Is it time for Schemes of Arrangement to step out of Examinerships shadow and provide a cost-effective alternative to formal insolvency for cash strapped SME companies.
In the current environment surrounding Covid 19 there is a lot of uncertainty from businesses as to the long-term future viability in a business environment which is increasingly volatile and unpredictable in the weeks and months ahead.
No one knows for certain what that impact will be but it is without doubt a number of companies will face the threat of business failure and will be considering all options available to avert such a threat.
Given the uncertainty – what could and should business owners do?
One option which may be open to a company may be an Examinership. Examinership is a Court supervised process lasting a maximum of a 100 days where a company is isolated from creditors action.
In order to be placed under Court protection, an independent accountant report needs to be prepared confirming that the company is insolvent (or likely to be) and that subject to a scheme of arrangement would have a realistic prospect of survival. On foot of a petition to the High Court, which is underpinned by the Independent Accountant’s report, an independent examiner is then appointed for a period of 70/100 days.
During this period, an Examiner will where possible formulate a proposal for a scheme of arrangement to ensure the survival of the Company as a going concern.
Such proposals generally provide for the write down of debt cross various classes of creditors, including Revenue Commissioners and secured creditors, in conjunction with the securing of investment.
As such – in these unusual and difficult times when no one knows how long and how deep this crisis will last – Examinership does give an opportunity to solve operational and structural underlying issues that have become crisis points in a time of reduced liquidity.
However, in the current environment, the above has to be caveated, as
a) It could be very difficult for an accountant accountant to sign off an independent accountant’s report identifying the funding required to enable the company to continue trading during the period of protection and the sources of that funding.
b) Secondly, there will also be large swathes of the SME market which are simply not large enough to justify going into, or have the resources to afford the examinership process. Examinership involves 4 sets of professionals, and the fees associated between all professionals can be significant and beyond the affordability of some companies.
In this context, there may be an opportunity for Companies to avail of Examinerships lesser known “sibling” – Schemes of Arrangement under Section 450 of the Companies Act 2014 to come into vogue.
For those companies that cannot afford Examinership or cannot get an independent accountant to give the necessary comfort required by the Court, Schemes of Arrangement could be a very pragmatic alternative in the current environment.
Schemes of arrangement have not been popular in the State in any of the iterations it has taken under the various companies acts down the years. They are mostly (albeit rarely) used in large scale corporate restructurings.
A Scheme of Arrangement is a time- efficient, cost efficient and flexible tool that companies can use, subject to court approval, to implement an insolvent restructuring. However, it does not necessarily have to be an insolvency process and can be used to restructure debt or shareholdings.
In essence, the directors or members of the Company can summons a meeting, without the need for a Court order, between company and members and creditors in order to formulate a scheme of arrangement.
With every notice convening or summoning the meeting which is sent to a creditor or member of the company concerned, there must also be sent also a circular explaining the effect of the compromise or arrangement,
At least 75% in value of creditors in attendance at the required meetings (at each class) must approve the scheme, after which a confirmatory High Court application is made.
However – one thing that has struck me in the current environment is the sense amongst the public and to a greater extent the business community of “being in this together”, that what we are all experiencing is bigger than the cut and thrust of normal commercial life and there is a willingness to “pull in the same direction”.
In these circumstances getting the special majority (75%) at the meetings may not be as difficult as in “normal times” – particularly when the alternative may be liquidation and a bad debt for creditors.
During this period the Company continues trading and directors stay in control of business.
If the creditors and members approve by special majority the scheme at each class meeting, the Company can then apply for Court sanction at hearing upon which it then becomes binding on all creditors and members.
In this regard, in the very special and extenuating circumstances business find themselves in – a Scheme of Arrangement may be a better and more cost-effective option than Examinership and definitely better than liquidation for the following reasons:
1. Significantly cheaper at a fraction the cost of an Examinership.
2. There is no need for an Independent Accountant’s report
a. identifying the funding required to enable the company to continue trading during the period of protection and the sources of that funding
b. Stating that the company has a reasonable prospect of survival
3. The business does not need to be advertised for sale
4. The shareholders will not lose control
5. There is little to no publicity
6. There are no strict deadlines (such as 100 days period in Examinership)
The above advantages need to be caveated though, in that with Examinership, the Company does have Court protection from creditors and
· No bank can appoint a receiver
· No creditor can claim retention of title
· No leasing company can repossess an asset
Furthermore, a company can repudiate leases in an examinership.
However, in different times – a different approach is needed and it may now be the time for Schemes of Arrangements to step out of Examinerships shadow
In this regard, I do believe that for micro and small companies the advantages offered by a Scheme of Arrangement relative to Examinership, may out way the disadvantages, and provide for members of this important and critical contingent of our business community, a cost-effective alternative
· to solve operational and structural underlying issues that have become crisis points in a time of reduced liquidity to avoid formal corporate insolvency and
· position themselves for whatever the “new norm” is in the Company’s market going forward.
Should you have any queries on any aspect of the above article – please contact one of our directors for further guidance on 01 661 4066 or by email as follows:
Tom Murray: email@example.com
Jim Stafford: firstname.lastname@example.org
Andrew Hendrick: email@example.com