The past ten years have been bleak for SME promoters looking for funding. We were all used to a glut of cheap credit being thrown around by banks like confetti at a wedding. Lending for SMEs evolved from the bank manager’s golf club friends and pillars of the community to more democratic arrangements, where so long as borrowers had property to secure them, loan cheques were being written to all and sundry.

No heed was paid to company balance sheets, cash flow projections or the industry sector in which the business was operating, and the tale of the banking sector’s exposure to this type of borrowing does not need to be told again here. Since the banks shut up shop in 2007 the lending environment has been desolate.

Luckily however, nature abhors a vacuum and sources of asymmetric funding that are accessible to SMEs are now emerging. Initially they started offering money to developers using the Anglo model, which was essentially a profit share. While development project promoters grumbled about the cost of these funds (at 12% annually) the reality is these funds were appropriately priced to reflect the risk inherent in the projects being funded at the time. Indeed, the shock with which borrowers view those operating in this loan space goes to show how spoiled they were in the previous lending environment.

With the property market having settled down, and greater certainty regarding costs, likely sales prices and the availability of funding for purchasers emerging, these rates are now coming down to reflect the new risk profile of these development projects.

The continuing reluctance of the pillar banks to lend to developers arising from their legacy aversion to risk and impossible lending conditions, together with borrowers’ scepticism looking past the bank’s fluffy advertising campaigns means they are now very secondary targets for developers and companies seeking funding to expand and grow.

The myriad of asymmetric lenders offering everything from crowd funding, kick starting, car finance, invoice discounting, equipment leasing, micro business funding, women in business funding and mentoring, state aid for marketing, training, through Local Enterprise  offices, Enterprise Ireland etc., all mean less reliance on banks as sources of financing.

In addition to this we have seen the improvement of company balance sheets that has resulted for the first time in resources now being available to companies looking to take advantage of less onerous trading conditions to expand by way of acquisition, or merger, or to properly and adequately capitalise their businesses.

The point is this; look past the traditional and to the new in terms of sources of funding for your company expansion.

Barry Lyons is a commercial solicitor with over 20 years’ experience advising SME promoters. He can be contacted at 01 539 0060 or blyons@lyonssolicitors.ie

How many times have we seen it; the abject failure of the state and its institutions to see the blindingly obvious solutions to societal problems? The housing crises is the most obvious current one, where the state controls all the input levers, including land supply, planning, access to finance, and the cost of the finished product, and yet remarkably is incapable of reconciling the extraordinary demand with supply of high quality, affordable housing.

Minister Murphy took over Simon Coveney’s 2016 housing strategy, promising to build 25,000 housing units per year from 2020. He suggests there are five pillars to the “strategy”; address homelessness, accelerate social housing, build more houses, improve the rental sector, and utilise existing housing. In truth there is one; build more houses according to need, and the other “pillars” will fall into their place.

It is interesting to see what has happened since the housing strategy was released. In Dublin where the supply of housing is most restricted, the scorecard for housing provision is sobering; of 1,500 houses that were expected to be delivered by year end 2018, 22 are completed. To put this performance into context 200 were to be delivered by end 2016, another 800 end 2017, and 500 end 2018. By the end of 2017 it is expected that 169 out of the planned 1,000 units will be completed, all in Dublin City Council areas. The remaining three local authorities in Dublin have yet to produce any plans for housing arising from the housing strategy.

These figures suggest that local authorities, who are the house building organs of the state, are incapable of carrying out this function.  If given a fair wind, in their absence the private sector could step into the breach, but there are drivers in the gift of the state that are the core problems; principally a cumbersome and opaque planning system, and the costs of development that are artificially high because of state interference.

Planning

When assessing the viability of a site, developers factor plot costs into the sale price the units are likely to achieve. After all, the cost of laying a brick is the same in Ballsbridge as it is anywhere else, and so the principal variable in deciding the cost of building is the plot cost. Given the lack of building over the past ten years there is practically unlimited demand in all areas for housing, and indeed we have seen that in the last quarter more lending has been approved by the pillar banks than was drawn down.

