As we are all well aware, there has been a major slowdown in economic activity in Ireland with the result that many businesses are now facing an uncertain future. A combination of factors has led to a tightening of purse strings among the general populace and this has placed many businesses, and in particular businesses dependent on the hospitality industry such as bars and clubs, under severe financial pressure.

The Thomas Read Group, which had control over a number of bars and restaurants, is an example of how badly the hospitality industry has been affected in recent times. In order to try and ensure the Group's survival, the company successfully applied to be placed into examinership. This process failed to rescue the company from its dire financial situation given the fact that the group was unable to attract any new investment and as such continue as a going concern. ACC Bank, the group's largest creditor, successfully applied for the appointment of a receiver to the Group in an attempt to recoup outstanding funds owing to the Bank from the Group.

While the examinership process was not successful for the Thomas Read Group, it is a process that an increasing number of businesses in financial difficulties are considering as it may be their final option for survival.

Examinership is a process whereby the protection of the Court is sought to assist the survival of a Company. The number of examinership applications being brought by troubled businesses, including public houses and restaurants, are increasing at an alarming rate.

Why is the process attractive to a company that finds itself
in financial difficulties?

Essentially the process allows a company to restructure its business, with the approval of the High Court and agreement of its creditors. Once the company is placed into examinership, creditors cannot seek repayment of outstanding debts from the company which in turn provides the company with breathing space to deal with its financial difficulties.

The process frequently starts when a company's directors apply to the High Court seeking the permission of the Court to place the company into examinership. However, the company itself, shareholders holding not less than 10% of the issued share capital and/or any creditor may also bring the necessary application to the Court.

To secure the protection of the Court, a company must be able to demonstrate, through an independent accountant's report, that it has a reasonable chance of survival. This report is extremely important and must contain a statement of affairs of the company and the opinion of the accountant as to whether there is a 'reasonable prospect' of survival.

If the Court grants protection, the company can be given up to 100 days to trade through its difficulties.

Once a company is under the protection of the Court, the role of the examiner is literally to 'examine' the company's affairs and formulate a compromise or scheme of arrangement (which is essentially the plan to save the company). Agreement must then be reached on this plan with the company's creditors. The Court must ultimately approve the scheme in order for it to become binding - this is a requirement even where a scheme is accepted by a majority of creditors.

If the scheme of arrangement is not approved by the High Court, or not successfully implemented, the protection of the Court is withdrawn and liquidation and/or receivership invariably follows.

Examinerships differ from the liquidations as it provides a valuable period of time in which debts can be reduced and a new financial plan can be put in place to secure the future of the business. If the process fails, the company may be placed in liquidation. Liquidation is the end of the road for the company leading to a realisation and disposal of its assets in an attempt to discharge sums due to out-of-pocket creditors.

However, as can be seen most recently from the fortunes of the Cork Rebel Group, (which has control over a number of bars and clubs in Cork), the provisional liquidator who was appointed to the Group, is currently negotiating with the Revenue Commissioners regarding the renewal of the bar licences for certain bars and if successful, the bars will re-open. A liquidator has the power to carry on the business of the company and in this instance some of the other bars which were leased by the company are at present continuing to trade. The carrying on of a business by a liquidator will not protect the company from its creditors. However, it shows that if the business is capable of continuing and it is beneficial to the winding up of the company, the liquidator will carry on the trade of the company until he disposes of the assets.

High profile companies which have successfully emerged from examinership include Shamrock Rovers Football Club and Chorus Communications. However, recently the Courts have been refusing an increasing number of petitions for examinership and are becoming more reluctant to grant Court protection to companies given the high failure rate of the process in recent times - this is primarily due to failure to attract the necessary investment.

Last year, examiners were appointed to approximately 70 companies. This is more than double the number of appointments granted in 2007, yet fewer than a third of all companies that have entered examinership since the start of 2007 are still in business. These statistics demonstrate that a trend is beginning to emerge in that many "unsuitable companies" are now seeking to use the examinership process as their final lifeline.

As mentioned previously, the examinership process proved unsuccessful for the Thomas Read Group and a receiver was subsequently appointed to the Group.

As the name implies, a receiver is granted the legal right to receive and dispose of property belonging to others for the benefit of a secured creditor. A Receiver and Manager has the additional power to manage and trade with the company's charged assets.

Although there are different types of receivership, the most common type is one that is appointed by a secured creditor, usually a lending institution, under the powers contained in the debenture/loan document.

On appointment, a receiver takes possession of all charged assets, disposes of those assets and discharges the debt owing to a secured creditor such as a Bank.

However, depending on the terms of their appointment, a receiver may continue the business with a view to maintaining or maximising the value of the company's charged assets and seek to sell the business as a going concern.

There has been a surge in the number of receivers being appointed in recent times as banks and other secured creditors take a more aggressive approach to securing debt. Recent figures reveal that 11 companies were placed in receivership in 2007, 57 companies in 2008 and as of 1 March 2009, a staggering 45 companies have been placed in receivership.

A petition for the examinership of the Thomas Read Group was brought to the High Court in November 2008 by the parent company of the pub group. At that stage, there was an investor interested in becoming involved in the group. ACC Bank, which was owed €15.5 million by the group, opposed the examiner's plan and asked that its proposals for survival be approved instead.

ACC wanted the Thomas Read Group placed into receivership and were contesting a valuation put on the premises by the examiner. In another recent high profile examinership (i.e. Birchport Ltd), as part of that scheme of arrangement, ACC Bank had agreed to a reduction in the value of its security and the examiner's scheme of arrangement was approved by the High Court. However, in the Thomas Read examinership, ACC was not prepared to agree a reduction in its security.

It subsequently transpired that the single investor was no longer prepared to be involved in the Thomas Read Group. A meeting of the directors of the parent company subsequently resolved to ask the High Court to appoint a receiver, a course of action proposed previously by ACC Bank.

In light of the fact that a receiver was appointed, the Court did not exercise its discretion to order the winding up of the company. Therefore, a receiver is now appointed under the debenture which ACC Bank holds.

It is more than likely that the receiver appointed to the Thomas Read Group will attempt to sell the assets charged by ACC Bank in a bid to discharge amounts outstanding to the Bank. This of course will prove difficult given the current economic climate and in all likelihood, the properties the Bank has secured will have devalued significantly over the last number of months. Only time will tell what the Receiver will attempt to do with the Bank's secured assets, as a similar Group to the Thomas Read Group has not been placed in receivership in recent times.

For suitable companies, that is those with a genuine prospect of survival if given a period of protection from creditors, there is no doubt but that the examinership process may be just the lifeline needed. However, without the prospect of investment and a willingness of creditors to compromise their positions, receivership or liquidation is the main likely outcome.

For further information please contact Clare Whelehan.

June 2009.