LAST MONTH, JOE.IE publisher Maximum Media entered into ‘examinership’ after the High Court approved the appointment of KPMG accountant Shane McCarthy as examiner to the troubled company.
Like ‘bond yields’ and ‘sovereign debt’, terms like ‘examinership’ only seem to enter into the common usage on news bulletins during times of economic turmoil.
But as we enter one of the most challenging downturns in the history of the state, some experts believe it could play a role in saving jobs that would otherwise be lost.
Simply put, examinership is a legal process through which a failing company can seek the temporary protection of the High Court from other parties to whom it owes money – for a period of 100 days.
As the Master of the High Court, Edmund Honohan, wrote recently, examinership “could be a useful lifeline for many small companies in the post-pandemic period”.
So, how does it actually work?
First, a minor history lesson
On 24 August 1990, Charlie Haughey, serving what would be his final term as Taoiseach, recalled the Dáil from its summer recess.
A regional dispute between two countries in the Persian Gulf, that had been simmering away during the summer months and for nearly a decade beforehand, had transformed suddenly into a headline-grabbing conflict, culminating on 2 August with the Iraqi invasion of Kuwait.
If most Irish people hadn’t heard of Kuwait or Saddam Hussein at the time, they certainly had heard of the millionaire beef magnate Larry Goodman. His Goodman International group represented 40% of the Irish beef market but the group’s live cattle export dealings with Iraq had left it exposed to the political instability that flared up over the summer.
As a result of the conflict, non-payment by the already indebted Goodman Group’s Iraqi customers had left a £72 million hole in its books.
Politicians were unnerved by the potentially “catastrophic” effect that the Goodman Group’s collapse would have had on the Ireland’s economy at the time — which was massively reliant on agriculture, says Declan Taite, managing director of Duff & Phelps Corporate Finance in Dublin.
At the time, the only relevant legal processes for insolvent Irish companies — ie ones that can’t pay their debts — were liquidation, through which the company is wound up and its assets sold off, or receivership. The latter is a process through which a bank can take charge of an asset — a development site, an investment property or even the company itself — that has been borrowed against.
In other words, there were no preventative measures on Irish statute books to help potentially viable but insolvent companies plot a way through a period of instability.
Because of the perceived strategic importance of the Goodman Group to the Irish economy, Taite explains that Haughey “recalled the Dáil from its summer vacation to facilitate the passing of new legislation, and it gave rise to the concept of examinership. The piece of legislation was the Companies Amendment Act of 1990″.
Although between 1991 and 1994 the Beef Tribunal would uncover certain damaging facts about Fianna Fáil’s relationship with beef barons including Goodman’s companies, the die was cast and the examinership process was cemented in law.
So how does it work?
Examinership starts with a petition to the High Court or the Circuit Court.
“That petition,” Taite explains, “can be presented by a number of different parties — the company itself, a shareholder who holds more than 10% of the issued and paid-up share capital, or a creditor of the company” to whom it owes money.
While it’s typically the company that makes the representation in court, Taite says there are circumstances where there are creditor-led petitions, as in the recent case of Maximum Media.
It’s important to understand the differences between the process as it was introduced in 1990 and as it is now.
When examinership was originally conjured up, the petition could only be made to the High Court, which would appoint an examiner if the company had a ‘prospect of survival’.
Since then, Taite says that it has gone through various iterations.
Now the petition has to be accompanied by the report of an independent expert, usually the company’s auditor, demonstrating that the company has “a reasonable prospect of survival” and that it has sufficient cash flow to make it through the 100-day period.
But going to the High Court is, of course, an expensive business and the system was long criticised for favouring bigger companies with deeper pockets. The 2014 Companies Act sought to address some of the disparity by introducing Circuit Court examinerships.
So what does the examiner actually do?
Exactly what it says on the tin.
In its petition to the court, the firm asks for an independent examiner to be appointed to literally ‘examine’ its prospect of survival over the 100-day period.
Taite says that once appointed, the examiner’s job is to investigate whether or not a survival package can be put together for the ailing business.
He explains, “The examiner has no executive function and doesn’t take responsibility for the day-to-day running of the business.
That power still vests with the board of directors. In the vast majority of cases, the company continues to run its business and the examiner is in the background overseeing matters.
That ‘survival package’ or ‘scheme of arrangement’, as its called, is the “kernel” of the examinership process, says Taite. To put it in place, the examiner determines what the company can afford to pay its creditors, which has to be at least what they would get if the company was put into liquidation.
“You take the balance sheet of the company and you try and project and estimate what that balance sheet would look like if that company went into liquidation and what dividend, each of the different categories of creditor would get,” he explains.
Finally, the creditors have to approve the scheme, which means compromising. The choice they are faced with is approving it and receiving a portion of what the troubled company owes them or rejecting it, risking its collapse in which case, they could get nothing.
Why is it relevant?
Unfortunately, ‘troubled companies’ is a phrase we’ll probably have to get used to over the coming weeks and months.
Covid-19 has had a devastating impact on Irish economic life and even though many business restrictions will be lifted from Monday, the scars will be visible for the foreseeable future.
Because of the nature of the current crisis, Taite believes the examinership process will be more relevant to companies than it was during the last recession.
“There’s a fundamental change between the 2008 crash and what we’re experiencing now,” he says.
The property companies, the development companies [after the last crash], they weren’t suitable for examinership. Most of them ended up going into receivership or their loans were transferred across to Nama. I think this time is different because you’re going to be dealing with trading businesses.
Most businesses will have been reliant on government supports for the duration of the lockdown period and Taite believes that the impact will be felt when those subsidies are wound down.
He says, “That is going to put additional working capital pressure on trading businesses, and it may well be the thing that forces them from where they’re at now into a formal process, whether that be examinership or liquidation.”
“So when we get into quarter three and quarter four, I suspect that’s when you’re going to see an increase in the incidence of insolvency. I think you will see an increase in the incidence of examinerships, particularly in the retail space, the hospitality space and the restaurant space”.
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