The issue then is the very first cost input (which arises whether a local authority or private) for the developer is the plot cost. Lesson one in economics is that where there is a demand, the absence of supply will cause the price of a commodity to rise. In this case it is the price of properties with planning permission that is rising because of unsated demand for accommodation. This feeds into a disproportionate impact of plot cost on the value of finished accommodation. Greater visibility, accessibility, speed of decision making, collaboration between developers and planners in relation to outcomes, and outcome foreseeability in the planning process is urgently needed to dial down the scarcity of plot costs as a function of property values.

Cost of state interference

Whereas 40,000 new units is the accepted number of new housing units required per year to accommodate population growth and changing household makeup for the year to end November 2016 just shy of 13,000 building commencements were reported. We can calculate the tax take on this by multiplying by the average cost of a property (€281,432 for the latest available year, 2015), and dividing that number by 45%, which is the value of the state’s share in your new house, between planning and development levies and contributions, VAT, PAYE, PRSI, stamp duties, Corporation Tax and Capital Gains Taxes. The gross sum thus collected by the state and its agents from housing is €1.65bn.

An alternative

Given the demand for housing, the availability of funding to buy housing, the societal impact of the unavailability of housing, the effect the lack of housing is having on the desirability of Ireland as a destination for companies wishing to set up here, the disproportionate cost of accommodation, the inability of the public sector to deliver affordable accommodation, there is a need for new thinking that is otherwise absent.

With a little imagination and creative thinking, one would have thought the Rebuilding Ireland strategy would run to 5 as opposed to 115 pages of guff and blather, most of which will be ignored and not implemented as is the natural order of these things. Some suggestions to accomplish these include;

Insist on guidelines and targets, while committing additional resources to the planning process,Make the planning process more transparent and efficientPrioritise the delivery of infrastructure (roads, water, services) required for housing delivery

The effect of these changes should make more plots available for development and will inevitably soon remove their value premium currently arising.

Reduce rates of categories of taxes from those applicable to building and development that are passed on to property purchasers in the form of increased prices,If it appears developers are not passing on decreasing costs to purchasers, increase the taxes payable on their profits,Modify by increasing the LPT payable on the units whose cost is reduced to account for the reduced plot and development costs.

We don’t need to wait another year, or another six months to realise what is happening is not going to deliver housing. What we need are more simple and effective solutions to the problems.

Barry Lyons is a solicitor who acts for several developers. The views expressed here do not necessarily reflect those of his clients. He can be contacted at blyons@lyonssolicitors.ie

In or about 2005, at meetings of the Alliance of Business Lawyers of which my firm was the Irish representative, I would describe the capital stack in SMEs here to my European colleagues. Invariably they were confused by the preponderance of bank debt in the capital structures of what were micro businesses by their standards. The banks’ exposure to this risk didn’t make sense to them, and because it was all that I knew, I was bemused by what I took to be misunderstandings of vagaries between the different economies represented at the conferences we were attending.

When we fast forward post-crash to analysing the elements that caused the banking crises, and look at what are going to be the likely practical outcomes for SMEs, we can say with a degree of certainty (in general terms), that lending was made to companies on the following basis (and in this order);

the security they or their promoters could offer,the ability to make repayments based on their current trade.

When the economy cooled, lenders were left with two extremely unfortunate outcomes; company turnover reduced thereby impacting on borrowers’ ability to meet repayments, and asset values reduced thereby undermining their security and putting in jeopardy the recovery of the funds lent. Because this funding procedure was so widespread, the impact of the slowdown was amplified and we had the banking crises that does not require further description here.

Simply speaking, company balance sheets were not sufficiently robust to withstand the adverse trading conditions, and hence the slew of insolvencies and job losses.

Fast forward to 2017, and all the numbers suggest the economy is charging along. However, as Fine Gael found to their cost in last year’s election, there was little in their recovery that gave succour to the electorate. This is because the SME sector which provides 70% of the employment in the state only accounts for 50% of its gross economic value, and the weakness in this sector was reflected by the political implications of their attitudes to this significant sector in this economy.

So, how has the State reacted to the requirement for funding? There are many aids for SMEs, which range from grants and investment from County Enterprise Boards and Enterprise Ireland, to funding for specific regions and objectives from the likes of Údarás na Gaeltachta. In addition, significant funding is available from the Ireland Strategic Investment Fund (ISIF) and the Strategic Banking Corporation of Ireland (SBCI) via investors and funding managers (in the case of the ISIF), and the established banks and asymmetric funders (in the case of the SBCI).

