1 Overview
1.1 Where would you place your jurisdiction on the spectrum of debtor- to creditor-friendly jurisdictions?
Ireland's insolvency and restructuring regime is generally regarded to be creditor-friendly with well-established and flexible remedies available to pursue delinquent debtors through enforcement of security, judgment proceedings and/ or a petition to wind-up.
However, the Irish Courts seek to protect viable enterprise and employment and rescue procedures are available to companies in financial difficulty including examinership, the small company administrative rescue procedure ("SCARP") and schemes of arrangement.
1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice?
There are a various options available to companies in financial difficulty in Ireland, ranging from informal consensual arrangements and work-outs to formal restructuring and insolvency processes.
Creditor forbearance, in the form of standstills, consensual variations, covenant waivers and/or extensions, will usually form a key cornerstone of any informal work-out. For many businesses, reaching an accommodation with key stakeholders, e.g. landlords, either through a staged payment plan to discharge accrued arrears of rent and service charges or a consensual surrender, can also be part of any informal work-out.
Where an informal work-out fails, there are various restructuring processes available including: (a) examinership, which was introduced in 1990 (similar to Chapter 11); (b) SCARP (available to small and micro-companies); and (c) schemes of arrangement.
Of these processes, examinership and SCARP are the most widely availed of Ireland's scheme of arrangement provisions, virtually mirror the regime in England and Wales, and have become increasingly popular since Brexit.
2 Key Issues to Consider When the Company is in Financial Difficulties
2.1 What duties, key considerations and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring or insolvency process?
In the ordinary course, the directors of a company owe a fiduciary duty to the company. When a company is in financial difficulty, the directors must also have regard to the interests of creditors. While there is no mandatory obligation to file for insolvency in the event the company is insolvent, directors must ensure that by not liquidating the company, they are not worsening the position of creditors.
The Irish legislature codified certain duties of directors arising when a company is in the so-called "twilight zone", i.e. when there are questions as to a company's ability to trade on a solvent basis. Provisions of the Companies Act 2014 (the "2014 Act") also give effect to the mandatory provisions of the Preventative Restructuring Directive1 and provide that where a director believes, or has reasonable cause to believe, that the company is, or is likely to be, unable to pay its debts, the director is required to have regard to:
- the interests of the creditors;
- the need to take steps to avoid insolvency; and
- the need to avoid deliberate or grossly negligent conduct that threatens the viability of the business of the company.
Shareholder and creditor interests should be considered by directors in exercising their duties. The directors' duty blends from one to the other as a company's financial position declines. If insolvency becomes inevitable, creditors interests become paramount. The directors need to keep their decision to continue to trade under constant review and should not sanction payments which benefit either closely connected companies or themselves personally to the detriment of the general body of creditors.
Irish law does not penalise genuine business failure nor does it penalise directors who have acted honestly and responsibly at a time when the company was in financial difficulty. Rather, the company law sanctions against directors of an insolvent company are designed to penalise individuals who are recklessly incurring credit or liabilities or who use up the company's assets where the directors cannot, on any reasonable or objective basis, believe that the company will be in a position to operate as a going concern.
2.2 Which other stakeholders may influence the company's situation? Are there any restrictions on the action that they can take against the company? For example, are there any special rules or regimes that apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?
The main stakeholders with influence over a company's situation include: (a) secured creditors; (b) preferential creditors, e.g. Revenue Commissioners ("Revenue"); (c) employees; (d) landlords; (e) retention of title creditors (whose claims can be validly enforced against a liquidator); and (f) general trade and unsecured creditors.
A secured creditor can appoint a receiver over the assets of an insolvent or defaulting borrower under the contractual powers granted by the borrower in the security documentation.
By issuing a statutory letter of demand, a creditor can petition for the winding up of the debtor company if the demand remains unsatisfied after the expiry of the 21-day period.
In an examinership, which can be triggered by the company, a shareholder or a creditor, the automatic moratorium and stay on enforcement, which comes into effect upon the presentation of the petition to appoint an Examiner, does not operate to prevent employees from taking certain proceedings to enforce outstanding judgments or to wind up the company. All other claims can only be brought or advanced with Court approval.
