Examinership Modified: Ireland Transposes the Preventive Restructuring Directive into Law

On Friday, 29 July the Minister for Enterprise, Trade and Employment signed into law the European Union (Preventive Restructuring) Regulations 2022 (the Regulations).

The Regulations provide for the transposition of the mandatory articles of Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measure to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (the Preventive Restructuring Directive).

Rather than introducing a separate restructuring regime, which could have been done to implement the Preventive Restructuring Directive, the Regulations modify the examinership process as set out in Companies Act 2014 (the Act) on the basis that the current examinership regime is largely aligned with requirements set out in the Preventive Restructuring Directive. Indeed, the Irish Government has stated that it is adopting a two phased approach to reviewing and amending Ireland’s examinership process with the passing of the Regulations constituting Phase 1¹.

Notable Amendments

Certain amendments brought in by the Regulations have a material impact on how the examinership process operates in Ireland, such as the amendment to voting procedures (considered below). Others codify certain obligations which have previously been recognised by the courts, such as the duty of directors of a company to have regard to the interests of creditors when a company is likely to be unable to pay its debts.

The amendments to the Act and therefore to the examinership process apply with immediate effect to all examinerships in respect of which a petition had not been presented to the Court before Friday, 29 July.

Below we highlight the most significant changes which the Regulations have on the examinership process.

“Out of the money” Impaired Creditors Not Counted for Proposal Voting

Possibly the most significant amendment to the examinership process which the Regulations bring about is the amendment to voting rights.

While it remains the case that only a single class approval is required in order for a court to confirm a scheme proposed by an examiner, it is now a requirement that any such class is also “in-the-money” i.e. that if the company was to be liquidated, the class of creditor who has voted in favour of the scheme must be in line to receive some payment. This is a material departure from how examinership previously operated.

Up until now, many examinerships would have relied on a class of creditors who would be likely to receive nothing in a liquidation scenario but who will receive some payment under an examiner’s scheme (e.g. unsecured trade creditors) voting in favour of the scheme in order to enable an examiner to proceed to seek court sanction of the scheme (on the basis that the Scheme proposals are fair and equitable and are not unfairly prejudicial). Under the revised voting rules brought about by the Regulations, the votes of an impaired class of creditors who are “out of the money” i.e. would not receive a dividend in a liquidation scenario, do not count. In practice, this may mean that some examinership schemes that would in the past have been sanctioned by the court, will not pass the voting stage.

Experience of Examiner to be Considered in Cases with a Cross-Border Element

The Regulations amend section 509 (2) of the Act to require the Court, in cases where there is a cross-border element, to consider whether or not the person to be appointed as examiner, has “sufficient expertise to perform the role, having due regard to the examiner’s experience and to the specific features of the case”. The Regulations do not set out the basis upon which the Court is to make this assessment and it remains to be seen whether or not this will have a material impact in practice or whether this will be addressed in an affidavit. If the latter, it remains to be seen as to the level of detail that will be required to be presented in the affidavit to enable a Court to make its assessment.

Best-Interest-of-Creditors Test

The Regulations amend the Act to import the “best-interest-of-creditors test” at a number of sections in Part 10 of the Act. The amending provisions do not define the “best-interest-of-creditors test” but the Regulations note that terms used in the Preventive Restructuring Directive and in Part 10 of the Act (as well as certain other sections) shall have the meaning as set out in the Preventive Restructuring Directive. The Preventive Restructuring Directive defines the “best-interests-of-creditors test” as “a test that is satisfied if no dissenting creditor would be worse off under a restructuring plan than such a creditor would be if the normal ranking of liquidation priorities under national law were applied, either in the event of liquidation, whether piecemeal or by sale as a going concern, or in the event of the next-best-alternative scenario if the restructuring plan were not confirmed”.

Notably, pursuant to section 541(5)(b), a Court cannot sanction the compromise or arrangement proposed by the examiner in the examiner’s report if it is satisfied that the proposals do not satisfy the best-interests-of-creditors test and an aggrieved creditor objects to the proposals on this basis.

Employee Claims Carve Out

The Regulations amend section 520 of the Act, which provides for the protection from creditors during the period in which the company remains in examinership, by the introduction of section 520(5A). Section 520(5A) provides a carve out to the general protection from creditors in respect of employees, who can commence or advance certain actions or proceedings notwithstanding the fact that the company is in examinership.

Restrictions on Certain Contracts During Examinership

The Regulations introduce a new section 520A, which precludes counterparties to certain contracts from taking certain actions on the basis of the company’s examinership and/or inability to pay monies owing. Of particular note is the fact that certain of the preclusions operate notwithstanding any contractual right to the contrary. Introducing an automatic provision will provide certainty to debtors. However, it will be interesting to see if any aggrieved creditors challenge this section on the basis of unconstitutional interference of (contractual) property rights.

Treatment of Liability Incurred During the Protection Period

The Regulations introduce a new section 529(2A) which provides that in the event of a company being wound up within 6 months of the end of the protection period, liabilities that were incurred during the protection period as a part of transaction that are “reasonable” and “immediately necessary for the scheme of arrangement” shall not be declared void, voidable or unenforceable on the ground that the transaction is detrimental to the general body of creditors unless there are other reasons why the transaction should be declared void, voidable or unenforceable.

Maximum Protection Period

The Regulations clarify that the maximum period of time which a company can remain under the protection of the Court is one year. However, this applies only in circumstances where the examiner has presented his or her report within the prescribed maximum period of time (currently, and temporarily, extendable up to 150 days²). The Regulations do not extend the period of time within which the examiner must present his or her report to the court.

Comparison with other countries

As can be seen from the comparison table below, while the US Chapter 11 arguably still leads the field in overall terms, having regard to the basis for founding jurisdiction and access to super-priority debtor-in-possession (DIP) financing. Ireland’s examinership process shapes up very well as a debtor-friendly restructuring tool particularly having regard to its voting threshold which only requires one ‘in-the-money’ impaired class to have voted, either in person or by proxy, in favour of the resolution for the proposals by a simple majority in number representing a simple majority in value of the claims represented at that class meeting and having regard to the fact that examinership will have automatic recognition across the EU under the European Insolvency Regulation.

Conclusion

Examinership has been a feature of the Irish corporate restructuring landscape since its inception in 1990 and therefore, as an English-speaking common-law jurisdiction, it benefits considerably from being administered by a dedicated division of the Irish High Court that has nearly three decades of jurisprudence and specialist expertise.

Furthermore, in recent years, there have been a number of significant international / cross border restructurings which have utilised examinership successfully, namely Eircom³, Weatherford⁴, Cityjet⁵, Norwegian Air⁶, and Mallinckrodt⁷ and so complex multi-jurisdictional issues are well-known to the Irish Courts.

The Regulations import some significant changes to a process that, up until now, has been very effective. The practical effects of the Regulations will come to light over the coming months and years although, as already noted above, the change to voting rights has the potential to have a material impact upon certain examinerships.

This article considers the key changes to examinership which the Regulations bring about. There are other changes which have not yet been considered. If you would like to learn more about the Regulations and how they may affect you in your capacity as a creditor or debtor, please feel free to contact Gavin Smith, Greg Cooney or your usual DLA Piper contact.