Slide Title

EDUCATING

SUPPORTING

REPRESENTING

Corporate Restructuring Benefits of

the Companies Act 2014

20th May 2015

Disclaimer

This seminar has been written in general terms and therefore cannot be relied on to cover specific

situations. Application of the principles set out will depend on the particular circumstances involved

and we recommend that you obtain professional advice before acting or refraining from acting on

any of the contents of this seminar.

The presenters accept no duty of care or liability for any loss occasioned to any person acting or

refraining from action as a result of any material in this seminar.

Seminar Contents

• Overview of main changes introduced by Companies Act 2014 affecting corporate insolvency:

Tom Murray

• Review of Section 450 Schemes of Arrangement: The Accountants Role: Jim Stafford

• Review of Section 676 Scheme of Arrangement: Jim Stafford

• Review of Section 450 Schemes of Arrangement: The Solicitors Role: Barry Lyons

• Questions & Answers

Insolvency Implications of the Companies Act 2014 Transitional Provisions: Schedule 6, paragraph 8

• Anything commenced and not completed may be continued under the new Act

• Includes winding up and examinership petitions not disposed of before repeal.

• Court may extend functions of court examiner to existing liquidations.

• Sections 646 – 648 (liquidator’s remuneration) will not apply to existing liquidations. (“Old”

legislation applies)

Section 429 & Section 436 (S.317 & S. 107) Notification that Receiver has been appointed

• Emails and websites must contain a statement that a receiver has been appointed.

• Still necessary to advertise in Iris Oifiguil, but no longer necessary to advertise in one daily

newspaper

Examinerships: Jurisdiction of the Circuit Court Available for “Small” Companies

Section 350 (5) requirements for small companies are as follows. The qualifying conditions for a

small company are satisfied by a company in relation to a financial year in which it fulfils 2 or more

of the following requirements:

a) The amount of the turnover of the company does not exceed €8.8million;

b) The balance sheet total of the company does not exceed €4.4million;

c) The average number of employees of the company does not exceed 50

Section 437 (S.316) Receiver’s Powers

• Receiver’s powers are enumerated in legislation for the first time

• Section 437 (1) states that the receiver has the power to do “in the state and elsewhere all

things necessary or convenient to be done for, or in connection with or incidental to the

attainment of the objectives for which the receiver was appointed”

• Section 437 (3) lists out 20 powers: usual suspects of taking control, borrow money, carry on

business, engage/discharge employees, appoint professional advisors, issue legal proceedings

etc

• However, Section 437 (4) recognises that it is possible that the receiver’s powers may be limited

by the court or “the instrument under which the receiver was appointed” and states that s 437 (1)

and (2) are subject to such provisions “being a provision that limits the receiver’s powers in any

way”.

Section 569 (S.213) Circumstances in which company may be wound up by the court

• New sub- section: “if the court is satisfied on a petition of the Director that it is in the public

interest that the company should be wound up”.

• Once a Company is wound up by Order of the Court, the liquidation is carried out as a Creditors

Voluntary Liquidation. This change will make High Court liquidations considerably cheaper.

Section 570 (S.214) Circumstances in which Company deemed to be unable to pay its

debts

• Minimum sum of €10,000 not paid within 21 days

• Or, if 2 or more creditors owed more than €20,000 not paid for 21 days

• As High Court liquidations will be cheaper to do, we should see an increase in High Court

petitions, as the indemnities to liquidators should be much more affordable.

Section 579 Commencement of a Members Voluntary Liquidation (1 of 2)

• Must use the Summary Approvals Procedure unless the winding up is:

• In the expiry of the period fixed in the constitution of the company; or

• To occur on the happening of a certain event as set out in the constitution of the company

(These exceptions can use the “old” procedure or may also use the Summary Approvals

Procedure.)

• Directors’ declaration has changed. It will no longer be a statutory declaration and it will not be

required to be sworn. “Part B” to accountant’s report is no longer required.

