Insolvency 2021

Last Updated November 23, 2021

Ireland

Trends and Developments


Authors



Dillon Eustace LLP is one of Ireland’s leading law firms focusing on financial services, banking and capital markets, insolvency and corporate recovery, corporate and M&A, litigation and dispute resolution, real estate and taxation. Headquartered in Dublin, Ireland, the firm’s international practice has seen it establish offices in Tokyo (2000), New York (2009) and Cayman Islands (2012). In tandem with Ireland’s development as a leading international financial services centre, Dillon Eustace LLP has developed a dynamic team of lawyers representing international and domestic asset managers, investment fund promoters, insurers, banks non-bank lenders, corporates, insolvency practitioners, TPAs and custodians, prime brokers, government and supranational bodies as well as newspapers, wind energy companies, aviation and maritime industry participants and real estate developers.

Trends

Market analysis

According to the most recent corporate insolvency statistics report prepared by Deloitte, corporate insolvencies in Ireland for year-to-date, as of 30 September 2021, showed a 36% decrease from the same time period in 2020. This relative stability over the last 18 months has been largely due to the government supports available to companies experiencing financial difficulties because of the pandemic. These supports ar nowe beginning to be phased out and the expectation is that they will all have ceased by the end of Q1 2022. This is reflected in an 88% increase in corporate insolvencies between Q2 and Q3 of 2021. The unfortunate reality is that many of these companies that are currently on "life support" may inevitably not be in a position to trade on once these supports come to an end. For otherwise viable companies, they may be able to restructure their legacy debt by availing of one of the statutory restructuring processes available in Ireland.

In that respect, a significant development in the Irish insolvency and restructuring landscape has been the introduction of a statutory rescue process for small and micro companies in July 2021, commonly referred to as the Small Company Administrative Rescue Process (SCARP). The SCARP is described in more detail below.

Brexit

Brexit continues to impact the Irish restructuring market and will do so for years to come. Brexit presents both challenges and opportunities for Ireland. There is currently no overarching legislative framework governing cross border insolvencies between the UK and the EU. Specifically, there is no automatic mutual recognition of insolvency proceedings between the UK and the remaining EU member states (member states), unless those proceedings commenced prior to 31 December 2020.

UK recognition of insolvency proceedings that are opened in Ireland after 31 December 2020 will therefore have to be sought under UK domestic law, particularly Section 486 of the UK Insolvency Act 1986, or otherwise under the UNCITRAL Model Law on cross-border insolvency proceedings (the Model Law) to which the UK is a signatory.

As the majority of members states are not presently signatories to the Model Law, recognition of UK insolvencies will largely be a matter for each EU member state’s domestic courts to determine. As such, determination is conducted on a case-by-case basis, which will lead to uncertainty in the market in the short-to-medium term.

Despite the serious issued posed to insolvency practitioners by the UK’s withdrawal from European Insolvency Regulation (Regulation (EC) No 1346/2000) as recast by Regulation 2015/848 of the European Parliament and of the Council of 20 May 2015 (the Recast Insolvency Regulation), Brexit also presents opportunities for Ireland as a destination for international cross-border restructurings. Ireland is now the only member state that; has English as its primary language, is a common law jurisdiction and benefits from the Recast Insolvency Regulation in respect of proceedings commenced after 1 January 2021 that are recognised across all member states.

Owing to the close economic and geographic ties between the UK and Ireland, re-establishing and regularising cross-border insolvency provisions with the UK has been highlighted as a priority for Ireland. The Irish Company Law Reform Group has recommended to the government of the day that Ireland signs up to the Model Law, which would facilitate with cross-border insolvency recognition and assistance with the UK. The Irish government has yet to initiate this process.

Ireland as a jurisdiction for international restructuring

Ireland has seen its corporate restructuring regimes, namely examinership and schemes of arrangement under Part 9 of the Irish Companies Act 2014 (as amended) (the "Companies Act"), utilised on a number of occasions in recent years in large scale and complex international restructurings. Particularly within the last two years or thereabouts, the Irish Courts have demonstrated their capacity to deal with large multijurisdictional restructurings. The Irish Commercial Court, which is recognised internationally, has the competence to case manage commercial cases with cross-border dimensions and/or involving questions of EU law.