While these sources of equity funding are most welcome, there is an argument they are unsuitable for many family centred micro business who are inevitably the most unattractive undertakings to finance. Among the reasons for this is the nature of the business is probably sufficient to generate an income, and in many cases a significant income, for one family, but little extra. Also because there is no obvious time for a liquidity event that will deliver an exit for the equity investor the timeline of the investment is unclear..

Historically these companies would have benefitted from the peculiar Irish funding environment where their performance would have made them a lending target for their bank. In this brave new world though, while there is no doubt these company promoters will do everything they can to keep the business going, when it gets beyond them there is very limited access for lenders to recourse for the funds lent, and with the exception of two forms of funding this is no longer available as a typical lending product. The two types of funding widely available are invoice discounting and leasing. Where these are not suitable for the company seeking funding, the alternatives are few and far between and this is the weakness in the current system.

As will always be the case, the market will resolve these matters, and there will be a confluence of the requirements of companies liking for money, and investors seeking a return on their funds. The elements involved here will be that;

the company promoter will cede some control of their company to the investor, and in the event of their non-performance potentially the entire company, andthe company promoter will properly pay for the investors risk in terms of an annual coupon on funds lent or otherwise invested, andstandard investment terms will emerge in terms of company valuation on investment and exit, voting arrangements to reflect control of the company, promoter remuneration provisions etc.pro forma documentation to reflect the arrangements in standard investment terms in the form of shareholder agreements, loan documentation, share purchase agreements etc. will evolve so as to reduce the transaction costs to remove this as an obstacle to investment.

As the economy improves, rather than stakeholders wringing their hands wishing money was available to pay for the additional working capital requirements of businesses, it makes sense to look at the position on the ground and work towards putting solutions in place so as to ensure the environment for SME growth improves to include these vital elements. The sooner this happens the better for all concerned.

A little like the requirements for housing, if the situation surrounding access to funding for SME’s does not change shortly if the SME sector remains tenuous, it is likely the electorate will take out their frustrations, and therefore sooner than later there may be political implications to the need for this to be addressed.

If you have any queries on this please contact Barry Lyons on 01 539 0060 or by email at .

Farmers know about the potential threat caused by marital breakdown to traditional holdings. However, remarkably few will do anything about it to protect themselves and their livelihoods. In this piece I will look at the conventional position, the changes in the treatment of the co-habiting partner, and volunteer some ideas about how the economic unit of the farm can be protected against being compromised by these family disputes.

1.   Conventional family farm

The traditional family holding will be well known to most readers. Its size and lay out depends on the type of farming carried out. Dairy farms are typically smaller than tillage, with the dairy at the centre of operations, normally close to the family house. Because of lower margins and the mechanised nature of modern agriculture, tillage operations are typically larger and more widely geographically located. However for a number of reasons, including security and convenience the main servicing yard for a tillage operation is also usually close to the family home.

If steps to ring fence the economic integrity of the farm are not taken, the typical farming set up can be compromised if the farm marriage break down. In this case the economic integrity means the ability of the farming assets to generate an income for the farming family.

In the event of marital breakdown the law provides that adequate provision be made from the family assets to each of the partners. What constitutes adequate provision depends on the circumstances of the case. However, certain outcomes are typical; the wife holds on to the family home (at least until the children reach the age of majority or finish their education when it is sold with a pre agreed distribution of proceeds), and the husband pays maintenance to her and the children.

The problem arises where a clean break is sought because relations have deteriorated to such an extent that the wife wants nothing more to do with the husband, and insists on the sale of some of the holding to pursue her entitlement to a share of the family assets. Given this will ruin the economic integrity of the farm (both because of the home typically being at the heart of the operation, as well as shrinking the size of the holding), such an outcome is extremely undesirable and needs to be managed in the interests of both the couple’s income and any of their children.

2.   Co-habiting partner

The Civil Partnership and Rights and Obligations of Cohabitants Act 2010 provides what were two individuals living together in a 'committed and intimate' relationship for two years if there is a child, and for five years otherwise, become qualified cohabitants. This entitles the non-asset owning partner to substantial family law rights, including that to adequate provision from the assets of the owning partner’s. These rights have the same potential to derail the economic integrity of the family farm.

