Examinership – “Criteria and Recent History”
93% of applications are successful
There has been a lot of publicity about the refusal of the Court to appoint an Examiner in two recent cases and in this article we look at what criteria the Court considers when an application is made for the protection of the Court.
Firstly we will look at the history of how the Court has considered applications for the appointment of an Examiner. The first point of note, based on statistics compiled by JW Accountants, 93.1% (163 out of 175) of all applications made in the last 5 years have resulted in the Court confirming the appointment of an Examiner. Therefore, in respect of just 12 companies in the last 5 years, an Examiner has not been appointed following an application made to the Court.
- For 3 of these 12 companies matters were settled prior to the Court considering whether to appoint an Examiner
- For 1 of these companies the application was withdrawn prior to the Court considering whether to appoint an Examiner
- For 2 of these companies an interim examiner was initially appointed but the interim examiner returned to Court to say the companies did not have a reasonable prospect of survival
- For 3 of these companies the Court ruled the companies did not have a reasonable prospect of survival
- For 1 of these companies the landlord opposed the application and the Court found the application was not made with utmost good faith
- For 2 of these companies the Court exercised its discretion and dismissed the application for the appointment of an Examiner
As can be seen from the above analysis the Court has only refused an application to appoint an Examiner in six cases out of a total of 175 applications. In other words, it is exceptionally rare.
The Criteria for appointing an examiner
In order for a company to qualify to be considered for the appointment of an Examiner it must meet the following criteria:
- a company is, or is likely to be, unable to pay its debts,
- there is a reasonable prospect of the survival of the company and the whole or any part of its undertaking as a going concern,
- no resolution subsists for the winding up of the company, and
- no order has been made for the winding up of the company.
Whether there exists a resolution to wind up a company or an order has been made to wind up a company (third and fourth criteria above) would be a matter of fact so it is the first two criteria which are the key criteria to be considered by a company seeking the protection of the Court.
Solvency and Reasonable Prospect of survival
An application for the appointment of an Examiner will be accompanied by a report of an Independent Expert (“IER”). The IER provides expert evidence for the Court and, as well as addressing a number of statutory matters, the IER will include an opinion on the solvency of the company and whether it has a reasonable prospect of survival.
Criteria 1 – In relation to the question of solvency the Court considers whether the Company is, or is likely to be, unable to pay its debts, and the Act provides as follows:
“s. 509 of the Companies Act 2014 (3) For the purposes of this section, a company is unable to pay its debts if—
(a) it is unable to pay its debts as they fall due,
(b) the value of its assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities, or
(c) the circumstances set out in section 570 (a), (b) or (c) are applicable to the company.”
The above considerations are often referred to as the “cashflow solvency test” and the “balance sheet solvency test” and in accordance with the Act a company will be deemed to meet the criteria of being unable to pay its debts under either of these tests.
Cashflow insolvency is often evidenced by significant delays in paying creditors, default in relation to debt obligations, default in relation to covenants or a legal demand being received from a creditor(s).
The balance sheet test compares a company’s assets to its liabilities and in this assessment consideration is given to any contingent liabilities. A company’s contingent liabilities could include potential redundancy costs, default obligations, potential legal claims and liabilities in relation to unsustainable lease agreements.
In the past five years, based on the analysis carried out by JW Accountants, the Court has not dismissed an application for Court protection based on this criteria. In the recent New Look examinership application, while the Court concluded “on a balance sheet basis, the Company is plainly not insolvent”, the Court also concluded the company was “likely to become insolvent” within a period of six months therefore meeting this criteria.
Criteria 2 – The Court cannot appoint an Examiner 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. The opinion included in the IER will form an important part of the Court’s consideration as will the view of other interested parties including creditors (who may put their own expert accounting evidence before the Court). The test is “reasonable prospect” so there is no requirement for the Court to determine the prospects of survival are definitive or even probable.
In considering whether a company has a reasonable prospect of survival the IER will look at inter alia the company’s history of trading, the specific reasons for the company’s insolvency and the company’s projected trade. While every case has different aspects, the IER will typically conclude a company has a reasonable prospect of survival if the company has demonstrated an ability to trade profitably in the past, there are specific issues resulting in the current trading difficulties and the company’s projections are based on reasonable assumptions.
In the past five years, based on the analysis carried out by JW Accountants, the Court has dismissed three applications on the basis that it was not satisfied the company had a reasonable prospect of survival.
These conditions are the main criteria considered by the Court however it is important to note, having met these conditions, a company does not automatically qualify for the appointment of an Examiner as the Court has discretion. If however, a company does not meet these criteria the Court is required to refuse the application and the matter of discretion does not come into play.
The Court’s discretion
In the past five years, based on the analysis carried out by JW Accountants, the Court has dismissed three applications on the basis of its discretion.
The initial application for the appointment of an Examiner is made on an ex parte basis and it is essential that all relevant matters are brought to the attention of the Court whether these matters benefit the application or otherwise. You must tell the Court the good and the bad. S 518 provides as follows:
“The court may decline to hear a petition presented to it or, as the case may be, may decline to continue hearing such a petition if it appears to the court that, in the preparation or presentation of the petition or in the preparation of the report of the independent expert, the petitioner or independent expert—
(a) has failed to disclose any information available to him or her which is material to the exercise by the court of its powers under this Part; or
(b) has in any other way failed to exercise utmost good faith”.
The Court will also consider other items such as the view of interested parties (including company creditors) and the actions of the petitioner prior to the application to appoint an examiner.
The examinership legislation is very important legislation to protect insolvent companies with a reasonable prospect of survival with the overwhelming majority of applications to appoint an examiner being successful. The team at JW Accountants Ireland have been involved in over 250 examinership cases and should you have any queries in relation to the process contact our team on a confidential basis.
Joe Walsh [email protected]
Robert Burke [email protected]
Padraic O’Malley [email protected]