A court ruling allowing a company to get out of onerous leases is a legal first here, writes Barry O'Halloran
INSOLVENT COMPANIES have examiners appointed when they can demonstrate that they have “a reasonable chance of survival as a going concern”.
Once an examiner is appointed, the company has High Court protection from its creditors, and the examiner has up to 100 days to put together a rescue plan, known as a scheme of arrangement.
The examiner has to put the scheme to a creditors’ meeting. Once one group of creditors whose rights are prejudiced by the scheme votes in its favour, it then goes to the High Court for its approval.
Anyone opposed to the scheme can then make their case against it. They must demonstrate that the scheme unfairly prejudices them, and that they would fare better in either a receivership or a liquidation.
If the court approves the scheme, it then makes whatever orders are required to give effect to it, and to bring the examinership and High Court protection to an end.
LINEN SUPPLY of Ireland has just emerged from examinership with its business intact and a guarantee of a small place in Irish legal history.
A Supreme Court ruling last December allowing the company to repudiate – to exit – a number of particularly onerous leases was, according to the firm’s management, and to its examiner, Kieran Wallace of KPMG, vital to its survival.
The same precedent may yet prove just as vital to other businesses that are struggling to pay property-boom rents out of recessionary earnings.
The ruling cleared up once and for all the question of whether or not leases could be classed as contracts within the meaning of the examinership legislation. The Supreme Court said that they were, which allowed Linen Supply of Ireland to exit the leases, and implement a rescue plan that allowed it to start again with a clean sheet.
It was all new to the company’s chief financial officer, Joerg Lankers, who came here from Germany in December 2008. A concept such as examinership, designed to give temporarily insolvent, but ultimately viable, companies some breathing space to come up with a rescue plan, does not exist in Germany.
He and his colleague, Joerg Falck, its managing director, had to learn fast once the High Court appointed Wallace last autumn. From the perspective of those managing the company itself, there were three strands that needed to be managed – staff, suppliers and customers.
Lankers says one of the most unfortunate consequences of what happened was that the company had to make redundancies, 260 in all, as it restructured the business and closed facilities in Dublin and Galway.
The redundancies involved talks with Siptu, the trade union that represents most of the company’s workers, and a day in the Labour Relations Commission (LRC). Linen Supply of Ireland agreed an ex-gratia payment of €5.4 million to the staff who lost their jobs, and its willingness to do this aided it in getting a deal with the union.
Most suppliers received 30 per cent of what they were owed. Lankers says this is a better dividend than that paid in other examinerships, but acknowledges that “it is still a 70 per cent discount” for businesses which themselves were not finding things easy.
Keeping them on board, particularly during the first week of the examinership, was one of his biggest challenges. It was not always easy; at one stage, a garage refused to fix a truck’s broken windshield without a prepayment of €100. The company continued to pay suppliers part of their bills up front throughout the process.
“We are now negotiating normal credit terms with our suppliers,” Lankers says. He adds that since the business has been put back on an even keel, with a much-reduced cost base, suppliers are open to returning to more conventional trade terms.
The company could not survive without customers. Broadly speaking, Linen Supply of Ireland has three businesses – linen services for the tourism and hospitality sector, work wear, and clean room clothing. This last one is based in Spiddal, and was separately incorporated from the rest of the group. As it was profitable, it was not included in the examinership process.
The general industrial business and particularly hospitality and tourism suffered as customers cut back on staff numbers and on their own capacity. Hotels were badly hit, as over-supply, the recession and weakening sterling all came together and sent tourism into a sharp decline.
An insolvency, even one that results in a rescue, can damage the reputation of a business, and even a perceived weakness will bring competitors out in force.
A key issue for Lankers was maintaining open lines of communication with with both suppliers and customers. He had to focus on reassuring both sides that the company was intent on staying in business.
When it came to the rescue plan, or scheme of arrangement as it’s known in the legislation, the crunch issue was the cost of the leases. The company was paying over €1 million a year, and because of the by now notorious upward-only rent review system, it had no prospect of reducing this cost.
If it could not have cut that cost, however, the company would not have survived. The law governing examinerships, the 1990 Companies Act, allows contracts to be repudiated, but it was not clear until the Supreme Court ruled in the Linen Supply of Ireland case that this did extend to leases.
Kieran Wallace says this ruling was critical to the success of the rescue plan. “If the repudiations had not happened, it was liquidation,” he says. “There would have been no choice.” Lankers says that continuing to pay the rent, particularly as it was closing operations, was simply not a commercial proposition.
Lankers remarks that he was astonished that issues such as this in company law could be open to interpretation in court. However, he feels that the examinership system works, and says a mechanism like this should be part of any company law code.
When examinership was first introduced in 1990, its critics argued that it made it too easy for insolvent companies to get High Court protection from their creditors, whose rights were essentially compromised by the entire process.
Reforms introduced 11 years ago now mean that the company has to have a reasonable prospect of survival as a going concern before the courts will allow it to go ahead, or approve a rescue plan. Wallace says that those changes strike the right balance. Also, the large number of cases over the last 12 to 18 months means the courts have ruled on some of the contentious issues, such as repudiation of leases.
“In the last 12 months, following decisions of both the Supreme and High Court, we have received more clarity on matters relevant to examinerships than ever before,” he says, adding that this trend is likely to continue over the next year.
The next year holds out some prospects for the company itself. Lankers says it is planning to introduce a number of new products and innovations developed by its German parent, CWS Boco, in coming months.
He does not have too many illusions about the challenges facing the business. Sales last year were €38.5 million, but it will be a fight to grow that. “This will be another challenging year,” he says. “We expect a further decline in volumes and prices, and the level of competition will be very high as there is excess capacity in the industry.”
The company now has 350 workers in operations in Dublin, Cork and Galway, and it also has a series of depots at strategic points around the country. The rescue plan meant that its parent was able to put €70 million in investment on the table, which Lankers points out was a considerable vote of confidence in the long-term future of the Irish business. At this rate, its local management expects that things will begin to turn the corner in 2011 and 2012.
EXAMINERSHIP EXPLAINED
INSOLVENT COMPANIES have examiners appointed when they can demonstrate that they have "a reasonable chance of survival as a going concern".
Once an examiner is appointed, the company has High Court protection from its creditors, and the examiner has up to 100 days to put together a rescue plan, known as a scheme of arrangement.
The examiner has to put the scheme to a creditors' meeting. Once one group of creditors whose rights are prejudiced by the scheme votes in its favour, it then goes to the High Court for its approval.
Anyone opposed to the scheme can then make their case against it. They must demonstrate that the scheme unfairly prejudices them, and that they would fare better in either a receivership or a liquidation.
If the court approves the scheme, it then makes whatever orders are required to give effect to it, and to bring the examinership and High Court protection to an end.
