Other Insolvency Issues
Receivership
A receiver takes control of those of the company’s assets that have been mortgaged or charged by the company in favour of a debenture holder, normally a bank. The receiver will sell such assets and uses the proceeds to discharge the debt owing to the debenture holder. The primary duty of the receiver is to the debenture holder. This is different from a liquidator who must act in the interest of all creditors.
Who avails of receivership services?
The debenture holder, normally a bank. In the current downturn, banks will be inclined top appoint a receiver rather than force a liquidation where it would receive little return. It is possible for a bank to have an informal workout arrangement where it would appoint an accountant to a decision making role rather than formally appointing a receiver. However a bank needs to protect itself from being seen as a quasi director of a company. Hence the chances of an increase in the number of formal receiverships arising in the current environment are increasing. Receivers are likely to be appointed to run companies in a reduced size for some time until such time as the situation improves.
Examinership
This puts the affairs of a company under the protection of the Court, to consider whether the company is capable of rescue and to prepare a plan for the rescue of the company. The company will continue to trade. After the appointment of an examiner debts may not be executed against the company. In order for a company to be suitable for examination, the court has to be satisfied the company has a reasonable hope of survival. Normally this means that there are additional new shareholder funds available and that it will justify the costs.
Who avails of examination?
Companies seeking rescue. However, as fees will be a minimum of €70,000, it may not be viable for an SME company. In the current downturn, there is also a significant shortage of new investors to provide the funds required to bring an examination to a successful conclusion.
Informal Schemes of Arrangement
A possible solution for an SME in financial difficulty is for the company to enter into a informal scheme of arrangement with its creditors. Such a scheme would be done outside the courts and are suitable when there are a small group of large creditors. Dealing with a large number of smaller creditors would be time consuming and the risk of news of the company’s difficulties will spread more quickly in such cases. Informal schemes of arrangement may allow a company in difficulty to stay in business and repay more to unsecured creditors than what they would receive in a liquidation.
