As a result of COVID-19, previously healthy companies in sectors such as casual dining, retail, travel and leisure have seen their revenue swiftly fall and many of those already operating on tight margins are now fighting for survival. It is therefore hardly surprising that over the past number of months the Irish courts have seen a rise in the number of examinership petitions being presented, including that of CityJet, Dublin based food supplier, Vernon Stores, Galway based delivery firm, Supreme Deliveries and digital media brand, Maximum Media.
Examinerships present clear prospects for distressed debt investors seeking opportunities arising from the coronavirus fallout. Investing in a company in examinership has its challenges, but these are far from insurmountable. In this article, we look at the strategies and obstacles investors should be cognisant of.
The examinership process: a brief synopsis
In short, examinership is a court supervised rescue process currently lasting a maximum period of 100 days during which a distressed company is insulated from creditor action. The principal legal test for the appointment of an examiner is: whether the company is insolvent or on the verge of insolvency and whether or not there is a reasonable prospect of the survival of the company and the whole or any part of its undertaking as a going concern.
If the court is satisfied that this test is met, an insolvency practitioner, (the Examiner), is tasked with reviewing the financial position of the company with a view to ultimately formulating 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 plan will be presented and considered by meetings of creditors (divided by class) and shareholders. Provided that at least one class of creditor impacted by the proposed scheme votes in favour of accepting the Examiner’s proposals, the Examiner may proceed to seek court approval sanctioning his scheme of arrangement, thereby making it binding on all parties.
The Examiner’s key function is to attempt to formulate proposals for a scheme of arrangement aimed at rehabilitating the company and putting it on a sound financial footing. Most survival plans require fresh investment. While fresh investment can come from existing stakeholders, in many cases proposals involve a transfer of ownership and control to a new investor. Invariably, a scheme of arrangement will involve a fresh injection of funds coupled with a write down of debt across the various classes of creditors.
Competing with other Investors
The Examiner will test the market for investment interest. Where a number of parties express an interest in investing in the company, the Examiner may select whichever party he/she believes will offer the greatest prospect for the company’s survival as a going concern. While important, the quantum of the initial investment will not always determine the matter, as the Examiner will also consider market experience, synergies that might be introduced in the business, the ability to inject additional funds at a future date and any other relevant non-cash considerations which will ensure the survival of the business.
From a practical perspective, it will be important to demonstrate to the Examiner that the investment is available on a ‘certain funds’ basis. In practice, this means that the only conditionality the court will accept is approval of the scheme.
In particular, close attention must be paid to completion mechanics for any financing, with detailed drawdown mechanics and CP confirmations agreed upfront. All typical finance, security and release documentation should be negotiated in short order, in the context of and subject to scheme approval by the court.
Unsurprisingly, funding arranged between the debtor company and investors or existing creditors prior to an examinership petition promotes a more rapid processing of a case.
The courts have previously highlighted the importance of the commercial judgment of the Examiner in the weighing up and calibration of competing interests. This does not mean that the investor with the deepest pockets will automatically be selected, and in our experience Examiners will place weight on experience. From an investor’s perspective, highlighting any existing knowledge or industry experience will invariably be a positive, albeit not essential, particularly if existing day to day management is robust and will remain in place.
In the same vein, an investor must ensure that its investment not only finances a scheme, but restructures to ensure appropriate governance is maintained, or in some cases improved, going forward.
Performing due diligence can present an issue in a lot of distressed investment scenarios. The statutory timeframe and potentially limited scope for due diligence can be challenging in the examinership context.
Investors investing in companies which are in examinership should expect to be met with a certain level of resistance for detailed requests for information.
In Ladbroke’s 2015 examinership, the Court outlined the duties of the Examiner regarding the information to be given to potential investors. In short, the court was clear that the extent of the information to be furnished to potential investors is a matter for the commercial judgment of the Examiner. If the Examiner gives too little information, he/she runs the risk of not getting a full or proper bid. If too much information is given – or all the information sought by an investor, he/she might then get a full and proper bid from such investor. However, other bidders might reduce their bids to discount for the fact that the company is now increasingly vulnerable to competitors when it exits the examinership. The Examiner is also always cognisant of the timeframe; the time limits are absolute and this is something that potential investors need to understand from the outset.
Accordingly, investors should take prompt action in exploring the viability of an investment and request that the Examiner furnish all available information as expeditiously as possible.
Prospective investors would be well advised to appoint financial and tax advisors to explore any potential tax issues (including issues that may arise as result in a change in control of the company or liabilities in the Examiner’s proposals for a scheme of arrangement).
Support of creditors
At the outset, it will be important to understand whether secured creditors are supportive of the proposed restructuring. In some cases, secured creditors may be positively disposed to an examinership application which restructures the company’s balance sheet. In these circumstances, examinership may increase the loan repayment capacity of the company post-examinership. Or, where an investor offers a secured creditor an immediate payment in excess of the value of its security, it is likely to be supportive of the examinership.
Time is always an issue in any distressed investing strategy, and given the statutory deadlines involved in the examinership process noted above, this is all the more true where time is inevitably short.
At the time of writing, the Irish parliament has passed the Companies (Miscellaneous Provisions) (Covid-19) Bill 2020, which is likely to be signed into law and commenced within two weeks. The Bill will provide the High Court with the power to extend an examinership by up to 50 days beyond the current 100 day limit. This is certainly a welcome development and should ease concerns that potential investors may have around timing.
Nevertheless, engaging experienced advisors as early as possible in the process will assist investors with navigating the examinership framework and driving the process forward in an expedient manner.
Examinership affords ample opportunity for the shrewd investor seeking to recalibrate an established business where that business is expected to ultimately exit the examinership process without the majority of or, indeed, any liabilities which had accumulated prior to entering the process. Given the nuances and complexities involved in the process, it will be essential for investors to secure competent and trusted counsel to navigate the examinership process on their behalf. It will be important that investors have a key contact who can co-ordinate across various disciplines, including insolvency, corporate, tax and financial services professionals. Engaging advisors early on in the process will assist in ensuring the best possible outcome for investors and ensure a successful result for all.
For more information and expert guidance in all related matters, contact a member of our Restructuring & Insolvency team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.