Changes have been made to the Irish review process by the European Union (Preventive Restructuring) Regulation 2022, which was signed by the Minister for Enterprise, Trade and Employment (the “Regulations“)1 Friday, July 29, 2022. The regulation provides for the transposition of the directive on preventive restructuring2 (there “directive“) in Irish law. The main purpose of the Directive is to ensure that all Member States of the European Union (“Member States“) have comparable preventive restructuring processes to improve the effective functioning of the internal market.
Given that the existing review process in Ireland already substantially aligns with the requirements of the Directive, the Irish Government’s preferred approach has been to incorporate requirements of the Directive which were not already foreseen. into Irish law with the existing review process under Part 10 of the Companies Act 2014 (the “Law“).
Since its enactment in 1990, the review procedure has proven to be an extremely flexible process offering alternative options for corporate restructuring. As it has been used very effectively in recent years to restructure large multinational companies and to carry out cross-border restructurings, any changes to the process and the certainty it provides to debtors and creditors should be carefully considered.
What is set out below is a high-level summary of some of the main changes to the Irish review process and the potential challenges the settlement could present to insolvency practitioners, debtors and creditors in a review process. exam started on or after Friday, July 29, 2022.
Arguably the most significant change brought about by the Regulations relates to interclass crowding.
Previously, the plan of arrangement had to be accepted by at least one voting class of impaired creditors before the jurisdiction of the court was engaged to review the plan of arrangement. However, a new section 534(3B) of the law has changed the situation in this respect. It now requires that before the court can sanction a plan of arrangement, it must be satisfied that:
(i) the majority of the classes of voting creditors whose interests or claims would be adversely affected by the plan of arrangement have accepted them, provided that at least one of those classes of creditors is a class of secured creditors or above the category of ordinary creditors are unsecured creditors (for example, creditors whose claims enjoy preferential status under the law); Where
(ii) where the condition prescribed in (i) above has not been satisfied, at least one class of voting creditors whose interests would be adversely affected by the plan of arrangement and who would be an “in-the-money creditor” in a liquidation voted in favor of the plan of arrangement.
This means that it is no longer possible for a reviewer to submit a plan of arrangement to the court for review solely based on the vote of a class of creditors who, based on an assessment of the company in as a going concern, would not reasonably be expected to receive any payment or retain any interest if the liquidation priority order was applied (i.e. “creditors out of the money”). This is a profound change in the way Examiners have operated to date and could hamper the flexibility currently afforded to the Examiner to get the Plan of Arrangement in court for sanction.
An examiner appointed in cases involving cross-border elements must have sufficient experience and expertise for this role, taking into account the nature of the case. There is no guidance as to what specifically 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 can only be confirmed if it satisfies the criterion of the best interests of the creditors, which is defined in Article 2 of the Directive as “a test which 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, either on a case-by-case basis, or by sale as in continuity of operation, or in the event of the closest scenario if the restructuring plan was not confirmed”.
It is already well established in Irish law that a court should only approve a plan of arrangement if it is satisfied that it is fair and equitable and does not unfairly prejudice a creditor (which usually involves a comparison of how each class of creditors would fare in a liquidation / receivership scenario). Although the courts’ interpretive discretion has been somewhat restricted, this new test is closely aligned with how courts have approached this issue to date.
Stay on application measures
A key feature of the current review process is the automatic moratorium on enforcement action against a company during the protection period. The Regulations have excluded employees from these provisions, which means that companies under review will no longer enjoy full protection. It is possible that an unexpected large employee complaint (or category of complaints) could potentially undermine or even unravel the reviewer process.
Creditors who are subject to a stay of execution of their claims are prevented by the Rules from suspending the execution, terminating, expediting or otherwise modifying “essential enforceable contracts” (i.e. i.e. contracts in which the parties still have obligations at the time of the stay and which are necessary for the continuation of the activities of the company) only because an examiner/interim examiner has been appointed and/or the company is unable to pay its debts. Similarly, the company must always respect its obligations under these contracts during the stay. Prior to this change, creditors were not required to continue doing business with a company under review.
Notice of meeting and proposals
An examiner is required by the Regulations to ensure that
all the member or creditor (or class of members or creditors) whose interests are adversely affected by the plan of arrangement is invited to attend meetings of members and creditors and the plan of arrangement does not bind the 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 a reviewer’s ability to ensure that all known and unknown creditors are bound by the scheme.
The Settlement also provides that creditors who will not be adversely affected by the proposed plan of arrangement will not be entitled to vote on its acceptance.
The regulation transposes only the mandatory articles of the directive. The Department for Enterprise, Trade and Employment has delayed passage of the directive’s optional articles (which include a proposed extension of workers’ rights and stronger protection for new and interim funding) on the grounds that they “mark a significant departure from the existing examiner framework both in terms of scope and operation”. Instead, the optional articles are intended to be considered as part of a broader consideration of the review process at a later stage.
Much remains to be clarified about how the provisions will work in practice. The Irish review regime has been hugely successful for domestic and cross-border restructurings, with over 30 years of established case law providing invaluable certainty to debtors contemplating restructuring. It remains a restructuring process for the purposes of the EU Insolvency Regulation and therefore enjoys automatic recognition in all Member States (except Denmark). Although some provisions have procedural implications and may, in the very short term, reduce the certainty to which we are accustomed, further analysis and interpretation by the courts in the near future will likely provide more clarity on the practical implications. of the changes. Furthermore, unlike other Member States who are required to introduce an entirely new procedure, the substantive requirements of the Directive have already been tried and tested by the Irish courts, which will help to ensure the continued use of the examiner as the tool of choice in international restructurings.
We will continue to follow future developments in this area and, in particular, the proposal for a broader revision of the examiners regime which could incorporate some of the optional articles of the Directive.
2. Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive frameworks for restructuring, discharge of debt and disqualifications, and on measures to increase the efficiency of procedures relating to restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Restructuring and Insolvency Directive
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.