Following the collapse of the Cyprus economy in 2012-13, Examinership was enacted through the Companies (Amending) (No.2) Law 2015 – Examinership N62 (I) / 2015 as a rescue mechanism for companies in economic distress. Previously, the only options available to companies in distress were to enter receivership or liquidation. Examinership is now a viable alternative to that.
Examinership has roots in the Irish Companies Act 1990 and in Ireland it has served as a lifeboat to businesses through financial predicaments preserving thousands of jobs and avoiding the crystallisation of millions of euro in redundancy and employee claims which would otherwise be payable by the State, not to mention the mental distress caused to employees by the loss of employment. It has also served to provide a return to creditors where in a receivership or liquidation, their return would be much lower. It has therefore contributed positively to the retention of enterprises for the greater good of the Irish economy, providing a second-chance at survival to companies which would otherwise fail. There is no reason why it cannot do similarly in Cyprus.
To begin with, in order for a company to be in a position to avail of examinership, it must meet the statutory requirements which are:
- To be insolvent or about to become insolvent which essentially means unable to pay all debts as they fall due or shortly expect to be in that position; and
- Have a ‘reasonable prospect of survival’.
Those requirements are dealt with in an independent expert’s report (“IER”) that is submitted to the Court as part of the application for Court protection. The IER is typically prepared by an accountant who can be the company’s auditor and the Independent Expert would typically have insolvency experience and practice in that area.
The protection of the Court prevents any of the creditors of the company from enforcing their claims against it for a period of 4 months, which may be extended to 6 months. That means that a secured creditor cannot appoint a receiver, tax authorities cannot present a winding up petition and creditors who have supplied stock or provided assets on a leased basis cannot take them back. The protection is therefore all encompassing.
The time period is used by the examiner, an insolvency practitioner nominated to act by the company and appointed by the Court, in order to secure investment and prepare a scheme of arrangement to deal with the claims of all members and creditors. The Scheme is required to be approved by at least one class of creditors, for the Court to confirm it. Under the Scheme, parties cannot fare worse than the outcome on a liquidation or receivership.
The Scheme once approved by the Court, becomes binding on all members and creditors, regardless of whether they voted in favour or opposed same. Amounts due to creditors are either rescheduled or extinguished by way of payment of the dividend provided for under the Scheme. It can therefore completely transform a company’s balance sheet for suitable candidates from insolvent to solvent.
Regrettably, take up from business owners has been low to date and anecdotally, this would seem to arise from a nervousness on their part and unfamiliarity with the process.
The response to these understandable concerns is relatively straightforward: through the Scheme of Arrangement, the company shall secure new investment including sufficient working capital to allow the company return to trade as normal. The investment is also used to discharge the Examiner’s costs. Very often, investors will only invest subject to a Scheme being entered into with creditors as otherwise, they would be investing in an insolvent company with associated pressures from creditors. The Scheme provides certainty as to how creditors are dealt with.
Examinership is Ireland’s formal corporate rescue mechanism which supports SMEs, the largest providers of employment in the country, accounting for around three quarters (70.1%) of private sector employment. The economic downturn from 2008 onwards and subsequent recovery has had a profound impact on the SME landscape all across the globe.
Corporate recovery though in Ireland has been swift and steady in the years that followed. As per the statistics of Central Bank of Ireland, SMEs loan default rates have declined by 32.7% since 2015, due to the impact of preventive restructuring framework mechanisms. Examinership in recent years has been more accessible to corporations through a less costly and more efficient court application process in the Circuit Courts. This has encouraged directors of companies with economic constrains to consider the process and to seek assistance from professionals at the earliest opportunity to reinforce their company’s prospects of survival.
Since 2015, 5.439 employees in total have retained their jobs through the Examinership process in Ireland, of which 3.744 were job positions in SMEs thus accounting for 69% of total jobs saved. That alone creates a chain reaction to local economy which is benefited from the rescued enterprise and knock-on benefits for other local businesses.
Baker Tilly Ireland has a leading position in Examinership appointments and is one of the key players in Corporate recovery. It is accountable for rescuing 1.527 SME sector jobs for the period of 2015 until the last quarter of 2019, reaching the impressive percentage of 41% over the total SMEs employment positions saved.
In Cyprus, the total corporate loan portfolio ranges up to 45% of total loan facilities granted, with SME loans accounting for 74% of the total corporate loans. One third (33%) of the SMEs loans are recorded as non-performing, an alarming percentage for the Cypriot economy that should act as wake-up call for our entrepreneurs.
Since the Examinership enactment in 2015, there have been 18 unsuccessful Examinership petitions with the predominant cause of failure being that these applications for the appointment of Examiner were made with the intention of interrupting receivership proceedings.
As the COVID-19 situation continues to evolve, entrepreneurs should ensure that they mitigate the risk imposed on their business, taking the necessary measures to safeguard business continuity. With SMEs accounting for 72.5% of Cypriot businesses, they are the backbone of the economy. Accordingly, business owners have additional responsibility to take precautionary and repressive measures to ensure the financial prosperity of their enterprise as well as the broader economy. There is a potential to rescue more distressed enterprises if company directors had a greater awareness of the protection that examinership provides and sought advice at an earlier stage.
Examinership was established as a preventive restructuring mechanism available to businesses in financial distress with a main focus on job retention and a way to contribute to the wider community. Planning for survival should be the prime strategy of any enterprise that is dealing with the unprecedented challenge of Covid-19.