Personal Guarantees in Examinership

We will soon enter a phase of the Covid19 era when more and more companies will be forced to apply for protection from their creditors under the Examinership provisions of the Companies Act, 2014. Security as always will be a key consideration for the stakeholders in this restructuring process. Fixed and floating charges are almost always well protected but what about personal or corporate guarantees?
 
The legislation
 
The legislation is very specific regarding guarantees.
 
Guarantors temporarily benefit from a company's protection from creditors during examinership and guarantees are not enforceable during the protection period.
 
The Companies Act, 2014 (the Act) provides that a guarantors' liability is not affected by the fact that the debt is the subject of a scheme of arrangement, unless the guarantor and the creditor agree otherwise. However, creditors relying on guarantees should be aware of the steps required to ensure they remain enforceable when examinership ends. 
 
In order to avail of this principle, creditors must comply with the very specific provisions of section 549 of the Act. When an Examiner serves notice of a meeting to consider a scheme of arrangement on creditors, any creditor who has a guarantee must serve a written notice on the guarantor offering to transfer to the guarantor, the creditor's right to vote on the Examiner’s scheme of arrangement. Where less than 14 days' notice of the creditors' meeting is provided by the Examiner (as is almost always the case), the offer must be served on the guarantor within 48 hours of receipt of notice from the Examiner.  
 
Where a creditor fails to comply with the notice provisions of the Act and a scheme of arrangement takes effect, the company debt will be written down in accordance with the scheme and the creditor will be prevented from pursuing the guarantor for the deficit under the guarantee.
 
The case law
 
Much of the case law in this area considers whether the service of the notice on the guarantor was effected within the 48 hours.
 
In the case of Ely Medical Group Limited^[1], the Court heard evidence from a creditor relying on a guarantee, that the guarantor had deliberately evaded service of the notice. On the facts of the case, the Court held that the service was good and the guarantor remained liable.

In Padraic Tuffy Limited -v- O'Neill & Anor^[2], an examiner served notice of the meeting to consider a scheme of arrangement on all creditors by email and by letter. The issue for consideration was the timing of receipt of the notice and whether the 48 hours for its transfer to a guarantor commenced on receipt of the notice by email, or, the following day when it was received by letter. The Court held that the 48 hour period starts from the time of first receipt of the notice, regardless of how it was delivered.  
 
Similar circumstances were considered in the recent UK case of Bank of Boroda v Maniar^[3]. An Indian Bank sought to enforce guarantees governed by English law, but which were given in respect of the liability of an Irish-registered company. The company had entered into examinership under Irish law and an Irish Court had approved a scheme of arrangement. One of the primary issues in dispute was whether service of a notice on the guarantors in accordance with the Act was effected. The High Court of England and Wales held that a failure to comply with the specific notice requirements of the Irish Companies Act would be fatal to an action to enforce the guarantees in the English courts.
 
Even where the notice provisions of the Act have been correctly complied with, a creditor must be careful not to jeopardise a personal guarantee. In a recent unreported case, a creditor issued the requisite notices which did comply with the 48 hour time limit. The offer to vote at the creditors meeting was neither accepted nor rejected by the guarantor. Perhaps because of this, the creditor attended at the creditor's meeting and voted in favour of the scheme of arrangement. In doing so, it was found that the creditor had negated the notice delivered to the guarantor and compromised its ability to rely on the guarantee.
 
Conclusion and advice
 
It is clear that the Courts in this jurisdiction and in the UK adopt a very strict interpretation of the provisions of the Companies Act on the enforceability of guarantees in an Examinership. Anyone relying on guarantees must be hyper vigilant in protecting their security. Indeed, we suggest any creditor relying on guarantees prepares a detailed schedule and appoints an individual responsible for monitoring the corresponding debtors. Contact details for personal guarantors, registered addresses and email addresses for corporate guarantees should all be included.
 
The Fieldfisher insolvency department has many years of experience in this technical area of law and can assist creditors and lenders alike in protecting all of their security. Please contact any of the team with queries.
 
Written by Mark Woodcock and Ciara Gilroy
 
End 31.09.20