Counterparties to "executory contracts" cannot withhold performance, terminate, accelerate or in any other way modify contracts to the detriment of the debtor solely because of the appointment of an Examiner or Interim Examiner to the company or a related company. An "executory contract" is a contract between a company and one or more creditors under which the parties still have obligations to perform at the time the stay takes effect, e.g. a lease.
In addition, counterparties to "essential executory contracts" cannot take the steps referred to above solely because the debtor is deemed unable to pay its debts. In this context, "essential executory contracts" include executory contracts which are necessary for the continuation of the day-to-day operations of the business, including contracts concerning supplies, the suspension of which would lead to the debtor's activities coming to a standstill, e.g. a utility contract.
In a SCARP process, Revenue can elect to have their debts excluded from any rescue plan on certain specific grounds which include: (a) the Company having failed at any time in the past to comply with any tax requirement either under the 2014 Act or any other enactment; (b) the Company being subject to an ongoing tax audit or intervention; or (c) the Company having appealed any tax-related decision.
2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available?
There are various remedies available to a liquidator of an insolvent company. These provisions seek to protect creditors by repatriating assets or setting aside company transactions which involve the transfer or dissipation of company assets. The provisions can, in certain circumstances, also apply to an insolvent company not in liquidation.
Unfair preference
Certain transactions can be set aside if they were carried out with the intention of the directors of preferring one creditor over another.
Fraudulent dispositions of property
If it can be shown that any property of any kind was disposed of, the effect of such was to perpetrate a fraud on the company, its creditors or its members, the Court may order any person who appears to have the use, control or possession of such property, or the proceeds of the sale, to deliver it or pay a sum in respect of it to the liquidator.
Invalidity of certain charges
A floating charge on the property of a company created within 12 months before the commencement of the winding up is invalid unless it is proved that immediately after the creation of the charge the company was solvent.
Reckless or fraudulent trading
If an officer is found liable for reckless trading or fraudulent trading, a Court may declare him personally liable for all or any part of the liabilities of the company.
3 Restructuring Options
3.1 Is it possible to implement an informal work-out in your jurisdiction?
It is possible to implement an informal work-out in Ireland through consensual arrangements between a company and any one or more of its creditors. One disadvantage of such a process is that, while in negotiations, the company does not benefit from any moratorium or stay on enforcement, and is therefore vulnerable to creditor action. As a result, the company should try to agree a standstill with key creditors while exploring options to address its financial indebtedness.
3.2 What informal or formal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies?
Informal
There are no defined informal rescue procedures under
Irish law. The structure of any informal restructuring is subject
to agreement between the company, its shareholders and
creditors.
Creditor forbearance, in the form of standstill arrangements, consensual variations of terms, covenant waivers and/ or extensions, may form part of an informal restructuring.
Other informal restructuring options may include exploring adjustments to the capital structure of the company by way of additional or new investment, debt-for-equity swaps, sale and leaseback of assets, asset sales, refinancing of existing debt, grant of additional security, etc. While many companies will explore all available options, if agreement cannot be reached with key stakeholders, they are more likely to avail of a formal restructuring process.
Formal
- Examinership
Examinership is a statutory scheme for the rescue of individual companies or groups of companies to facilitate the survival of the whole or any part of a company as a going concern. The company is placed under the protection of the Court for a limited period whilst its affairs are investigated by an Examiner to see whether the company is capable of being rescued. The Examiner has a maximum of 100 days to lodge a scheme in Court. Examinership usually comprises three main components: (a) new investment into the company; (b) forced write down of the company's current liabilities; and (c) "legal stay" or protection period which prevents any enforcement action being taken. Furthermore, no petition may be brought to wind up the company, a receiver may not be appointed, leased goods may not be repossessed, and retention of title rights may not be enforced. If upon the presentation of a petition a receiver stands appointed for less than three days, the receiver will cease to act and the examinership will proceed. - SCARP
SCARP is a dedicated rescue framework for small and micro companies. SCARP mirrors elements of examinership in an administrative context (i.e. without direct Court involvement, save in certain prescribed circumstances) resulting in efficiencies and lower comparable costs. A "Process Advisor", appointed by resolution of the directors, prepares a rescue plan for the company. There is no automatic moratorium on enforcement actions against a company in SCARP. - Schemes of arrangement
A scheme of arrangement comprises an arrangement between a company, its creditors, and its members to financially restructure a business. There are two types of scheme of arrangement under Irish law: (i) those approved by the Court governed by Part 9 of the 2014 Act; and (ii) those that do not require Court approval governed by Part 11 of the 2014 Act.
