Examinership, Birchport, ACC Bank, Ocean Bar, Secured Creditors, High Court

Examinership gives an insolvent company protection from its creditors for up to 100 days while it attempts to save its struggling business. But in the case of secured creditors such as banks, recent case law suggests the situation may not be as clear-cut as was once thought.

In the current economic climate, the examinership process has never been more in demand. Record numbers of companies are now asking the High Court for protection from their creditors in order to buy some breathing space to solve their financial problems.

Once placed under the protection of the court, the role of the examiner is to formulate proposals for a compromise, or scheme of arrangement, in respect of the company and to try to reach agreement with the company's creditors. Ultimately, the examiner must deliver a report to the court outlining his proposals for a scheme of arrangement. The court must approve the scheme of arrangement in order for it to become binding - even where the scheme of arrangement is accepted by a majority of the creditors. If a scheme of arrangement is not approved by the court, an order will invariably be made for the company to be wound up.

It should be noted that the court cannot sanction a scheme of arrangement in a number of circumstances, including where doing so would unfairly prejudice a class of creditor whose interests would be impaired by the implementation of the proposals. In the case of a secured creditor, the court would be unlikely to write down its debt where it is expected to remain in situ as the primary lender to the company.

It should also be borne in mind that in many cases a company's loans will be personally guaranteed by the company's directors. The approval of a scheme of arrangement is likely to trigger the crystallisation of these personal guarantees. In the event that a secured creditor has to write down its debt through an examinership, it is likely to seek to enforce any personal guarantees that it holds.

The Examinership of Birchport Limited

October 2008, Birchport Limited (the company behind Ocean Bar, an upmarket pub and restaurant in the Docklands area of Dublin) was the then latest in an increasingly long line of companies to be placed into examinership. Like many businesses affected by the current economic downturn, it suffered cashflow difficulties and was unable to repay its creditors, including ACC Bank (�1.2 million) over which it holds security and the Revenue (�0.25 million).

ACC Bank had originally provided a loan to the company of �1.4 million. Its loan was secured against the lease that the company held over the property. That lease had been originally valued at �1.4 million. By the time of the examinership, the balance of that loan stood at �1.2 million. By the time the company went into examinership, the value of the lease has fallen significantly. The examiner and the bank separately had the lease valued: the examiner's valuation was �500,000, while the bank's was �950,000.

The bank rejected the examiner's first proposal for a scheme of arrangement (which adopted the examiner's valuation of the lease), which would have required the bank to agree to write off in excess of half of the balance then on its loan. Under the terms of the revised scheme of arrangement which was ultimately agreed with the company's creditors (including ACC Bank) and approved by the High Court on 2 December 2008, the company and ACC Bank agreed that ACC Bank would retain security over a sum of �950,000 (repayable over 15 years). It was agreed that the balance of the loan (�250,000) was to be treated as unsecured, with the bank receiving 10% of this sum - the same as the company's other unsecured creditors.

In the wake of the Birchport examinership, a number of commentators suggested that the court's decision reflected a change in the law whereby lending institutions could, as part of the examinership process, be forced to write down the value of their secured loans to the market value of the charged asset. Some commentators also suggested that the court's decision could result in the banking sector facing losses in excess of �1 billion on loans secured against commercial property.

In reality, the Birchport decision does not represent a new departure in Irish law. In fact, it would have been very unusual if the court had not approved the scheme of arrangement which had the support of each class of creditor, including the approval of the bank, the fundamental point being that ACC Bank agreed to reduce the value of its security. While its agreement clearly took account of the lower value of the security it held, it isn't the case that ACC Bank had a reduction of its security thrust upon it by a decision of the High Court.

Of course, other secured lenders may increasingly find themselves in a similar position and facing a similar choice. Only time will tell whether the �1 billion estimate is accurate.