Institute of Directors

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Institute of Directors

Companies facing difficulties – Options for Directors

Michael McAteer

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Options for companies facing difficulties

Insolvency options Receivership Provisional liquidation Court

liquidation Creditors voluntary liquidation

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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

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Fixed charge v floating charge

Fixed charge Security is over specific assets Ranks ahead of pref. creditors Floating charge

Security is over all the assets of the

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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

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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

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Irish pre-pack receivership

Profit & loss risk 12 weeks

5 days

Balance sheet risk 12 weeks

Appointment / date of transaction

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What's the problem ?

• lack of understanding • suspicion by creditors

• sale to connected parties (TCH)

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Priority of distributions

Costs of liquidation

Unsecured creditors

Any remaining to shareholders

or Receivers costs of selling fixed assets

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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

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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

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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

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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

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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

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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

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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

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35 Days No Ex a m in e r Ex a m in e r pu ll s pl ug No p la n Pla n Rej e c te d No Ex te ns io n No p la n No Con firm a tio n Day 1 Protection starts for 70 days Day 10 (Approx.) Protection Continues Day 35 Protection Continues Day 70 Protection Continues

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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)

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Examinerships

Overview of process

• examiner – non executive supervisory role • management stays in place

• examiner is focused on restructuring issues not operational

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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 1993 - super preferential • preferential creditors

• floating charge

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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

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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)

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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

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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

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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 Additional Notes

Property xxControl ? Suitable f or Platf orms / Lack of enterprise

prohibits examinership / Control big issue on consensual sale.

Quarries x √ √ x √ Trading very dif f icult due to messy nature of

industry / Examinership challenging due to operational risk

WasteValue ?Viability ? √ Cessation of trade has realisation value

impact / trading receivership challenging and may require f unding due to def erred income norm

Licensed Premises Value ? Value ? Value ? Prospect of historic leakage render a consensual sale / pre pack dif f icult. Small scale Examinership very possible f or prof itable entities

Hotels Value ? Value ? Hostile Examinership possible if prof itable /

Established operator model w ithin Trading Receivership / Current strong disposal market

Mechanical & Electrical

x √ √ x √ Insolvency Clauses prominent in contracts thus prohibiting examinership / trading receivership

PharmaciesValue ? √ √ √ Trade sale important to preserve 4 to 5 times

EBITDA multiple / PSI interaction imperative

Convenience Stores Value ? Limited operator market / short term trading

w ith accelerated disposal likely strategy in trading receivership

High Street RetailValue ?Viability ? √ Examinership f ocus due to repudiation threat on onerous property positions / No

established operator model f or trading receivership

Haulage / Logistics Viability ? Viability ? Trading in enf orcement dif f icult due to likely creditor liens / Break up sale likely w ithout consensual sale

Service Sector Viability ? Client relationshops usually stakeholder driven

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References

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