3.  Some ideas about protecting the asset’s economic integrity

Pre-nuptial agreement

While the Courts have yet to rule definitively on the enforceability of the pre-nuptial agreement, the reality is they are typically entered at a time when there is a significant amount of goodwill between the couple, almost certainly more than the hurt and bitterness caused by the separation. In this regard it is likely that cool heads can bring a greater degree of objectivity to the economic reality of the situation being faced by the couple in the event of breakdown.

To a large extent therefore, the objective of a pre-nup. should be to contain the same provisions as a separation agreement – the adequate provision for the spouse from the family assets while diminishing to the least extent possible the economic integrity of the farm.

Company incorporation

I am seeing more and more that farming trade and assets are being carried out by limited companies which are formed for the purpose of the economic undertaking of farming. This makes a lot of sense for many reasons, including;

The certainty of the company paying rent (albeit limited) for the use of the land,The separation of the farming income and expenditure from that of the family,The separation of farming assets (tractors & machinery, dairies, stock) from those of the family.

Shares of the Company can be allocated to spouses in pre agreed proportions, and each retain them in the event of marital breakup. The provisions of a shareholders agreement can address what happens the shares or the assets the event of marital breakup, but subject to the requirement that full and adequate provision is made for the spouse.

In addition, somewhat ironically company law protections on minority shareholder rights are more objective and very developed (because they have been reported for many years) than family law proceedings (which are held in camera), and so reasonable behaviour is given greater weight in the event of a family law dispute underpinning it.

That having been said, the ultimate outcome in minority shareholder oppression proceedings is the winding up of the Company and the disposal of its assets, but the same arises in family law proceedings .

Barry Lyons is a solicitor with over 20 years’ experience in litigation, business structuring, insolvency and commercial law. For further assistance regarding queries on the above topic he can be contacted at blyons@lyonssolicitors.ie and (01) 539 0060

With greater enforcement activity by frustrated lenders, the Government needs to make a choice between the interests of society generally, and those of certain financial institutions.

In his well-publicised report on the performance of the Insolvency Service of Ireland (ISI) Lorcan O’Connor highlights that in the year to date 2017, 6,000 new applications for a Protective Certificate as part of a Personal Insolvency Arrangement by borrowers who are attempting to address their outstanding debt issues. Rather less publicised however are the numbers of those for whom their applications are successful, which is 600, or one in ten.

This is a remarkable statistic and it not being highlighted illustrates a number of things;

with such a limited success rate the Personal Insolvency Act 2012 (as amended) (“the Legislation”) is not fit for purpose, andthe ISI is completely detached from its function, which is the resolution of problem debt, and where this is not possible suggesting workable alternatives to the solutions that are on offer in the Legislation, andthat lending institutions are applying policies that actively frustrate the policy objectives of the Legislation by wholesale opposition to proposals for personal insolvency arrangements,the media’s attention is limited to the effect of homelessness, and not its causes,an almost inevitable impact of the people who unsuccessfully apply for a PIA is the loss of their home, and the resultant demand for non-existent rental properties, or homelessness.

As a society we need to deal with highly divisive issue of mortgage debt and its default. In my experience people’s attitudes to this is divided 50/50 between those inclined to a hard line approach, which is; I am repaying my debts, so the person in default can repay all the money they borrowed, or become destitute. Others have a different approach, which is that if people become destitute, the costs to society in terms of the residual impact on children and families is simply too great for such a simplistic approach to problematic mortgage debt.

Where the line falls in terms of allowing restructures is not a matter for this article; while I have thoughts about it, there are going to be losers in any reset of the process, and those losers will either be lending institutions or defaulting borrowers.

If lenders come out on the wrong side it will have a number of obvious effects; fewer mortgages being granted , more expensive mortgages, the value of the State’s shares in pillar banks decreasing, less appetite for disruptor lenders setting up operations. From a societal point of view, these outcomes are very undesirable.

If the impact is primarily felt by borrowers, the effects will include; rehousing of the borrower and their family in local authority or private rental accommodation (given their flawed credit history the borrower will not get a mortgage to buy replacement accommodation), and because of the lack of alternative housing, the real risk of homelessness.

