5 February 2008
Current market volatility has impacted on all companies operating in the financial sector – and Irish companies and financial institutions are no different.
Recently, there have been two high-profile cases involving Irish companies that have sought the protection of the Irish courts to attempt to restructure their debts and deal speedily with financial problems encountered due to a downturn in the market.
But how has the examinership regime in Ireland been used to afford those companies the chance to restructure and survive?
Examinership was introduced in Ireland in 1990 by way of the Companies (Amendment) Act 1990. This provides a mechanism for companies that have become insolvent to gain the protection of the court from their creditors to determine whether there is a possibility to restructure and survive, thereby escaping formal insolvency.
Structured Credit Company (SCC) is an unlimited Irish registered company providing credit risk protection to various market counterparties. In August 2007, counterparties to its various credit agreements made demands for extra collateral to be posted. SCC could not raise the additional collateral and to protect itself it petitioned for protection under the act.
At the presentation of the petition, SCC indicated that if an examiner was not appointed the only option was liquidation, and if that occurred the estimated deficit could be $300m (£153.38m). SCC believed, however, that there was an opportunity to restructure and save the business. An examiner was appointed.
The second case involves the International Securities Trading Corporation (ISTC). ISTC’s business included investing in bank and insurance capital, structured finance securities and special investment vehicles (SIVs). By late 2007 it found itself the subject of increased demands for additional cash and collateral from counterparties and creditors due to its exposure to and the decline in the SIV market. The petition presented stated that should ISTC go into liquidation the estimated deficit would be e871m (£649.71m). An examiner was also appointed.
The question the court had to consider in both cases, in deciding whether or not to appoint an examiner, was whether there was a reasonable prospect of the company – or at least a part of the undertaking – surviving as a going concern. This is the statutory test. In both cases the court decided, based on the evidence before it, that there was such a reasonable prospect.
A clear advantage to companies seeking examinership protection is the moratorium from creditors for a period of 70 days from the date the petition is presented. This period can be extended to 100 days.
From the company’s perspective, this timescale allows the opportunity to determine, in conjunction with the examiner, whether a proposed scheme to deal with existing creditors and continue the business is feasible. It also puts the onus on prospective investors to more quickly make a decision about their interest in the firm.
From the viewpoint of creditors dealing with companies, those holding security are not entitled to enforce while the company is under protection. Unlike the position in the UK, holders of floating charges do not have the right to block the appointment of an examiner.
SCC’s examinership concluded successfully with a scheme of arrangement approved by creditors and a new investor injecting the necessary funds to continue the business and pay a dividend to creditors. Only one of the 12 original counterparties of SCC opted to continue trading with the firm. Even though the business saved comprised a small percentage of its original business, the court was satisfied to sanction the scheme and save the company.
The act enabled SCC to start again with a clean slate as regards its creditors and entering into new transactions going forward. It will be interesting to see how SCC operates, given that its original creditors declined to continue trading with it. The firm may have to attempt to persuade those same parties that it can now be successful and they should continue to do business with it.
ISTC is in the early stages of examinership but there would appear to be sufficient interest from potential investors to enable the examiner to formulate a scheme of arrangement and restructure that company also. ISTC’s creditors include many of the financial institutions and banks operating in the market. Any restructuring scheme will require their continued support, not only of the scheme itself but also of the future business ISTC wishes to transact.
In the cases of SCC and ISTC, most of the business transacted involved both companies posting collateral to counterparties. Legally, the protection of the court does not impact on the rights of counterparties holding collateral to net or set off the collateral against monies due. This could include selling collateral.
In real terms, much will depend on the form of collateral held. In instances where non-cash collateral is in illiquid form in current market conditions, decisions will have to be taken by creditors as to how best to deal with the collateral to achieve maximum value. They are under a duty to mitigate any loss.
Creditors can also expect that the company and the examiner will investigate whether the company has rights to the collateral held and whether or not the collateral can be factored into any proposed scheme of arrangement.
Under the Netting of Financial Contracts Act 1995 and the European Communities (Financial Collateral Arrangements) Regulations 2004 (as amended), Irish law recognises as legally enforceable the provisions relating to netting contained within a netting agreement against a party to the agreement and the provisions relating to set off of the amounts due under netting agreements – notwithstanding anything contained in any rule of law relating to bankruptcy, insolvency or receivership.
These type of cases present new challenges to the examinership regime in Ireland. Traditionally, companies that sought the protection of the Irish courts have been domestic manufacturing and service companies. In SCC and ISTC, the creditors and business were mostly located outside of the jurisdiction.
The challenge will now be for the courts and the practitioners to adopt the existing examinership regime to deal with the problems faced in restructuring complex international financial businesses. In the cases to date, the court has shown understanding and a willingness to do whatever it can under the legislative framework to save these financial vehicles.
There is no doubt that the examinership regime affords a speedy process for restructuring companies in financial difficulty. It is a quicker process than Chapter 11 or administration. It has been used successfully in SCC and potentially in ISTC to save a company that, up until the recent problems in the financial markets, traded profitably. It is unclear whether there are other companies in similar situations that will look for the court’s protection.
Market conditions are still volatile. Companies and creditors can, however, take comfort that the examinership regime affords an opportunity to save a business that otherwise would go into liquidation with little or no prospect of any dividend to creditors.
Mark Traynor is a litigation partner at Maples and Calder