Section 579 Commencement of a Members Voluntary Liquidation (2 of 2)

• The Declaration must be:

• Made in writing

• By all or a majority of directors

• At a meeting held not earlier than 30 days before the shareholders meeting

• State the amount of current assets and liabilities

• That the company will be able to pay its debts in full within 12 months of commencement of

winding up

• Accompanied by an auditors report stating that the declaration is not unreasonable

• Appended to shareholders notice/resolution

• Delivered to CRO within 14 days

Section 587 (S.266) Meeting of Creditors (CVL’s)

The Notice shall:

• State the date, time and location of the meeting

• State the name and address of the proposed liquidator, if any

• Attach a list of the creditors of the company OR notify creditor of his rights to inspect the list of

creditors

• A Creditor may, with 24 hours notice, inspect the list of creditors at the registered office OR

request the company to deliver a copy of the list of creditors

Section 617 (S.281) Costs, etc. in winding up

• New cost inserted “Any cost and expenses necessarily incurred in connection with the

summoning, advertisement and holding of a creditors’ meeting under Section 587”

• Accordingly, fees due to professional advisors for organising creditors meetings and which were

previously disallowed following the Compustore Ltd case are now allowed as an expense.

Section 627 (S.231) Liquidator’s Powers

Section 627 contains a table setting out the liquidators powers. The powers of a liquidator in the

three types of liquidation are now uniform.

Section 629 (S.231 & S.276) Notice to be given with respect to exercise of powers

The liquidator shall, within 14 days of exercising any of the following powers: take any legal

proceedings, Defend any legal proceedings, Recommence the business, Continue the business,

Appoint a legal practitioner, Pay any class of creditors in full, compromise debts etc notify the

creditors.

Section 633 Qualifications necessary for Appointment as Liquidator/Provisional Liquidator or Examiner

• Members of a prescribed accountancy body

• Practising Solicitor

• Member of other professional body recognised by Supervisory Authority

• Person qualified under the law of another EEA state

• Person with practical experience of windings up and knowledge of relevant law (grandfathering

provision)

Section 646 Liquidator’s remuneration – now a 2 step process

• In seeking approval, the liquidator shall “cause particulars in writing of the terms upon which he

seeks entitlement to be furnished” to the committee/creditors etc

• A liquidator shall, as soon as is practicable, seek agreement of the terms upon which he has an

entitlement to remuneration. (If there is no committee, the liquidator will have to consider

convening an immediate meeting of creditors to obtain agreement,)

• Agreement may be subsequently varied

• Section 647 then requires liquidator to seek formal approval of fee drawn down

• Section 648: may go to arbitration

• What about fees obtained for selling properties on behalf of the banks?

Section 678 (S.222) Actions against Company stayed on winding up order

• No action or proceedings shall be proceeded with or commenced against the company except

by leave of the court. (Previously actions stayed only in Court liquidations.) Is application for a

personal injuries claim to the Injuries Board “action”? No

• Stay does not apply to Employment Appeals Tribunal

Section 819 Restrictions & Disqualifications of Directors

• Minimum share capital amounts increased to €500,000 for a PLC and €100,000 in the case of

any other company.

• New restrictions on company having a “restricted” person from acquiring certain non-cash

assets unless certain conditions are satisfied.

• Directors may avoid a court appearance by giving an undertaking to ODCE that they will allow

themselves to be disqualified. (Possible savings in legal costs.)

Schemes of arrangement: Favourite Tools!

• If your favourite tool is a hammer, then every problem will be a nail.

• If your favourite tool is a liquidation, then every company in financial difficulty is a liquidation.

• If your favourite tool is a receivership, then every company in financial difficulty will be a

receivership.

• New tool: Schemes of Arrangement

What is a Scheme of Arrangement

• A statutory compromise or arrangement between a company and its creditors or members

• Class members must have sufficiently common rights to enable them to consult together in

relation to the proposed scheme.

• It is not an Insolvency Procedure within the meaning of the European Insolvency Regulations.

Accordingly, foreign companies do not have to satisfy COMI rules to avail of Irish procedure.

