Small Businesses, Big Changes: How New Examinership Legislation Will be a Lifeline for Hundreds of Small and Micro Companies

"Company Failure is an inevitable feature of Commercial Life...However, a company that is encountering difficulties is not inevitably a complete failure." - The Company Law Review Group.[1]

New legislation on examinership released in July 2021[2] was introduced as an “effective lifeline to viable small businesses.”[3] We have already seen the positive effect that examinership has had in Ireland, with almost 600 jobs saved in 2020.[4]  This new legislation is different in that it is targeted towards small and micro companies. Small businesses are the backbones of many communities in Ireland, employing 724, 562 people in 2021.[5]   

Since 2013, small-and-medium-sized enterprises (SMEs) have been catered for under “examinership lite”. Before the introduction of the amendment, approximately 1% of SMEs in distress were willing to make use of the ‘time out’ period for companies in financial difficulty. This was the first attempt to reduce the costs of Examinerships. Immediately, the jump in numbers was obvious. In 2014, 1,089 SME jobs were saved by the end of the third quarter. This was a 52% increase on the same period in 2013 wherein 539 SME jobs were saved. However, the process was still not speedy nor inexpensive enough and remained outside the reach of smaller and micro companies. A report by the Organisation for Economic Co-operation and Development even called Ireland’s insolvency legislation into light with regards to small and micro companies when they named Ireland among the companies that were particularly vulnerable to macroeconomic and financial shocks.[6]

So, how exactly does this new legislation work? Any company who “is, or is likely to be, unable to pay its debts”,[7] is entitled to have a process advisor determine if the company has a “reasonable prospect of survival.”[8] This decision will be based on the company’s “statement” of affairs[9] but will also consider other internal and external factors, such as availability of funding and the circumstances of the market.[10] Accurate information must be used at all times, or a director may face a criminal offence.[11]

The process advisor will prepare a report if he believes that there is a reasonable prospect of survival. The report sets out the directors of the company, the affairs of the eligible company, recommendations and opinions of the examiners and any other matter which the advisor deems relevant.[12]

The Board will appoint the process advisor at a resolution of the Board of Directors within 7 days of receiving the report. The process advisor shall stay under review and has a duty to give notice of a determination and resign should he determine that there is no longer a prospect of survival.[13] Similarly, the directors have a duty to co-operate with the process advisor and disclose any information relating to the performance of the business. They must also take the appropriate steps to protect the interests of the employees of the company.[14]

The process advisor will decide which court to petition to.[15] Having regard to the need for a speedy process which minimises costs, the process advisor may decide to bring proceedings to the High Court or the Circuit Court.[16] Given the fact that these companies are small, it is appropriate that the Circuit Court is used in most circumstances, and the Act makes reference to this – “refraining from bringing proceedings in the High Court unless there are good reasons for doing so.” By having legislation that is more distanced from the Courts than the ordinary examinership process, this is an effective method for keeping the costs of examinership down for these small companies.

After the resolution and the process advisor’s appointment, the process advisor must give notice of the appointment to the register, on the company website, in Irish Oifigiúil, and file the relevant copies of the resolution.[17] Similarly, the process advisor must give notice to employees and creditors.[18] Creditors must acknowledge notice of the process advisor. 

A key role of the creditor is to prepare a report within 49 days.[19] The report must set out: 

-       the rescue plan that was considered at the rescue meetings and any modification of it, 

-       the outcome of the required meetings, 

-       a statement of the assets and liabilities,

-       a list of creditors and the amount owed to each, 

-       a list of the companies’ officers,

-       the process advisor’s recommendations,

-       any renumeration, or costs and expenses incurred by or for the process advisor.[20]

There will then be a meeting with creditors and appropriate members in order to consider the rescue plan. It will be held that the rescue plan has been accepted where 60% have voted in favour.[21] This will be binding within 21 days unless an objection is filed by a creditor or a member.[22]

The new legislation is coming at an important time. It is expected that as Covid-19 government supports begin to phase out, as this “life-support”[23] is ending, there will be a “wave of examinerships.” Undoubtedly, the pandemic has presented a difficult time for business owners. As these small and micro companies make up 90% of businesses in Ireland, this legislation will protect these small companies through these difficult times. It is coming at exactly the right time. This is a common trend throughout the world as countries try and protect their small companies which make up so much of the market. Although Covid-19 no doubt hastened the introduction of the Act, it is interesting to note that Ireland did not take an approach where they introduced an emergency act solely as a result of the pandemic. 

It is noteworthy that the EU provides a definition whereby micro-companies are included within the definition of small and medium sized enterprises.[24] This is a very common approach throughout the world, and it would have meant that Ireland was covered under its “examinership-lite” programme. As mentioned earlier, there has been an increasing awareness of the high costs of insolvency and the high barriers to entry. The European Law Institute took this into account and recommended specific provisions for MSEs (micro and small-sized enterprises.)[25] Furthermore, both the World Bank and the United Nations Commission on International Trade Law[26] have recommended a separate, simpler approach for micro companies. Ireland is mostly in alignment with these recommendations, especially as the new framework is simple, flexible, low-cost, and accessible.