An obvious example of the potential of Ireland as a European hub for international restructuring, and hopefully a template for post-Brexit cross border restructurings more generally, has been displayed in the aviation sector. The combination of Ireland’s standing as a global aviation financing powerhouse, its established corporate rescue processes, and the impact of the pandemic on the airline industry has seen a number of high-profile restructurings take place in Ireland. Examples include Nordic Aviation Capital’s restructuring of its debt through an Irish scheme of arrangement and the successful examinerships of Norwegian Air and Cityjet.

Norwegian Air (2021)

In the case of Norwegian Air, the parent company, Norwegian Air Shuttle (NAS), was a Norwegian entity whose "centre of main interests" (COMI) was not located in Ireland or in any other EU member state and, as such, was beyond the scope of the Recast Insolvency Regulation. Nonetheless the Irish High Court found that because much of NAS’s economic activity was carried out through subsidiaries incorporated in Ireland which were also seeking the protection, the Irish High Court found that NAS had a “sufficient connection” to Ireland. It was held that this “sufficient connection” afforded the Irish Court jurisdiction to appoint an examiner to NAS, on the basis that the Norwegian Air group of companies the subject of the Irish examinership petition were so closely linked and inter-dependent that NAS had a real and deep connection to Ireland.

The Norwegian Air examinership also demonstrated the willingness of the Irish Courts to permit companies in examinership to repudiate a wide array of their pre-existing contracts where it would facilitate a successful restructuring. In order to streamline its operations, the Norwegian Air group companies in examinership agreed the termination of a number of their aircraft leasing and sub-leasing arrangements with willing creditors. Where an agreement could not be reached consensually, the High Court approved separate and distinct repudiation applications based on the fact that repudiation was essential for survival of the various companies as going concerns. This included the repudiation of English and New York law aircraft leases, sub-leases, security assignments, operational contracts and for the first time, guarantees.

A number of the repudiated contracts were governed by UK law. The Irish Court was nonetheless satisfied, on the basis of submissions before it by UK Counsel, that the relevant repudiation orders would be recognised by the English Courts under UK domestic law, notwithstanding the fact that following the UK’s withdrawal from the EU there was no automatic recognition of the orders of the Irish Courts, as would have previously existed under the Recast Insolvency Regulation.

The Irish Court also provided welcome clarification on a number of aspects of the Cape Town Convention and Aircraft Protocol (the Aircraft Protocol) in the context of an Irish examinership. Repudiation of aircraft leases by a debtor company as a debtor-in-possession in the examinership process is not prohibited by the Aircraft Protocol. Where an aircraft lease is successfully repudiated within the examinership process, an aircraft lessee’s obligation to give possession under the Aircraft Protocol does not extend to a requirement to redeliver the aircraft back to the lessor under any relevant provisions under the repudiated aircraft lease.

Nordic Aviation Capital (2020)

An Irish scheme of arrangement under Part 9 of the Companies Act is a very flexible restructuring tool with many similarities to the equivalent process in the UK, albeit that in Ireland an application can be made to the Irish Court for a stay on creditor proceedings to facilitate a restructuring. This process can be used to implement any restructuring where there is a degree of give and take between the scheme company and its creditors or members.

The approval of the Nordic Aviation scheme of arrangement by the Irish High Court demonstrated why such schemes can be a useful restructuring process for multinational companies:

  • this scheme applied across 89 separate facilities, governed by a mixture of New York, English and German law;
  • the Irish Court approved the scheme which included the restructuring of debt where third parties were the principal creditors, but which debt had been guaranteed by the scheme company; and
  • helpfully, recognition of the Irish Court order under Chapter 15 of the US Bankruptcy Code was also entered by the New York Bankruptcy Court.

Developments

SCARP

The legislation enacting the SCARP was signed into law in Ireland on 22 July 2021, marking arguably the most significant legislative development in Irish domestic corporate restructuring since the introduction of examinership in 1990.

