Institute of Directors

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1 Institute of Directors Companies facing difficulties Options for Directors Michael McAteer March 2015

2 Options for companies facing difficulties Insolvency options Receivership Provisional liquidation Court liquidation Creditors voluntary liquidation Examinership

3 Receiverships

4 Receivership loan must be in default e.g. payments or covenants secured lender must demand repayment giving appropriate time for default to be cured after expiry of time, secured lender can appoint a receiver receivers power will be determined from underlying security documents such as debenture directors may still have executive powers depending on extent of receivers powers directors can request appointment if appropriate

5 Fixed charge v floating charge Fixed charge Floating charge Bank is in control at all times and can fix disposal fee Security is over specific assets Security is over all the assets of the company Bank is in control but difficult to gauge disposal costs Ranks ahead of pref. creditors Ranks below pref. creditors

6 What is a pre-pack receivership? A pre-packaged insolvency sale is a sale of all or part of the business and assets of an insolvent company which is negotiated before the company enters a formal insolvency process, and concluded immediately upon the company s entry into an insolvency procedure.

7 Why pre-pack receivership current economy: business is fragile regulation utilities high volume of transactions business where high degree of customer confidence is required e.g. retail (Clerys, Superquinn) period of trading during receivership can spiral downward. Buyer risk = lower price for secured lender

8 Irish pre-pack receivership Appointment / date of transaction Balance sheet risk 12 weeks 5 days Profit & loss risk 12 weeks Window of opportunity

9 What's the problem? lack of understanding suspicion by creditors sale to connected parties (TCH) will on the part of the judiciary, insolvency practitioner s and the banks to consider

10 Priority of distributions VAT/PAYE/PRSI 12 month CT/IT/CGT/RCT Assessed any 12 months or Receivers costs of selling fixed assets Costs of liquidation Fixed charge Super preferential claim Preferential claim Floating charge Unpaid PRSI Unsecured creditors Any remaining to shareholders

11 Liquidations

12 Appointment of a liquidator Creditors voluntary liquidation shareholders pass resolution to liquidate company advertise in 2 national newspapers 10 days notice to creditors statement of affairs presented to creditors any creditor can attend meeting a director chairs the meeting and gives a statement for the reasons for liquidation liquidator appointed by creditors owed the most amount of money directors are subject to a Section 56 report to the ODCE On notification a bank can appoint Receiver

13 Appointment of a liquidator Court appointed liquidation 21 day demand letter unsatisfied Undisputed debt Draft petition papers filed with the Central Office of the High Court (21 days until hearing) Advertise petition in 2 national newspapers High Court hearing Appointment of Official Liquidator Court duty 4% on liquid assets (cost to floating charge holder)will change post 2014 Act enactment On notification a bank can appoint Receiver

14 Appointment of a liquidator Provisional liquidation creditors are not notified as ex-parte application limited powers preserve and protect asset value need to demonstrate to court why urgency of appointment required

15 Interaction between receiver and liquidator to save company 1. receiver discharged after realising all assets directors are still responsible for appointing liquidator and if no remaining assets, at personal cost to the directors 2. receiver and liquidator appointed at same time receiver no longer agent for borrower company not liable for new debts incurred receiver personally liable for contracts entered into 3. liquidator will inspect charges, specifically date registered 4. liquidator will inspect R&P account and judge apportionment of costs to fixed and floating realisations for fairness Risk to Receiver

16 Examinerships

17 Purpose of examinerships to facilitate the survival of the whole or part of the undertaking (The Company), by dealing with historical liabilities through a scheme of arrangement and the future profitability of the company by injection of adequate working capital removal of onerous contracts such as leases changes by agreement to work practices it is not the sale of assets for the highest price like a liquidation or a receivership

18 Examinerships Key recent developments use by multinationals (brand PR not an issue) repudiation issues not fully tested parent guarantees profitability and transfer pricing individual v store repudiation availability of investment capital secured lender involvement Vantage Flannerys Hyper Trust

19 Examinerships McInerney Homes the judge determined that secured debt can be written down in a scheme of arrangement. however, proposals must not be unfairly prejudicial. the bank can't be forced to 'stay in'. satisfied that the banking syndicate had put forward a credible case that it would get a greater return in a controlled work out over a number of years than the dividend offered in the proposals.

