Bar being raised for companies seeking examinership Sunday, August 09, 2009 By Neil Hughes The Supreme Court appeal taken by developer Liam Carroll in relation to the refusal of Mr Justice Peter Kelly to appoint an examiner to certain companies in his group has brought Ireland’s formal corporate recovery mechanism into sharp focus. Examinership underwent formal legislative change in 1999 and now, as it approaches 20 years on the statute books, the practice is still evolving rapidly due to developing case law.
The recent decision of Mr Justice Frank Clarke to refuse the high-profile Laragan Developments scheme, and the Carroll decision, have made it clear that the bar continues to be raised in relation to the process - from the point of view of both the types of company that will qualify for examinership and also the types of schemes that will be approved by the High Court.
Last Thursday, in further evidence of the trend, the interim examiner in the Hugh O’Regan case decided after only a few days that three of the hotelier’s companies were not suitable candidates for examinership.
This came after the directors had taken the most unusual step of presenting an emergency petition to a judge at home on a Sunday evening. Perhaps the examinership process will never return to the 95 per cent success rate enjoyed in the period between 2004 to 2006. However, there is no doubt that ongoing changes to the process of examinership, as a result of court cases, will be hugely beneficial in the long run to restoring the faith of the economy in all of the positive aspects of the examinership process.
Those positive aspects are the protection of an insolvent trading business with a reasonable prospect of survival, thereby allowing it to continue to trade and restructure, preserving employment, goodwill and work in progress, all the while delivering a better return to creditors than would be the case in a winding up. Examinership is not about maximising return in a quasi asset recovery exercise, or about protecting shareholder value.
Examinations have been responsible for saving many thousands of jobs in Ireland in the past number of years; clearly, a credible and robust formal recovery mechanism has a crucial role to play in Ireland as the economy enters what may be a prolonged recession. Some of the recent changes in examinership procedures are outlined below.
The independent accountant
The 1999 amendments to examinership legislation in Ireland had already raised the bar considerably in relation to the types of companies which qualified for the procedure. In particular, these amendments introduced the Independent Accountants Report (IAR), which is now a necessary part of the proof needed to appoint an examiner.
The IAR must demonstrate to the court the ‘‘reasonable prospects of survival’’ of the company. Following the decision of Judge Kelly last week, it seems that the practice of a company’s own firm of accountants preparing the IAR is likely to become increasingly a thing of the past.
A strong argument can always be made that the company’s own accountancy/audit firm is not sufficiently independent when it comes to the petition.
The reasons for this are clear: if the petition fails, at the very least that firm stands to lose its audit client and possibly whatever work in progress it has accumulated. It therefore has a vested interest in the petition’s outcome and can be easily perceived to be conflicted. Some of the recent changes to the system are outlined below.
Statement of Insolvency
The Statement of Insolvency Practice 19B, issued by the Consultative Committee of Accountancy Bodies in Ireland (CCABI) in January, means the independent accountant now must approach the preparation of the IAR as a non-audit ‘assurance engagement’.
Essentially, the CCABI responded to criticisms by Judge Kelly in late 2008 of standard ‘formulaic’ type reports drawn from precedents in other cases, and which offered no real insight into the company’s true prospects for survival.
In practical terms, this means that the preparation work required for the average report for even a small company has gone from one to two days’ work to perhaps three to four days’ work, or even longer.
The length of time taken to prepare the Vantive IAR in the Carroll case was specifically questioned at the petition hearing, presumably in the context of it being the basis of a petition for what would have been (and may still be) the biggest examinership in the history of the state.
Oral evidence
For many years it was almost unheard of that oral evidence would be required at either the appointment stage or indeed, at any of the subsequent hearings of an examinership case. The process is largely affidavit-driven.
However, in the Lullymore Developments case in August 2008, the managing director of the company was asked by Judge Kelly to give oral evidence to expand on the reasons for the company’s prospects for survival, following queries raised by the Revenue Commissioners.
It appears that the sight of a company director in the witness box endeavouring to persuade a judge of a company’s prospects for survival could conceivably become a regular occurrence in the Four Courts. The examiner is not immune from a requirement to give oral evidence. In both the Ardmore Technologies and the Ely Medical Group cases recently, I was required to give oral evidence in court.
The funding of schemes of arrangement
Some of the most rapid developments in examinership have occurred in the funding of schemes of arrangement. The finding of fresh investment for the insolvent company has rightfully been seen as a key part of the process. Indeed, it is common now at the initial petition stage of an examination for some form of evidence to be made available, to assist the court to confirm that at least one investor is considering investment to facilitate the company coming out of examination.
A few years ago, examiners would only satisfy themselves as to the availability of an investor’s funding by securing documentary proof from the investor.
The collapse of the Antigen examinership and the storm of litigation that followed altered judiciary thinking in this area substantially. Now, invariably at the final confirmation hearing, questions will be asked of the examiner regarding the absolute certainty of funding. It is a brave examiner that will bring a scheme before the High Court without the necessary funds for the scheme safely squirreled away in their solicitor’s client account.
In fact, practice has developed that a Designated Trust Account (DTA) is opened by the company or the examiner to ensure even greater certainty that the examinership dividends are paid out.
Raising the bar
While the increasing failure rate of companies - some of which were probably never suitable candidates for examinership in the first place - over the last 12 months had begun to bring the examinership process into some disregard, the tightening of examinership practice and the raising of the bar for companies to both qualify for and successfully emerge from examination should be hugely beneficial in the long run in restoring the confidence of Irish business in all of the positive aspects of Ireland’s formal corporate recovery process.
Neil Hughes is managing partner of Hughes Blake chartered accountant s . See www.examinership.ie
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