PIPs starting to insert "Poison Pill" defences into PIAs

Jim Stafford

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A poison pill is a strategy used by companies to discourage hostile takeovers. With a poison pill, the target company attempts to make its shares less attractive to the acquirer.

With the recent legislative changes that introduced "Examinership" type rules to a "no veto type PIA", some Personal Insolvency Practitioners have started to incorporate "Poison Pill" defences into the "no veto type" PIA.

A "no veto type PIA" could have a number of “classes” of creditors. For example, a PPR lender is a distinct “class” ( due to extensive legislation on family homes). Other classes of creditors could be:

  • Rates (guaranteed payment within 2 years)
  • Income Tax/VAT/RCT/CGT/CAT
  • Judgement Mortgage
  • Hire Purchase
  • Contingent Debt
  • Retention of Title Creditors
  • Unquantified Legal Claim
  • Connected Person (cannot vote in favour)
  • Trade Creditor
  • Secured Loan
  • Landlord
  • Property Management Charges
For "no veto type PIAs", a 51% vote of creditors in just one class of creditors may be sufficient to carry the PIA over the line! In theory, a PPR lender could approve a PIA that just pays minimal dividends to other creditors.

If the PIA does not reach the "normal" voting thresholds of 65% overall debt, 50% secured debt and 50% unsecured debt, but does meet the "Examinership" test (in simple terms: at least one class of creditor has voted in favour of the PIA) then the PIP has to go to court to have the Scheme "Reviewed". Obviously, such court reviews are not cheap: I am aware of a recent case where one creditor incurred legal costs of approximately €20,000.

To "encourage" Creditors to vote in favour of schemes, some PIPs have started to insert "Poison Pill" clauses into the PIA's stating that if the debtor has to incur a costly trip to the courts to have the PIA approved, and if the courts approve the PIA, that the costs will be deducted from the dividend going to the "class" of creditors that voted against it. In such cases it would be important for the PIP to ensure that he has created the correct "classes" so that a "co-operative" creditor who is put in the wrong "class" is not penalised by a creditor of that class who votes no.

Jim Stafford
 
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I am aware of a recent case where on creditor incurred legal costs of approximately €20,000.
So the costs become another class of creditor payable by dividend and subject to the usual risk of changes etc!! Is that acceptable to the solicitors etc?
 
So the costs become another class of creditor payable by dividend and subject to the usual risk of changes etc!! Is that acceptable to the solicitors etc?

In a Court review of a PIA, a court may award costs against the debtor or the creditor. if the costs are awarded against the debtor, then technically it would mean that the PIA failed and technically the legal costs could become its own separate "class" of creditors in a later PIA. (A debtor can only have one PIA in a life time: if the first attempt at a PIA fails, then the debtor usually has to wait 12 months before attempting another PIA.)

As solicitors should be familiar with the legislation, they should be aware of the risks of not getting paid etc.

Jim Stafford
 
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