Unsuccessful examinership not (necessarily) the end of the road
In a recent case involving a company that owned and operated a nursing home (Melbourne Health Care Limited), the Examiner was unable to formulate proposals for a Scheme of Arrangement within the 100 days allowed to do so. At a late stage of the process it became apparent that the preferred investor could not satisfy its lender’s conditions precedent to draw down the financed element of the investment within the period of protection. As a result, the examiner applied to the High Court for directions.
The company applied for examinership protection as its secured lender had issued a demand for repayment of its facility that the company could not meet, rendering it insolvent on a cashflow basis. The secured lender fully engaged with the examinership process and was prepared to accept a level of write-down proposed by the Examiner. The draft proposals for a scheme of arrangement provided for the Revenue Commissioners to be paid in full and for unsecured creditors to receive a dividend of 25%, representing a very high level of dividend. Therefore, the requisite minimum level of support required in order for proposals for a scheme of arrangement to be confirmed by the court was expected. However, the examiner ran out of time to present proposals for a scheme of arrangement.
Section 535 of the Companies Act, 2014 provides that where an Examiner cannot formulate proposals for a scheme of arrangement he “may” (though in reality should) apply to the court for directions. S535(2) provides, “The court may, on such an application, give such directions or make such order as it deems fit, including, if it considers it just and equitable to do so, an order for the winding up of the company”. It is usual in such circumstances for the Court to appoint a liquidator to the admittedly insolvent company unless a secured creditor intends to appoint a receiver and manager to operate the company’s business once protection is lifted.
However, in this case given that a potential investor was still interested (now in acquiring the assets and undertaking, rather than the shares in the company), and given the sensitivity of the company’s operations (it being a nursing home with 74 elderly residents), each of the company, the secured creditor and the Revenue Commissioners did not think it just and equitable for the company to be liquidated and were prepared to allow the company attempt to conclude a sale of its assets and undertaking outside the examinership process. While reserving its right to do so, the secured creditor confirmed that it did not intend to appoint a receiver and manager to the company pro tem and it withdrew the demand previously made. Therefore, the company stated that it was solvent on a cashflow basis, even if not on a balance sheet basis.
On this basis, the Court lifted protection and discharged the examiner, without making any further order regarding the company. The Court did comment that as the company was insolvent the directors have particular duties. While the court did not elaborate on what those duties are, they include the duty to act in the creditors’ best interests; not to trade recklessly, i.e. not to incur new liabilities without reasonably believing they can be discharged when due for payment; and, ultimately, to liquidate the company if it cannot be restored to solvency.
While the examinership was not successful, a voluntary sale of its assets and undertaking may yet be achieved. This case may be unique in that after protection was lifted neither a liquidator not a receiver was appointed.
AMOSS acted for the secured creditor in this case. For further information in relation to corporate restructuring and insolvency please contact Gavin Simons (Partner) or your usual AMOSS contact.
