COVID-19: Schemes Of Arrangement - A compelling restructuring toolTuesday, 21 April 2020
In our earlier article, we discussed the importance of timing in corporate recovery efforts and the difficulties facing companies with the examinership process and its legislative requirements. Against the backdrop of lobbying for legislative changes to certain insolvency provisions in the Companies Act 2014 (the “Act”) (including the examinership provisions), we take a closer look below at schemes of arrangement - to date a much underutilised restructuring tool which can address many of the difficulties surrounding the complications and viability of the examinership process generally.
Limitations of examinership
Examinership is a corporate rescue process which gives an insolvent company (or group of companies) protection from its creditors for a period of up to 100 days during which a company (through a court appointed examiner) secures investment and seeks to put a legally binding scheme of arrangement in place for the settlement of debts with its creditors.
While the examinership process aims to rescue companies as going concerns (with a particular emphasis on saving jobs), this may not be a viable option for many companies for the following reasons:
- The court cannot appoint an examiner unless the company can demonstrate that it is insolvent (or likely to be insolvent) and it has a reasonable prospect of survival as a going concern;
- The latter threshold needs to be vouched for by a separate and independent accountant who undertakes an analysis of the company’s trade, pipeline business and opines on viable measures the company can take in order for it to be saved. As mentioned in our previous article, given the uncertainty surrounding the effect of this global pandemic, it may be far too premature for an independent expert to be in a position to opine on the prospects of survival of a particular company. If not, any such conclusions may be heavily caveated to the extent that their reliability for prospective investors and the court could be called into question;
- The level of court supervision and reporting requirements in an examinership, by necessity, may involve number of court hearings throughout the process. The associated costs of these hearings for smaller businesses may be prohibitive and may usefully be deployed in alternative restructuring efforts. As a result, examinerships have traditionally been perceived as being the go to rescue option for larger corporations with significant levels of debt; and
- For many directors, the prospect of acceding control of the company to an examiner is unpalatable in circumstances where directors’ powers can be transferred from them to the Examiner throughout the process.
Schemes of Arrangement under Part 10 Companies Act 2014 - an alternative to examinership
A Scheme of Arrangement under Chapter 1, Part 9 of the Act (“Scheme”) provides a statutory mechanism for a company to reach agreement with its shareholders and/or creditors in relation to the restructuring of its debt obligations. Such Schemes are different to schemes of arrangement proposed by an examiner under the examinership provisions of the Act. Unlike examinership, there is no automatic court protection pending the approval of a Scheme. While both involve court sanction and are binding on creditors, there are some fundamental differences between the two processes, which may make Schemes under Part 9 of the Act more appealing, for instance:
- To invoke the process under Part 9 of the Act (that is to say effect a Scheme of Arrangement outside of an examinership process) the company need not be insolvent. It can be used to effect a solvent reorganisation of a company or group structure (and unlike examinership is not limited to going concerns but can include holding companies) as well as by insolvent or financially distressed companies who want to settle their debts and reach a binding agreement with their creditors.
- While a court must eventually sanction any compromise or Scheme proposed under Part 9 of the Act, it is not a court led process. A Scheme under Part 9 of the Act can, in the absence of a challenge in court by an aggrieved creditor, be less costly than the examinership process. Furthermore, there is less publicity involved under a Part 9 Scheme as the Scheme is only advertised if the creditors approve it.
- Unlike an examinership, there is no prior investigation into the company's affairs and significantly, no requirement to demonstrate that the company in question has a reasonable prospect of survival. In addition, there are no statutory imposed deadlines within which a Scheme must be formulated and presented for court sanction.
- Directors do not accede control of the business to an outside party to effect a Scheme/compromise (unless this is a term of the Scheme or compromise reached).
In order for a Scheme to be binding on all creditors and shareholders, the Act provides that:
- Notice be given of the meeting(s) at which approval for the proposed Scheme will be sought;
- The proposed Scheme must be approved by a majority in number representing at least 75% in value of the creditors or class of creditors or members or both present and voting at the Scheme meeting. This is materially different from a scheme of arrangement in an examinership which requires approval from only one class of creditors, at a minimum, whose interests are to be impaired by way of simple majority in number and value;
- The Scheme must be sanctioned by the High Court.
In considering whether or not to sanction a Scheme under Part 9 of the Act, the court will consider a number of criteria which have been applied in previous cases involving the sanction of schemes. The company must be able to show that:
(a) Statutory requirements (such as reaching the required voting thresholds) under Part 9 of the Act have been complied with;
(b) Sufficient steps to locate and notify all interested parties have been taken;
(c) The classes of creditors voting on the Scheme have been properly constituted;
(d) There was no element of improper coercion or bad faith with respect to seeking approval of the Scheme; and
(e) The Scheme itself is one which an intelligent and honest person being a member of a class voting and acting in respect of its interests might reasonably approve.
If the above criteria can be satisfied, the court will be slow to differ from creditor/stakeholder wishes and will usually be happy to sanction the Scheme. While a court will not merely be a rubber stamp in this process, it recognises that creditors are the best judges of what is in their commercial interest when it comes to agreeing compromises or Schemes. Absent a challenge to the Scheme and approval process, reaching a binding compromise or agreement with creditors can be a very straightforward process. While the threshold for approving Schemes under Part 9 of the Act is considerably more onerous than in the examinership process, the devastating effects of COVID-19 on the economy will be felt globally. Such a backdrop can provide fertile ground for compromise and settlement which further highlights the benefits in taking early ownership of distressed situations. Early communication with stakeholders and creditors can give clear visibility on the feasibility of reaching an agreement or compromise, making for a smoother process with the hope of a fresh start.
For further information, please contact John Fitzgerald, Gemma Freeman or Sinéad Ronan from the ByrneWallace Corporate Restructuring & Insolvency team, or your usual ByrneWallace contact.
Please note that the content of this summary does not amount to professional advice. Legal and tax advice should be sought in respect of specific queries. The COVID-19 situation is evolving rapidly and this update is provided on the basis of information available as at 21 April 2020.