“To achieve great things, two things are needed: a plan, and not quite enough time.” – Leonard Bernstein
To paraphrase, great things happen when there is a plan and a deadline.
Examinership is one of Ireland’s key rescue processes for insolvent companies. It has been used successfully in very many cases since its introduction almost 20 years ago.
Crucially, it encompasses a deadline with no flexibility.
In brief, examinership is a court supervised rescue process lasting a maximum period of 100 days during which the company is insulated from creditor action. An insolvency practitioner, (the “Examiner’), is tasked with reviewing the financial position of the company and, where feasible, the Examiner will formulate proposals for a scheme of arrangement to ensure the survival of the company and all or part of its undertaking as a going concern.
The proposals for a scheme of arrangement typically provide for a write down of debt across various classes of creditors, including secured creditors, in conjunction with fresh investment.
The fresh investment may be from existing stakeholders or third parties who have had no prior involvement with the company. Where a number of parties express an interest in investing in the company, the Examiner may select whichever party he believes will offer the greatest prospect for the company’s survival as a going concern.
The courts have been very clear that the process is not intended or designed to protect shareholder interests.
This short period of less than 100 days is the timeframe within which a prospective investor has to carry out any due diligence and sign an investment agreement. This arrangement must be binding and unconditional in order for the Examiner to present his/her proposals for a scheme of arrangement to the court. By that stage, the only permitted conditionality is the approval of the court.
Is there enough time?
A question that frequently arises is how a new investor can adequately conduct a diligence process in that timeframe?
Equally, a related question is whether existing stakeholders, who are familiar with the business and its financial affairs, will have an insurmountable advantage over unrelated parties in formulating a suitable investment proposal?
The answer to both is that, while the timeframe and potentially limited scope for due diligence is challenging, it is far from impossible for a third party to be chosen as the preferred investor by the Examiner.
Moreover, investing in a company in examinership can offer scope for positive returns given the ability to sanitise the company’s financial affairs from legacy issues, including unprofitable contracts, and unsustainable levels of debt.
Notwithstanding the unique benefits of the process in terms of the scope to eliminate historic issues and significant sums of debt, the examinership process does not jettison the requirement for an investor to conduct appropriate due diligence.
It is still advisable to establish and verify in as much detail as possible all existing obligations of the company so that any issues can be addressed in the proposals for a scheme of arrangement. An investor may not wish to retain certain contracts or leases of premises but unless the details of the contracts and leases are known, the situation cannot be fully assessed.
Given the statutory deadline for the process, very prompt action is required by any party wishing to explore the feasibility of investment and the Examiner should be asked to furnish all available information as quickly as possible. Queries should be raised at the first opportunity and, to the extent that any detailed diligence of the books and records is required then that request should also be made as early in the process as possible.
Depending on the profile of the prospective investor, in addition to legal advice, it may also be prudent to appoint financial and tax advisors to review the figures presented in the petition papers and in the independent expert’s report. A comparison of those figures to recent audited and management accounts will also be critical. Any tax issues need to be established and addressed; this includes not only historical issues but those tax issues that may result from a change in control of the company or liabilities in the Examiner's proposals for a scheme of arrangement.
The types of issues/areas that normally need to be considered as part of the due diligence are those that an investor is usually concerned with e.g. employee terms, property, operational issues and/or ownership of assets.
Is it worth it?
Investing in a company in examinership undoubtedly has its challenges but the rewards can be substantial.
Proposed investors should expect to be met with a certain level of resistance to very detailed requests for due diligence and they will be expected to furnish the Examiner with their indicative investment proposal relatively early in the process along with a plan for the future survival of a business that they are, at that stage, largely unfamiliar with. On occasion, a view must be taken as to the risk profile of any investment and this is equally the case with investing in a company in examinership.
Considerable work has to be done in what is unquestionably a short amount of time. However, with appropriate investment and the right business model in place, many companies have exited the examinership process with great success having been relieved of the burden of legacy unsustainable debt and unprofitable contracts.
For the astute investor, rewards are most certainly there.
The content of this article is provided for information purposes only and does not constitute legal or other advice.