• Types of schemes:

• Pre-Pack Schemes

• Cram down schemes

• Distribution Schemes

Advantages of Schemes of Arrangement over Examinership

• Much cheaper:

• No Independent Accountants Report (€5,000 + VAT)

• No Petition costs (€20,000 + VAT)

• No Examinership costs. (€50,000 + VAT.) In a Scheme of arrangement legal costs are

strictly only necessary if creditors vote in favour of Scheme.

• Less publicity (The existence of the Scheme is only advertised if the creditors approve it.)

• Directors/shareholders do not lose control. (May lose control under examinership.)

• Can deal with only a single class of creditor.

• No investigation! No ODCE!

• The business does not have to be viable!

• No statutory deadlines to comply with.

Dis-advantages of Schemes of Arrangement over Examinership

• No protection against Receivership. (But most banks should be on side in any event.)

• No protection against Reservation of Title claims.

• Higher voting thresholds: majority in number and 75% of creditors of each class

• Can’t repudiate leases. (Could “crystallise” repudiation in advance of Scheme?)

• Might not be possible to get all classes of creditors to vote in favour (whereas in an

Examinership you only need one class of creditor to vote in favour.)

Schemes of Arrangement

• Prior to the Companies Act 2014 scheme meetings could only be summoned by order of the

High Court

• Under S. 450 the scheme meetings may still be convened by court order, on the application of:

- the company; or

- any creditor or member; or

- the liquidator (if the company is being wound up).

• However, under S. 450 scheme meetings may now also be convened by the board of

directors without the need for a court order. Strictly speaking, solicitors not needed in

order to convene meetings of creditors.

Schemes Arrangement – The Calling of Scheme Meetings

• Under S. 450(5), the court is given a new power (which reflects recent judicial practice) to give

directions as to class composition when summoning the scheme meetings.

• There is no jurisdiction for the court to give such directions where the scheme meetings are

merely convened by the board of directors.

• A failure to segregate members and/or creditors into the correct classes may be fatal to the

whole scheme. For this reason some companies may still prefer to apply to court to guidance on

summoning meetings. However, in our view, a competent Insolvency Practitioner should be able

to constitute classes of creditors.

Schemes of Arrangement – Staying Proceedings Against the Company

• Under S. 451 the High Court is empowered (as it was under S. 201 of the 1963 Act) to stay

proceedings against the company for such period of the scheme process as the court thinks fit.

• The Court may grant the stay irrespective of whether the scheme meetings have been convened

by the board of directors or summoned by court order.

• Thus, if the scheme involves a compromise or arrangement between the company and all or

some of its creditors, it may still be necessary to have the meetings summoned by court order

so as to get directions as to how the meetings are to be convened and held

• The scope of the stay is the same as pertained under S. 201 of the 1963 Act and applies only to

actual or threatened legal proceedings, including winding up proceedings.

• Other enforcement actions, such as the appointment of a receiver, the taking of possession of

mortgaged property by a mortgagee and the repossession of goods subject to retention of title,

hire purchase or leasing arrangements remains permitted

Schemes of Arrangement – The “Special Majority”

• Under S. 201 of the 1963 Act the requisite majority for the approval of a scheme of arrangement

was a majority in number representing at least 75% in value of those members or creditors

present in person or by proxy and voting at each class meeting.

• The “Special Majority” provisions are continued in sections 449 and 453 of the Act

Schemes of Arrangement – State Votes

• Previously there had been some doubt as to whether State Authorities (including the Revenue

Commissioners) would be acting ultra vires to vote in favour of a scheme to take less than 100

cent in the euro.

• Such a power had already been conferred on State Authorities in relation to examinership by

Section 23(5) of the Companies (Amendment) Act 1990.

• That power has now also been extended to State Authorities in respect of schemes of

arrangement by Section 453(4) of the Act.

Schemes of Arrangement – Conditions for the Scheme to become binding

• If the scheme of arrangement has been sanctioned by the court, it does not become binding

until a copy of the court order has been delivered to the registrar of companies.

• Delivery of the court order must take place within 21 days.

• S.453 (2)(b) expressly provides that notice of (a) the passing of the resolutions approving the

schemes, and (b) the application to have the scheme sanctioned by the court must be

advertised once in at least two daily newspapers circulating in the district where the company

has its registered office or principal place of business.

