeting of the directors of the parent company subsequently resolved to ask the High Court to appoint a receiver, a course of action proposed previously by ACC Bank.
In light of the fact that a receiver was appointed, the court did not exercise its discretion to order the winding up of the company. Therefore, a receiver is now appointed under the debenture which ACC Bank holds.
For suitable companies, that is those with a genuine prospect of survival if given a period of protection from their creditors, there is no doubt but that the examinership process may be just the lifeline needed. However, without the prospect of investment and a willingness of creditors to compromise their positions, receivership or liquidation is the main likely outcome.