Corporate structuring options for COVID-19 hit businesses

Executive Summary

COVID-19 poses high levels of financial distress for Ireland and Irish business.  Ireland's examinership regime (Examinership) and schemes of arrangement under part 9 of the Companies Act 2014 (Schemes) are effective tools for corporate restructuring either immediately and/or once the more immediate threat of COVID-19 has passed.

The Government is announcing a range of financial measures, details of which can be found here.

The answer to "what do I do?" is that there are practical ways to preserve and operate your business; contracts may be amended or extended and there are a range of protections for viable businesses in financial difficulty. We have extensive experience of these issues and we can guide you in your discussions with stakeholders.

Provided that you seek professional advice early, communicate clearly with creditors and can rationalise continuity decisions as being in the best interest of those impacted it is possible to keep things afloat. The alternative could be worse, triggering further liabilities for immediate payment.

In this article, Barry Cahir, Litigation & Insolvency Partner, explains Examinerships and Schemes of Arrangement.

EXAMINERSHIP

Examinership was introduced in 1990 in direct response to a financial crisis in the beef processing sector. It is available to ailing but potentially viable companies which are insolvent or about to become insolvent (unable to pay its debts).

The central feature of Examinership is the protection of jobs through the court appointment of an examiner and the placing of the company concerned under the protection of the court for 70-100 days. While the company is so protected, it may not be wound up, a receiver may not be appointed, and generally debts or security may not be executed or enforced against it.

During the period of protection, the company may, subject to court approval, disclaim or repudiate onerous contracts. Losses to the third party consequential upon the disclaimer/repudiation will be treated as an unsecured claim which can be crammed down in the Scheme. This feature has been most frequently and successfully invoked by businesses, including retailers seeking to shrink their real estate footprint and/or rental liabilities.

The Examiner is tasked with formulating a scheme of arrangement in which creditors are offered a fraction of what they are owed and the company continues to trade without those liabilities. Voting to accept the scheme is by majority in number representing a majority in value of the claims represented at a separate meeting of each class of creditors.

If at least one class of impaired creditors has accepted the proposals the court will be asked to sanction the scheme.  If the scheme is approved by the court, it will fix a date for the court protection to be lifted and the scheme to take effect.

The primary steps in the process may therefore be summarised as follows:

1. Presentation of petition and initial ex parte hearing (at which an interim Examiner may be appointed);
2. Full hearing of petition on notice to interested parties;
3. Appointment of an Examiner;
4. Examiner formulates proposals for a Scheme;
5. Examiner convenes meetings of creditors to consider the Scheme and vote;
6. Voting for each class is by simple majority in number representing a simple majority in value;
7. Provided one class of creditors has approved the Scheme, court asked to approve the Scheme;
8. Scheme approved (subject to an overriding ‘unfair prejudice’ test), moratorium lifted and the Scheme takes effect.

SCHEMES

As an alternative to Examinership, a Scheme is a time- efficient and nimble tool that companies can use, subject to court approval, to implement an insolvent restructuring. At least 75% in value of creditors in attendance at the required meetings must approve the scheme, after which a confirmatory High Court application is made. For present purposes it may be regarded as a tool best suited to restructuring one type of creditor, for example, financial creditors.

The essential features of a Scheme with creditors may be summarised as follows:

1. A compromise or arrangement is proposed between a company and its creditors or any class of them;
2. Directors may convene meetings of creditors without court order;
3. The court may, if required, order a moratorium for such period as it sees fit;
4. Creditor approval requires a majority in number representing three-fourths in value (of each class);
5. Court sanction hearing at which process and form, and a ‘fair and equitable’ / ‘reasonable man’ test is applied.

Irish reinsurance SPV Ballantyne Re plc recently underwent a successful complex international restructuring. Some $1.65 billion of senior New York law-governed debt was restructured through a Scheme. We report on the judgement here, which highlights the speed at which the process can operate. Mr Justice Barniville provided a thorough judgement the day after the contested hearing to sanction the scheme, and within six weeks of Ballantyne’s original application to the court.

For more information please get in touch with Barry Cahir (Litigation & Insolvency).

To discuss any other COVID-19 related issues impacting your business, please get in touch with Barry Cahir (Litigation and Insolvency), Thomas O'Dwyer (Litigation), Sharon Delaney (Litigation), Dorit McCann (EU, Competition & Procurement), Damian Maloney (Corporate and Commercial), Aidan Marsh (Commercial Property), Gerry Gallen (Commercial Property), Sandra Masterson Power (Employment), Paul Gough (Employment), Edward Evans (Corporate & Commerical), Fidelma McManus (Housing) or your usual Beauchamps contact.