20 {EXAMINERSHIP COLLAPES} No Examiner Examiner pulls plug No plan Plan Rejected {EXAMINERSHIP} {TIMLINE} Day 1 Protection starts for 70 days Independent Accountants Report + Petition Apply to Court Directions Interim Examiner? Day 10 (Approx.) Protection Continues Petition heard Examiner? Creditors may have a view! 35 Days Day 35 Protection Continues Examiner formulates a plan and convenes meetings of Creditors to approve plan and Shareholder s to consider plan Day 70 Protection Continues Examiner delivers report to Court or applies for extension Day 100 (max) Day 100+ Examiner may apply for a further extension of 30 days to deliver his report Examiner must deliver his report and Court fixes date for hearing to confirm plan and may continue protection Court hearing to confirm plan Creditors may have a view Protection ceases Effective date protection ceases and the plan is binding on creditors and shareholders Insolvency Process No Extension No plan No Confirmation Liquidation And /Or Receivership

21 Examinerships Overview of process 100 day process similar to chapter 11 in US as debtor lead ex-partie application immediate court protection from all creditors commences with petition from all creditors commences with petition by interested party independent accountant report must accompany petition (specific exceptions allowed) interim examiner appointed at discretion of court

22 Examinerships Overview of process examiner non executive supervisory role management stays in place examiner is focused on restructuring issues not operational formulates scheme in conjunction with investor but must ensure creditors obtain at least what they would receive in a winding up.

23 Examinerships Order of priorities CGT/VAT on transaction fees costs and expenses of examiner receiver's fees costs and expenses fixed charge holder Section 10 costs charges and expenses of the liquidation Section 16(2) Social Welfare Act super preferential preferential creditors floating charge unsecured creditors subordinated creditors

24 Companies Act 2014 changes

25 Companies Act 2014 What has happened? currently companies must refer to The Companies Act 1963 and approximately 32 other pieces of legislations this is still the active legislation the Companies Act 2014 (the Act ) consolidates all this into 25 parts, over 1400 sections - enacted on 23 December 2014, expected commencement on 1 June 2015 the Act is structured in two volumes: parts 1 to 15 model private company limited by shares parts 17 to 25 all other companies 18 month transition phase planned for commencement June 2015

26 Companies Act 2014 Company types going forward Private company Limited by Shares (Ltd) Designated Activity Company (DAC) Unlimited companies Private unlimited company with shares (ULC) Public unlimited company with shares (PUC) Public unlimited company no shares (PULC) Public Limited Company (PLC) Guarantee Company (CLG)

27 Companies Act 2014 Important changes insolvency effective expected 01/06/15 expanded Powers of a Receiver (s.437) (In addition to the powers contained within the instrument) some of which are enter into possession and take control lease, hire or dispose of property repair carry on any business of the company execute documents (s.569) Director of corporate enforcement now has locus standi to petition to have a company wound up, if in the public interest

28 Companies Act 2014 Important changes insolvency directors loans, if not in writing debtor Bears interest, repayable on demand creditor no interest and subordinated to all other creditors regulation insolvency practitioner s increase in outstanding amount due, for a creditor to petition to wind up examinerships SME circuit court NAMA notification extended directors of Insolvent company must show they co-operated with the liquidator to avoid restrictions changes to court involvement

29 Sectorial experience in enforcement Sectorial Analysis Sectorial Analysis Industry Examiners hip Liquidatio n / Receivers hip Wind Down Pre Pack Receivers hip Trading Receivers hip Consensu al Sale Property x x Control? Quarries x x Waste Value? Viability? Licensed Premises Value? Value? Value? Hotels Value? Value? Mechanical & Electrical x x Pharmacies Value? Convenience Stores Value? High Street Retail Value? Viability? Haulage / Logistics Viability? Viability? Service Sector Viability? Additional Notes Suitable for Platforms / Lack of enterprise prohibits examinership / Control big issue on consensual sale. Trading very difficult due to messy nature of industry / Examinership challenging due to operational risk Cessation of trade has realisation value impact / trading receivership challenging and may require funding due to deferred income norm Prospect of historic leakage render a consensual sale / pre pack difficult. Small scale Examinership very possible for profitable entities Hostile Examinership possible if profitable / Established operator model w ithin Trading Receivership / Current strong disposal market Insolvency Clauses prominent in contracts thus prohibiting examinership / trading receivership Trade sale important to preserve 4 to 5 times EBITDA multiple / PSI interaction imperative Limited operator market / short term trading w ith accelerated disposal likely strategy in trading receivership Examinership focus due to repudiation threat on onerous property positions / No established operator model for trading receivership Trading in enforcement difficult due to likely creditor liens / Break up sale likely w ithout consensual sale Client relationshops usually stakeholder driven therefore difficult to trade in enforcement

30 Questions & feedback

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