All Things Newz
Law \ Legal

Preventive Restructuring Directive Takes Effect In Ireland – Insolvency/Bankruptcy


Introduction

Changes have been made to the Irish examinership process by the
European Union (Preventive Restructuring) Regulations 2022, which
were signed by the Minister for Enterprise, Trade and Employment
(the “Regulations“)1 on
Friday, 29 July 2022. The Regulations provide for the transposition
of the Preventive Restructuring Directive2 (the
Directive“) into Irish law. The
Directive’s principal objective is to ensure that all member
states of the European Union (“Member
States
“) have comparable preventive restructuring
processes to enhance the efficient functioning of the internal
market.

Given that Ireland’s existing examinership process already
aligns to a substantial effect with the requirements of the
Directive, the approach favoured by the Irish Government has been
to integrate those requirements of the Directive which were not
already provided for in Irish law with the existing examinership
process under Part 10 of the Companies Act 2014 (the
Act“).

Since its enactment in 1990, the examinership procedure has
proven to be an extremely flexible process offering alternative
options for the restructuring of companies. As it has been used
very effectively in recent years to restructure large multinational
companies and to effect cross-border restructurings, any changes to
the process and the certainty it provides to debtors and creditors
must be scrutinised closely.

What is set out below is a high level summary of some of the key
changes to the Irish examinership process and the potential
challenges the Regulations might present to insolvency
practitioners, debtors and creditors in an examinership process
commenced on or after Friday, 29 July 2022.

Cross-Class Cram-Down

Arguably the most significant change to be brought about by the
Regulations is in relation to cross-class cram-down.

It was previously the case that the scheme of arrangement had to
be accepted by at least one voting class of impaired creditors
before the jurisdiction of the court would be engaged to consider
the scheme of arrangement. However, a new section 534(3B) of the
Act has changed the position in this regard. It now prescribes that
before the court can sanction a scheme of arrangement, it must be
satisfied that:

(i) a majority of the voting classes of creditors whose
interests or claims would be impaired by the scheme of arrangement
have accepted them, provided that at least one of those creditor
classes is a class of secured creditors or is senior to the class
of ordinary unsecured creditors (e.g. creditors whose claims are
afforded preferential status pursuant to statute); or

(ii) where the condition prescribed in (i) above has not been
satisfied, at least one voting class of creditor whose interest
would be impaired by the scheme of arrangement and who would be an
“in the money creditor” in a liquidation has voted in
favour of the scheme of arrangement.

This means that it is no longer possible for an examiner to
present a scheme of arrangement to the court for consideration
solely in reliance on the vote of a class of creditor who, upon a
valuation of the company as a going concern, would not reasonably
be presumed to receive any payment or retain any interest if the
liquidation order of priorities was applied (i.e. “out of the
money creditors”). This is a far-reaching change to how
examinerships have operated to date and could hinder the
flexibility currently afforded to the examiner to get the scheme of
arrangement before the court for sanction.

Expertise of Examiner

An examiner appointed in cases involving cross-border elements
is required to have sufficient experience and expertise for that
role, taking into account the nature of the case. There is no
guidance provided as to what precisely an examiner must demonstrate
to satisfy this or how the court may assess this.

Best-Interest-of-Creditors Test

The Directive provides that a restructuring plan cannot be
confirmed unless it satisfies the best-interest-of-creditors test,
which is defined in Article 2 of the Directive as “a test
that is satisfied if no dissenting creditor would be worse off
under a restructuring plan than such a creditor would be if the
normal ranking of liquidation priorities under national law were
applied, either in the event of liquidation, whether piecemeal or
by sale as a going concern, or in the event of the
next-best-alternative scenario if the restructuring plan were not
confirmed”.

It is already well-established in Irish law that a court should
not approve a scheme of arrangement unless it is satisfied that it
is fair and equitable and not unfairly prejudicial to any creditor
(which has generally involved a comparison as to how each class of
creditors would fare in a liquidation / receivership scenario).
While the courts’ interpretive discretion has been somewhat
narrowed, this new test is closely aligned with how the courts have
approached this issue to date.