• The section does not indicate how far in advance of the court hearing the notices must be

advertised. This will therefore have to be determined by the court at the directions hearing,

which takes place in advance of the substantive hearing of the petition.

Schemes of Arrangement – Essential Steps for the accountant

• Clear Communication is essential: Similar to Examinership:

• Explanatory memorandum outlining reasons for the Scheme. Must be plausible, honest

and transparent.

• Statement of Estimated Outcome showing benefits of the Scheme over liquidation.

• Notice of Scheme meetings and Proxies

• Gather votes!

• As valuations can determine which classes of creditors should be included in the scheme,

valuations are key. UK case law indicates that going concern valuations are appropriate.

• Scheme meetings must be properly conducted. Issues on validity of proxies etc

• If the Scheme is approved by the creditors, then the matter can be passed to the solicitors to

obtain court approval.

Section 676 (S. 279) Provisions as to arrangements binding creditors

• Previous Section 279 provisions remain unchanged. i.e. A company about to be, or in the

course of being wound up, may enter into an arrangement with its creditors if 75% in number

AND value of ALL creditors vote in favour.

Avoiding Conflict • Know who your Client is – Company v Director v Shareholder v Creditor • As there is no Examiner, Solicitor is instructed by the Company’s directors on behalf of

the Company • The Solicitor acts for the Company and not the individual shareholders or even the

directors personal interests • Common conflicts encountered by solicitors – Directors Loans, Personal Guarantees, Loss

of Shareholding following investment

Solicitors Advises in Establishing the Classes of Creditors • The Solicitor should be present at the creditors meetings to assist the Directors in fielding questions and to explain

the legalities of the scheme. • The Solicitor should actively participate and assist the directors in determining the Company’s defined “Classes of

Creditors” as set out in Section 450. • The Solicitor should similarly assist in the definition of a “member” as set out in Section 450 ( investor option

agreements, employee share options schemes ). • The Solicitor should reference the wealth of case law developed under Examinership to assist the determination

of what is an appropriate “class” ( i.e. as these classes are largely an estimate of similarities shared by creditors, advice should be offered regarding case law of analogous categorisations ).

• Critical component - similar parties are treated equally. • If the Solicitor is advising a creditor who is presented with a scheme, they may consider an objection under

Section 450 ( 3 ).

Considering Outstanding Litigation Before The Court • The Solicitor for the Company may already be defending existing proceedings against it from creditors –

in the event that these proceedings may be compromised by any scheme, application should be made by the solicitor under Section 451 to stay such proceedings.

• This commonly occurs in Examinership and the Solicitor should consider whether it is appropriate to

simply admit the claim in full so that it may be written down or compromised by an approved scheme in order to avoid further Court costs and an ultimate award.

Bank Claims • Particular attention should be given by the Solicitor to the notice requirements of Section 452 (

iii ) regarding secured creditors . • The Solicitor should navigate the legal mine field and offering advice to directors on writing

down Bank debt ( Secured v Unsecured ). • What should the Solicitor ensure is contained in the notice sent to a debenture holder or Bank?

Organising Formal Proofs • Ensure that proof of the formalities set out in the legislation are complied with and properly

evidenced. • Notices to Creditors are in compliance with Section 459. • Drafting Legal Notices for Newspapers . • Grounding Affidavit ordinarily executed by a director exhibiting formal proofs to be lodged in Court

offices ( to include notices, scheme, copies of newspaper advertisements and minutes reflecting voting of creditors ).

• Consequences of non-compliance Section 452 ( iii ). • The Solicitor may assist the Court registrar in drafting and approving the Judgement of Court which

must be lodged with the Register of Companies within 21 days.

What's to come?

• Rules of Superior Courts to be updated

• Statements of Insolvency Practice to be updated

• High Court interpretations of any new issues etc.

THANK YOU

Friel Stafford

44 Fitzwilliam Place

Dublin 2

Tel: 01 661 4066

Email: jim.Stafford@frielstafford.ie

tom.murray@frielstafford.ie

Web: www.frielstafford.ie

In association with FRP Advisory