France remains at the forefront of insolvency law but with Germany making huge advancements with their Covid-19 legislation: “Business Stabilisation and Restructuring Act.” America introduced “Subchapter V” – a simplified process for smaller companies as a result of similar complaints to Ireland – that the Chapter 11 process was too costly and time consuming. Emergency insolvency laws have been introduced specifically to deal with micro-companies in countries such as Colombia, India, Laos, Australia and Singapore.[27]

Myanmar’s MSME insolvency law will introduce a framework to facilitate cross-border insolvency.[28] This follows the principles set out by the UNCITRAL. Although the EU does have some regulation here,[29] it has been argued that this regulation does not work in practice.[30] As companies are more and more likely to work across borders, it would be ideal for a more rigid European framework which would introduce a simplified system throughout the EU to simplify and streamline the insolvency process in Europe. 

In some cases, it may be a liquidation, a receivership, a sale of debt or an examinership that will be the necessary next step for a company to take. Examinership is a process that can take up valuable time and money, but one must decide if it is worth it or not. Each individual case is unique but is subject to rigorous rules and regulations but obtaining the ability to go into examinership means a real opportunity for the business to survive. 

Although this sounds great on paper, there are also some practical issues. Small and micro companies face very different challenges to their larger counterparts. There are more issues especially with accessing financing, less assets and limited liability. However, this time out period offers a break to these small and micro companies and is a valuable tool that will help protect Irish jobs. Ultimately, as we move into post-Covid recovery, this new legislation is more important than ever.

[1] Company Law Review Group, First Report, Chapter 2 (Stationery Office, 1994) 2.

[2] Companies (Rescue Process for Small and Micro Companies) Act 2021

[3] Dáil Éireann debate - Friday, 2 Jul 2021 Vol. 1009 No. 7. Companies (Rescue Process for Small and Micro Companies) Bill 2021: Second Stage

[4] Joe Brennan, ‘Examinerships saved almost 600 jobs last year.’ The Irish Times 2021

[5] D. Clark, “Number of people employed by SMEs in Ireland in 2008 to 2021.” Statistica.com 2021

[6] Organization for Economic Co-operation and Development, The Impact of the Global Crisis on SME and Entrepreneurship Financing and Policy Responses, (26-27 March 2009, Italy)

[7] Companies (Rescue Process for Small and Micro Companies) Act 2021 s558B (2)

[8] Companies (Rescue Process for Small and Micro Companies) Act 2021 s558C

[9] Companies (Rescue Process for Small and Micro Companies) Act 2021 s558B(4)

[10] Companies (Rescue Process for Small and Micro Companies) Act 2021 s558C(4).

[11] Companies (Rescue Process for Small and Micro Companies) Act 2021 s558B(6)

[12] Companies (Rescue Process for Small and Micro Companies) Act 2021 s558D

[13] Companies (Rescue Process for Small and Micro Companies) Act 2021 s558F

[14] Companies (Rescue Process for Small and Micro Companies) Act 2021 s558G

[15] Companies (Rescue Process for Small and Micro Companies) Act 2021 s558H(2)

[16] Ibid s558H(3)

[17] Companies (Rescue Process for Small and Micro Companies) Act 2021 s558J

[18] Companies (Rescue Process for Small and Micro Companies) Act 2021 s558K

[19] Companies (Rescue Process for Small and Micro Companies) Act 2021 s558T

[20] Companies (Rescue Process for Small and Micro Companies) Act 2021 s558ZA

[21] Companies (Rescue Process for Small and Micro Companies) Act 2021 s558Y(4)

[22] Companies (Rescue Process for Small and Micro Companies) Act 2021 s558XB

[23] Baker Tilly Corporate Recovery Team ‘Wave of Examinerships Expected in 2021 As Covid Supports Begin to Phase Out.’ Bakertilly(21 Jan 2021)

[24] EU Recommendation 2003/361/EC

[25]European Law Institute Rescue of Business in Insolvency Law (2017)

[26] United Nations Commission on International Trade Law UNCITRAL Legislative Recommendations on Insolvency of Micro- and Small Enterprises (A/76/17)

[27] Aurelio Gurrea-Martínez, “Insolvency Law in Times of COVID-19” (2020) Ibero-American Institute for Law and Finance Working Paper 2/2020

[28] Myanmar Insolvency Law, Union Hluttaw Law 1/2020 Part X

[29] Council Regulation 1346/2000 on Insolvency Proceedings

[30] ISRAEL, Jona, European cross-border insolvency regulation: a critical appraisal of Council Regulation 1346 2000 on insolvency proceedings in the light of a paradigm of cooperation and a Comitas Europaea, Florence, European University Institute, 2004, EUI PhD theses, Department of Law. Retrieved from Cadmus, European University Institute Research Repository, at: http://hdl.handle.net/1814/4661