The principal differences are as follows: a Court-approved scheme applies to solvent or insolvent companies. It is possible to apply to the Court for a period of protection (i.e. a stay on all proceedings against the company), and once approved by the Court, the scheme is unlikely to be set aside. However, a non-Court approved scheme arises where the company is about to be, or is in the course of, being wound up. No period of protection arises and any creditor or contributory may, within 21 days of completion of the scheme, seek to appeal to the Court.
In either case, the company (or a liquidator in the case of a Part 11 Scheme) draws up a scheme proposal which is submitted to creditors for consideration. At a creditors' meeting, the scheme is explained and creditors can vote. The company continues to trade and directors remain in control during the process.
3.3 Are debt-for-equity swaps and pre-packaged sales possible? In the case of a pre-packaged sale, are there any restrictions on the involvement of connected persons?
Debt-for-equity swaps are a common feature in examinership. In certain circumstances, an examinership can also implement a pre-agreed transaction, albeit this remains subject to Court approval.
Pre-packaged sales can occur and usually arise in the context of a pre-pack receivership. A receiver may be appointed by a secured creditor over the assets of an insolvent or defaulting borrower under the contractual powers granted by the borrower in the security documentation. The main function of a receiver is to receive or get in the assets of the borrower comprised in the security document and dispose of them in order to pay off the principal, interest and other sums due to the creditor.
The receiver's primary obligation is to obtain the best price reasonably obtainable for the property at the time of its sale. Where a receiver sells non-cash assets to certain connected persons within a certain period, he must give 14 days' notice of his intention to sell to all creditors of the company (although, this requirement does not apply in the context of an auction sale).
3.4 To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram-down dissenting classes of stakeholder?
While there is no mechanism to cram-down the liabilities of dissenting creditor classes in an informal restructuring, a cross-class cram-down may arise in the context of various formal restructuring processes as follows:
Examinership
Creditors have a key role in approving the Examiner's scheme. Cross-class cram-down is permitted provided the Examiner's scheme of arrangement is approved by either: (a) a majority of the voting classes of impaired creditors provided at least one of those classes is a secured creditor or is senior to the ordinary unsecured creditors (e.g. preferential creditors); or (b) at least one class of impaired creditors provided that class is one which would receive some payment or interest in the event that the company were liquidated (i.e. an "in the money" class). The creditors or a creditor class is deemed to have approved the scheme if a majority in number and value (51%) vote in favour.
SCARP
In order for the rescue plan to be approved and binding on all creditors, 60% in number representing a majority in value of just one impaired class of creditors have to vote in favour of the rescue plan. If approved, any cross-class cram-down will be binding on all creditors.
Schemes of arrangement
Part 9 (Court) Scheme: In the case of a Court Scheme, it is binding when three conditions are satisfied: (i) majority in number and 75% in value of each class votes in favour; (ii) notice of final Court hearing has been advertised; and (iii) Court sanctions the scheme. If the requisite majority is achieved and the Court has sanctioned it, the scheme including any crossclass cram-down is binding on the minority.
Part 11 (Non-Court) Scheme: In the case of a non-Court Scheme, it is binding if 75% in number and value of all creditors vote in favour of the scheme. Once the scheme has obtained the relevant support, any cross-class cram-down will be binding on the company, its creditors and any liquidator (if the scheme of arrangement is promoted by a liquidator).
3.5 What are the criteria for entry into each restructuring procedure?
Examinership
The criteria to enter into examinership are threefold: (a) the company is, or is likely to become, insolvent; (b) no resolution has been passed (nor has any order been made) to wind up the company; and (c) there is a reasonable prospect of survival of the whole or part of the business as a going concern.
SCARP
SCARP may be availed of by companies which satisfy two of the three following criteria: (i) turnover does not exceed €12 million; (ii) the balance sheet total does not exceed €6 million; and (iii) the average number of employees does not exceed 50. In addition, the company must not have entered an examinership or SCARP process in the previous five years and there must be no order made, and no pending resolution, for its winding up.
Schemes of arrangement
A Part 9 scheme applies to solvent or insolvent companies. A Part 11 scheme may be availed of where the company is about to be or is in the course of being wound up.
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Originally published by ICLG
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