The purpose of the SCARP is to provide a framework for the rescue of small and micro companies (as they are defined in the Companies Act) which make up 98% of all companies in Ireland. Despite the many benefits of the examinership process, the costs associated with the court applications required in this process can be prohibitive for a lot of smaller struggling companies. The SCARP is designed to have minimal court involvement, but with recourse to the courts available where there are disputes or where there is a need to guard against abuse of the process. Therefore, whilst the SCARP takes heavy influence from examinership, it is to be primarily conducted as an administrative process, which bypasses the courts to the greatest extent possible, reducing costs for small and micro companies.

The process is available to companies that satisfy two or more of the following requirements in a single financial year:

  • turnover does not exceed EUR12 million;
  • balance sheet total not exceeding EUR6 million; and
  • the average number of employees not exceeding 50.

The SCARP can be summarised as follows.

  • A designated "process advisor" must first be provided with a sworn statement of affairs by the directors outlining the assets and liabilities of the eligible company. If the process advisor is satisfied based on this statement of affairs that the company has a reasonable prospect of survival, they will prepare a report to that effect. The board of the eligible company must then pass a resolution to appoint the process advisor and, as such, the process is initiated without the need for a court application. The process advisor must then notify the relevant creditors of their appointment.
  • The process advisor must next formulate a rescue plan for the company, which may provide for a writing-down of the company’s debt and/or a cross-class cram down of the relevant debt. A cross-class cram down permits the approval of a process advisor’s rescue plan even when there are a class or classes of dissenting creditors. The primary restriction on the process advisor in this respect is that the debt cannot be written down to a value lower than the value of a creditor’s security, whilst the liability of third-party guarantors also cannot be affected by the rescue plan.
  • The process advisor has only 49 days from the date of the directors’ resolution to prepare their report stating that they have been in a position to put together a rescue plan and that they have obtained the requisite number of votes in favour of the rescue plan. At least one class of creditor whose interests are being impaired by the rescue plan must vote in its favour.
  • A notice must then be filed in court confirming that the rescue plan has been approved. Dissatisfied creditors may file an objection to the plan within 21 days of this notice being filed and therefore the total timeline for the process is 70 days.
  • The process advisor is also afforded the power to repudiate onerous contracts, but only if they believe it is absolutely required for the survival of the company as a going concern. This is similar to the power afforded to an examiner in the examinership process.
  • As there is little court involvement or supervision in the SCARP, the legalisation provides for criminal sanctions for directors who fail to provide the relevant information, or who provide false or misleading information. The process advisor is also under an absolute obligation to report directors’ offences to the Director of Public Prosecutions and the Office of the Director of Corporate Enforcement, respectively.

It remains to be seen whether the SCARP will apply in practise as intended. Commentators have highlighted that the court applications required for court protection and to repudiate onerous contracts may negate some of the cost-benefits which the process is structured to provide. Furthermore, the fact the certain debts owing to the Irish Revenue Commissioners, who are typically a key creditor, can be excludable from the process in certain specific circumstances has been highlighted as another potential weakness. Nonetheless, as the government’s COVID-19 supports draw to an end in the coming months, the SCARP will no doubt represent a welcome statutory process for struggling SMEs who have viable business if their legacy debt can be restructured.

Dillon Eustace LLP

33 Sir John Rogerson’s Quay
Dublin 2
Ireland

+353 1 667 00 22

+353 1 667 00 42

enquiries@dilloneustace.ie www.dilloneustace.com
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Trends and Development

Authors



Dillon Eustace LLP is one of Ireland’s leading law firms focusing on financial services, banking and capital markets, insolvency and corporate recovery, corporate and M&A, litigation and dispute resolution, real estate and taxation. Headquartered in Dublin, Ireland, the firm’s international practice has seen it establish offices in Tokyo (2000), New York (2009) and Cayman Islands (2012). In tandem with Ireland’s development as a leading international financial services centre, Dillon Eustace LLP has developed a dynamic team of lawyers representing international and domestic asset managers, investment fund promoters, insurers, banks non-bank lenders, corporates, insolvency practitioners, TPAs and custodians, prime brokers, government and supranational bodies as well as newspapers, wind energy companies, aviation and maritime industry participants and real estate developers.

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