Sunday Independent September 6th 2020
Declan de Lacy of PKF O’Connor, Leddy & Holmes Limited writes on the need for formal restructuring to be made available to SME’s in the Sunday Independent.
The examinership process offers larger businesses an opportunity to write down historical debts and to renegotiate onerous leases.
Thirty years ago the then-Taoiseach Charlie Haughey recalled the Dáil to introduce legislation to save the Goodman Group. Examinership legislation was subsequently rushed through all stages in only three days.
As we enter the seventh month of Covid restrictions the future of many small- and medium-sized enterprises (SMEs) is becoming increasingly doubtful, yet Irish SMEs are precluded from using that very examinership process, which remains available to larger firms, to restructure their businesses.
The inevitable, but easily avoidable, consequence is that hundreds, if not thousands, of potentially viable Irish SMEs will be forced into unnecessary liquidation.
The examinership process offers larger businesses an opportunity to write down historical debts and to renegotiate onerous leases. However, examinership rarely costs less than €100,000, putting it outside the reach of more than 250,000 small businesses that collectively employ over 600,000 people. This is not just unfair, it makes jobs in small business more precarious, and gives a competitive advantage to large firms.
Consider two restaurants or retailers located side by side, the first is part of an international chain, and the second is a family business. If the first emerges from examinership with its debt burden and annual rent reduced not only does it manage to stay in business but it gains a competitive advantage over its neighbour for whom examinership is simply too expensive.
Although the number of liquidations in recent months has been small, this belies the depth of the problem. The true count of corporate failures has been suppressed both by Government funding payroll costs and Revenue allowing firms to defer Vat and PAYE liabilities. An unprecedented wave of corporate insolvencies is inevitable when these supports come to an end. Whether troubled companies are given the option to restructure their debt and obligations, or are forced into liquidation, will determine the depth of the recession that will follow in the pandemic’s wake.
Nobody questions the need for structures to allow small businesses to restructure without expensive court procedures. Indeed the 2011 Programme for Government adopted by the Fine Gael/Labour coalition included a promise to do just this. The matter was referred to the Company Law Review Group, who delivered a report with recommendations in September 2012. The first line of their report said that, insofar as it relates to small companies, the examinership process “is inadequate by reason of the costs involved which are prohibitive”.
The only recommendation from the report that was adopted was to allow the Circuit Court, instead of the High Court, to administer the examinership of a small- or medium-sized company. Simply changing the forum where examinerships are dealt with has done little to reduce the cost, and nothing to reduce the complexity, of the process. That only nine examinerships commenced in the Circuit Court in 2019 suggests that this change has done little to facilitate the restructuring of small businesses.
The programme for government adopted by the recently-formed coalition includes a new promise to simplify and improve the examinership process. EU law requires the Government to implement the Directive on Restructuring and Insolvency by July 17, 2021.
The directive requires the State to have statutory procedures for struggling, but potentially viable, companies so as to avoid liquidation by agreeing a compromise with their creditors. The directive is not overly prescriptive and gives the State considerable leeway over implementation
Our current examinership structure will need some amendments to comply with the directive. In essence the State must choose between tweaking the examinership beast with all of its cost and cumbersome procedures, or adopting a modern approach that dispenses with the court except to deal with abuses. All indications are that the State is leaning towards tweaking, which will provide little, if any, relief to troubled SMEs.
This type of approach is consistent with the scheme foreseen by the EU Restructuring Directive.
Although very rarely used, Ireland, like the UK, has for many years had legislation to allow companies put restructuring proposals to creditors that can become binding without Court intervention. The Irish schemes are known as “Part 11 Schemes of Arrangement”. The UK procedure, known as Company Voluntary Arrangements (CVA) is available to all companies, unlike in Ireland where the procedure is only available to companies being or about to be wound-up. The UK procedure makes proposals binding on all creditors if agreed by 75pc of creditors in each class who attend a meeting. The Irish procedure requires consent from 75pc of all creditors.
The UK procedure can also be used to reduce rents to market rates. The Irish procedure contains no such provision. Both procedures allow creditors who are unfairly prejudiced to appeal to the Court.
In the UK, 351 companies restructured their debts using a CVA during 2019. Schemes of Arrangement are rarely if ever used to restructure debts in Ireland, in part because Revenue is invariably a significant creditor and its policy is to oppose any write down of tax debts.
Changes introduced by the UK in June allow a company to obtain protection from its creditors for 40 days while a proposal to creditors is formulated. Notably the firm does not have to go to court to obtain this protection. The period of protection can then be extended until that proposal is considered by the creditors. This closely resembles the “protective certificate” procedure introduced into Irish personal insolvency legislation in recent years.
The UK changes also allow a new form of CVA where the court may make a proposal binding on all classes of creditors if at least 75pc of one class of affected creditors votes in favour. This mimics the examinership process, although in examinership the majority required in at least one class is only 50pc.
In essence, the new UK model has very similar outcomes to examinership, but omits Court involvement unless a class of creditors dissents from the proposals. This model could be readily replicated in Ireland, and comply with the Restructuring Directive. This would only involve modifying the personal-insolvency protective-certificate procedure to apply to companies, and incorporating the examinership provisions relating to creditors votes and onerous contracts into the rules on Schemes of Arrangement.
The hundreds, if not thousands, of Irish SMEs that might make use of an affordable restructuring option were it available are arguably more important to the Irish economy than one beef company back in 1990. Given how many Irish jobs are dependent on those companies, this is an issue requiring some political urgency.