Examinership - Preserving the right to pursue guarantors

A company that is insolvent or facing insolvency can seek protection from its creditors in the Circuit Court or High Court, depending on the size of the company. During the protection period, creditors cannot seek to recover debts owed to them by the company or assets held by the company. This protection also extends to guarantors of a company’s liabilities, who cannot be pursued under their guarantees for so long as the company is under court protection.

Whether a creditor can pursue a guarantor after an examinership will depend on whether the creditor has complied with the provisions of section 549 of the Companies Act, 2014 and whether the examinership is successful. That section requires a creditor who has the benefit of a personal guarantee to serve a written notice on the guarantor offering to transfer to the guarantor the creditor’s right to vote on the examiner’s proposals for a compromise or scheme of arrangement. If less than 14 days’ notice of the meeting is given, which is invariably the case, this notice must be served on the guarantor within 48 hours of the creditor receiving the notice convening the meeting of creditors.

If the creditor complies with the provisions of section 549 then it will be able to enforce the guarantor’s obligations once the company exits the examinership process, regardless of whether the examinership was successful or not.

If the creditor does not comply with the provisions of section 549 and a compromise or scheme of arrangement is entered into and takes effect, the creditor may not enforce the guarantee “by legal means or otherwise”.

If the creditor does not comply with the provisions of section 549 and a compromise or scheme of arrangement is not entered into or does not take effect then the creditor may only enforce the guarantee with the leave of the court. It would be expected that the court would grant leave in such circumstances.

A compromise or scheme of arrangement will usually provide for a write-down of liabilities owed to creditors by the company in examinership. The level of write-down will depend on what a creditor would be expected to recover in a liquidation or receivership of the company. Typically, unsecured creditors could be written down by between 80% to 99%. A secured creditor could have the value of its secured claim against the company written down to the current value of the assets against which it is secured. The level of write- down can, therefore, be significant.

If the creditor has the benefit of a guarantee and has complied with section 549 it can look to recover from the guarantor the amount of its claim written-off under the compromise or scheme of arrangement once the company exits examinership.

If the creditor has not complied with section 549 and the examinership is successful, the guarantee is worthless.

In a recent case for summary Judgment in which AMOSS acted this issue took centre stage. In the case while the guaranteed creditor had made the offer pursuant to section 549 the offer was neither accepted nor rejected by the guarantor. The creditor attended the meeting of creditors and voted in favour of the scheme of arrangement. In doing so, it was argued, the creditor had negated the offer provided pursuant to section 549 and thereby compromised its ability to seek to recover on foot of the guarantee.

In granting the creditor liberty to enter final Judgment on foot of the guarantee the Court found that;

  • the s549 offer was made within the requisite time;
  • the guarantor made no contact with the creditor in advance of the meeting of creditors;
  • the guarantor did not show up at the creditors meeting;
  • the guarantor never communicated or sought to communicate acceptance of the offer to the creditor or to the Examiner;
  • s549(3) clearly requires that if the offer has been accepted by the guarantor, s/he must furnish to the Examiner at the meeting a copy of the offer made and inform the Examiner of that s/he has accepted it;
  • for a guarantor to displace the guaranteed creditor’s right to vote at a meeting of creditors s/he must positively indicate acceptance of the offer. If s/he does not do so then the guaranteed creditor’s right to vote remains and voting in that context does not have the effect of negating the offer validly made.

Given the level of potential write down, it is of vital importance to the creditor that it is aware of the provisions of section 549 and that it is in a position to comply with them within 48 hours.

For further information in relation to this matter, please contact Gavin Simons (Partner), or your usual AMOSS contact.