Stay on Enforcement Actions

A key feature of the current examinership process is the
automatic moratorium on enforcement actions against a company
during the protection period. The Regulations have carved employees
out of those provisions, which means that companies in examinership
will no longer enjoy complete protection. It is possible that a
significant unforeseen employee claim (or class of claim) could
potentially undermine or even unravel the examinership process.

Executory Contracts

Creditors that are subject to a stay on the enforcement of their
claims are prevented by the Regulations from withholding
performance, terminating, accelerating or otherwise modifying
“essential executory contracts” (i.e. contracts where the
parties still have obligations at the time of the stay and that are
necessary for the continued operation of the business) solely
because an examiner / interim examiner has been appointed and / or
the company is unable to pay its debts. Similarly, the company must
still comply with its obligations under those contracts during the
stay. Prior to this change, creditors were not required to continue
trading with a company in examinership.

Notice of Meetings and Proposals

An examiner is required under the Regulations to ensure that
every member or creditor (or class of members or
creditors) whose interests are being impaired by the scheme of
arrangement is invited to attend the meetings of members and
creditors and the scheme of arrangement will not be binding on any
members or creditors who did not receive notice of the meetings.
This goes beyond what was previously required by section 534 of the
Act and complicates the ability of an examiner to ensure all known
and unknown creditors are bound by the scheme.

The Regulations also provide that creditors who will not be
impaired by the proposed scheme of arrangement will not have a
right to vote on its acceptance.

Phased Approach

The Regulations transpose the mandatory articles of the
Directive only. The Department of Enterprise Trade and Employment
has held off adopting the optional articles of the Directive (which
include a proposed extension of workers’ rights and enhanced
protection for new and interim financing) on the basis that they
would “mark a significant change from the existing
examinership framework both in terms of its scope and
operation”.
Instead, the optional articles are set to be
considered as part of a wider review of the examinership procedure
at a later stage.

Conclusion

There is still a considerable amount that needs to be clarified
in terms of how the provisions will operate in practice. The Irish
examinership regime has been hugely successful for both domestic
and cross-border restructurings, with more than 30 years of
established jurisprudence which has brought much valued certainty
to debtors contemplating a restructuring. It remains a
restructuring process for the purpose of the EU Insolvency
Regulation and is therefore afforded automatic recognition
throughout the Member States (excluding Denmark). Although there
are some provisions which will impact on the procedure and may, in
the very short term, reduce the certainty we are accustomed to,
further analysis and interpretation by the courts in the near
future will likely provide more clarity on the practical
implications of the changes. In addition, unlike other Member
States which are required to introduce an entirely new process, the
substantial requirements of the Directive have been tried and
tested already by the Irish courts, which will assist in ensuring
the continued use of examinership as the tool of choice in
international restructurings.

We will continue to monitor future developments in this area
and, in particular, the proposed wider review of the examinership
regime which may incorporate some of the optional articles of the
Directive.

Footnotes

1. https://enterprise.gov.ie/en/legislation/legislation-files/si-no-380-of-2022.pdf

2. Directive (EU) 2019/1023
of the European Parliament and of the Council of 20 June 2019 on
preventive restructuring frameworks, on discharge of debt and
disqualifications, and on measures to increase the efficiency of
procedures concerning restructuring, insolvency and discharge of
debt, and amending directive (EU) 2017/1132 (directive on
restructuring and insolvency

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



Source link

Related posts

Cayman Islands Regulatory Update – The Economic Substance Return Filing Deadline Draws Closer – Fund Management/ REITs

U.S. EPA Proposed Listing Of PFOA And PFOS: The Effects And Costs Of Forever Chemicals – Environmental Law

A Constrained Budget Compels A More Ingenious Financing Option For Nigeria’s Infrastructure Development Securitization – Securitization & Structured Finance