Introduction
Changes have been made to the Irish examinership process by the European Union (Preventive Restructuring) Regulations 2022, which were signed by the Minister for Enterprise, Trade and Employment (the "Regulations")[1] on, 27 July 2022. The Regulations provide for the transposition of the Preventive Restructuring Directive[2] (the "Directive") into Irish law. The Directive's principal objective is to ensure that all member states of the European Union ("Member States") have comparable preventive restructuring processes to enhance the efficient functioning of the internal market.
Given that Ireland's existing examinership process already aligns to a substantial effect with the requirements of the Directive, the approach favoured by the Irish Government has been to integrate those requirements of the Directive which were not already provided for in Irish law with the existing examinership process under Part 10 of the Companies Act 2014 (the "Act").
Since its enactment in 1990, the examinership procedure has proven to be an extremely flexible process offering alternative options for the restructuring of companies. As it has been used very effectively in recent years to restructure large multinational companies and to effect cross-border restructurings, any changes to the process and the certainty it provides to debtors and creditors must be scrutinised closely.
What is set out below is a high level summary of some of the key changes to the Irish examinership process and the potential challenges the Regulations might present to insolvency practitioners, debtors and creditors in an examinership process commenced on or after the 27 July 2022.
Cross-Class Cram-Down
Arguably the most significant change to be brought about by the Regulations is in relation to cross-class cram-down.
It was previously the case that the scheme of arrangement had to be accepted by at least one voting class of impaired creditors before the jurisdiction of the court would be engaged to consider the scheme of arrangement. However, a new section 534(3B) of the Act has changed the position in this regard. It now prescribes that before the court can sanction a scheme of arrangement, it must be satisfied that:
(i) a majority of the voting classes of creditors whose interests or claims would be impaired by the scheme of arrangement have accepted them, provided that at least one of those creditor classes is a class of secured creditors or is senior to the class of ordinary unsecured creditors (e.g. creditors whose claims are afforded preferential status pursuant to statute); or
(ii) where the condition prescribed in (i) above has not been satisfied, at least one voting class of creditor whose interest would be impaired by the scheme of arrangement and who would be an "in the money creditor" in a liquidation has voted in favour of the scheme of arrangement.
This means that it is no longer possible for an examiner to present a scheme of arrangement to the court for consideration solely in reliance on the vote of a class of creditor who, upon a valuation of the company as a going concern, would not reasonably be presumed to receive any payment or retain any interest if the liquidation order of priorities was applied (i.e. "out of the money creditors"). This is a far-reaching change to how examinerships have operated to date and could hinder the flexibility currently afforded to the examiner to get the scheme of arrangement before the court for sanction.
Expertise of Examiner
An examiner appointed in cases involving cross-border elements is required to have sufficient experience and expertise for that role, taking into account the nature of the case. There is no guidance provided as to what precisely an examiner must demonstrate to satisfy this or how the court may assess this.
Best-Interest-of-Creditors Test
The Directive provides that a restructuring plan cannot be confirmed unless it satisfies the best-interest-of-creditors test, which is defined in Article 2 of the Directive 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".
It is already well-established in Irish law that a court should not approve a scheme of arrangement unless it is satisfied that it is fair and equitable and not unfairly prejudicial to any creditor (which has generally involved a comparison as to how each class of creditors would fare in a liquidation / receivership scenario). While the courts' interpretive discretion has been somewhat narrowed, this new test is closely aligned with how the courts have approached this issue to date.
Stay on Enforcement Actions
A key feature of the current examinership process is the automatic moratorium on enforcement actions against a company during the protection period. The Regulations have carved employees out of those provisions, which means that companies in examinership will no longer enjoy complete protection. It is possible that a significant unforeseen employee claim (or class of claim) could potentially undermine or even unravel the examinership process.
Executory Contracts
Creditors that are subject to a stay on the enforcement of their claims are prevented by the Regulations from withholding performance, terminating, accelerating or otherwise modifying "essential executory contracts" (i.e. contracts where the parties still have obligations at the time of the stay and that are necessary for the continued operation of the business) solely because an examiner / interim examiner has been appointed and / or the company is unable to pay its debts. Similarly, the company must still comply with its obligations under those contracts during the stay. Prior to this change, creditors were not required to continue trading with a company in examinership.
Notice of Meetings and Proposals
An examiner is required under the Regulations to ensure that every member or creditor (or class of members or creditors) whose interests are being impaired by the scheme of arrangement is invited to attend the meetings of members and creditors and the scheme of arrangement will not be binding on any members or creditors who did not receive notice of the meetings. This goes beyond what was previously required by section 534 of the Act and complicates the ability of an examiner to ensure all known and unknown creditors are bound by the scheme.
The Regulations also provide that creditors who will not be impaired by the proposed scheme of arrangement will not have a right to vote on its acceptance.
Phased Approach
The Regulations transpose the mandatory articles of the Directive only. The Department of Enterprise Trade and Employment has held off adopting the optional articles of the Directive (which include a proposed extension of workers' rights and enhanced protection for new and interim financing) on the basis that they would "mark a significant change from the existing examinership framework both in terms of its scope and operation". Instead, the optional articles are set to be considered as part of a wider review of the examinership procedure at a later stage.
Conclusion
There is still a considerable amount that needs to be clarified in terms of how the provisions will operate in practice. The Irish examinership regime has been hugely successful for both domestic and cross-border restructurings, with more than 30 years of established jurisprudence which has brought much valued certainty to debtors contemplating a restructuring. It remains a restructuring process for the purpose of the EU Insolvency Regulation and is therefore afforded automatic recognition throughout the Member States (excluding Denmark). Although there are some provisions which will impact on the procedure and may, in the very short term, reduce the certainty we are accustomed to, further analysis and interpretation by the courts in the near future will likely provide more clarity on the practical implications of the changes. In addition, unlike other Member States which are required to introduce an entirely new process, the substantial requirements of the Directive have been tried and tested already by the Irish courts, which will assist in ensuring the continued use of examinership as the tool of choice in international restructurings.
We will continue to monitor future developments in this area and, in particular, the proposed wider review of the examinership regime which may incorporate some of the optional articles of the Directive.
For further information in relation to how the Regulations may impact your business or practice, please contact our Corporate Restructuring and Insolvency lawyers or your usual Matheson contact.
Resources:
1https://enterprise.gov.ie/en/legislation/legislation-files/si-no-380-of-2022.pdf