Section 509 of the Companies Act 2014 provides that the Courts may appoint an examiner to a company where it appears to the Courts that a company is or is likely to be unable to pay its debts.
Thus an examiner can be appointed by the Courts where a company is not at the time of the petition but may in the future but unable to pay its debts.
The appointment of an examiner is at the discretion of the Courts.
New Look – The Facts
New Look Retailers (Ireland) Limited is a fashion retailer which operates 27 stores across Ireland.
On 28 August 2020 it petitioned the High Court on for the appointment of an examiner. An interim examiner was appointed pending the full hearing of the petition which took place in early October 2020.
The petition was grounded on the fact that as a result of the impact of Covid-19 restrictions the lockdown and social distancing measures introduced from March 2020 to the present date had a severely damaging effect on the company’s revenue. The company’s directors stated that turnover across the Irish stores had fallen by over 60% in the period from March to August 2020 as against the same period in 2019.
In applying for the appointment of an examiner, the company argued that it was likely to become insolvent (unable to pay its debts) pursuant to section 509 of the Companies Act 2014 in the near future.
The petition was opposed by three of the company’s landlord who argued that the company had not satisfied the statutory requirements for an examiner to be appointed. They contended that company:
- had cash reserves of circa €15,000,000;
- had ceased paying rents without engaging with landlords; and
- would not be cashflow insolvent until 2021 at the earliest.
There was a degree of positional change from in the independent expert’s report filed with the petition as to when the company would become insolvent. When the petition was initially presented on 28 August 2020 it was stated that the company stated would be cashflow insolvent by October 2020 – however, when the full hearing of the petition was heard this forecast for cashflow insolvency had been pushed out to March 2021.
Two Central Issues
At the hearing of the petition Mr Justice McDonald stated that there were two central issues to this petition, namely:
- whether the company had satisfied the statutory test as set out by Section 509 of the Companies Act 2014; and,
- if the test had been met, whether the Court should exercise its discretion to dismiss the petition.
The Court took the view that it was likely that the company would become unable to pay its debts sometime during the first six months of 2021 thereby satisfying the Section 509 test. It was then a matter for the Judge to exercise his discretion as to whether or not to dismiss the petition. Ultimately the Judge chose to exercise his discretion and dismissed the petition.
It was a clear factor in the decision of Mr Justice McDonald that the company had failed to substantially engage with its major creditors who were the landlords for its 27 stores in an attempt to come to an arrangement around its rental obligations. The fact that the company had substantial cash reserves and that the insolvency was not imminent was also a consideration of the Court when coming to its decision. The judge stated in his judgment that “a court, in the exercise of its discretion, is less likely to be prepared to appoint an examiner if the risk of insolvency is some significant distance away.”
It was noted by the Court that “there was no substantial attempt made on the part of the Company to initiate any process of negotiation with landlords”. The Court was of the opinion that less drastic options should first be explored before a company takes the step of seeking to have an examiner appointed. The Judge stated that, “in substance, no process of negotiation was initiated by the Company and yet, against that backdrop, the Company is now seeking the appointment of an examiner in order to bring about such a process. That seems to be to be a classic case of putting cart before horse.”
It should be highlighted, however, that Mr Justice McDonald did note in his judgment that he did believe that the company may face insolvency in the medium term, possibly in the first half of 2021 and that there was nothing to prevent the company from seeking the appointment of an examiner in the future. However that the petition before the Court was premature considering the facts of the case.
The outtakes from the Judgment are as follows:
- it reinforces the fact that the Courts do not wish the examinership process to be abused by applicants who are seeking (or not seeking) to renegotiate their obligations with their creditors;
- engagement with creditors prior to any petition for the appointment of an examiner will be a factor that the Courts will have regard to in deciding on any petition;
- a company does not need to be on the point of insolvency to bring a petition for the appointment of an examiner. However as a counterpoint to this the Courts will not look too far into the future in relying on future insolvency to exercise the discretion to appoint an examiner.