Which effect is the most undesirable? To a certain extent this depends on your viewpoint. However using Central Bank statistics we can anticipate certain outcomes. These suggest there are still 90,000 mortgages in arrears in excess of 12 months, the majority of which we can anticipate will ultimately be subjected to the ISI process. If current success rates are applied (and on the basis of the failure of borrowers to engage heretofore this is doubtful), we can expect at least 81,000 households to fall victim to the ultimate sanction of the market, which is losing their homes. In the absence of accommodation alternatives for the people thus affected, it is not an overstatement to suggest the potential scale of this problem has the very real capacity to undermine the stability of the state.

The problem of profligate lending up to 2007 has had an extraordinarily long tail, principally caused by the failure and delay by the state and its organs to grasp the nettle and deal with problem personal debt in a comprehensive and definitive manner. So far, the political impact of wholesale evictions has been relatively limited because of banks reluctance to pursue this objective on the scale the problem is required.

However, with the performance of the economy improving, together with the demands by the ECB and bank investors for them to address legacy debt issues, this restraint is likely to change and this is where the tyre hits the road in terms of the interaction between the problem and the solutions that might be available. One thing is pretty certain though; unless serious attention is soon paid to the problem, the outcome is likely to be as bad as can be anticipated.

The press and airwaves have been inundated with complaints of exorbitant insurance premiums, which according to the insurance industry are principally caused by fraudsters bringing false claims. This is supported by a press and public relations campaign including daily tabloid style reporting about claimants either making up, or exaggerating the effect of their injuries thus justifying the increased premiums. But does this argument stack up?

Be under no illusion but these news items are part of a sophisticated communications campaign run by the multi-billion euro insurance industry and its agents. At the coal face, it works like this. The insurers;

identify the fraudulent claimant,stack up the evidence against them, e.g.; golfing with an injured back, jogging home carrying the crutches they used when going into the doctor’s office, running multiple claims for the same injuries, using different solicitors, variations of their names, and treating doctorstell court reporters some of the salacious detail they can expect to hear in court (but don’t tell the other side of the same information so it is addressed in open court and admitted into evidence),ensure the evidence is presented in circumstances of absolute privilege, where they can say anything about the claimant without the threat of defamation proceedings . In turn reporters present copy to their editors who are glad to publish with banner headlines the outrageous claims for compensation being made.

For the record, I have no sympathy whatsoever for claimants that make up an accident, or exaggerate the extent of injuries sustained or its impact on their lives. But the insurance industry’s is an effective strategy to discourage legitimate claimants because of the stain of being associated with these fraudsters.

For legitimate claimants the reality is this;

70% of claims are settled following the assessment of damages by the Personal Injuries Assessment Board (PIAB)Of those cases remaining, for example where there is an issue regarding who is liable for the injury suffered, or the amount assessed by PIAB of the appropriate compensation, 30% are settled out of court following negotiations between the parties as to the value of the claim and responsibility for the accidentThe number of cases remaining include;

cases where the difference between the settlement expectations of the parties cannot be bridged by negotiation,cases where the parties cannot agree who is responsible for the accident,where claimants are victims of medical accidents,certain infant and other claims that are expressly excluded from consideration by PIAB, andour friends the fraudsters.

Despite their prominence in the media and elsewhere, stakeholders in the process including PIAB, insurance companies and lawyers know that fraudulent claims represent an infinitesimally tiny minority of those brought each year. However, if proved they provide evidence of abuse of the system generally. The ridicule and opprobrium heaped on these claimants discourages legitimate claims by parties who might otherwise be inclined to pursue their right to compensation.

As a postscript to the activities of fraudulent claimants, it will be interesting to see the outcome of the recent Competition Authority dawn-raids on the offices of various insurers and the investigation arising, to see whether they have been operating a criminal cartel in setting insurance premiums.

Let he who hasn’t sinned…….

*In contentious cases a solicitor may not calculate fees or other charges as a percentage or proportion of any award or settlement.

For further assistance regarding queries on the above topic Barry can be contacted at blyons@lyonssolicitors.ie and (01) 539 0060.

As so-called “vulture” funds put the squeeze on SME borrowers to dispose of assets to liquidate their portfolios, we need to be reminded that the funds are set up to operate exclusively for the benefit of their shareholders and not borrowers, and often expect to recover more than the borrower or its guarantors are legally obliged to give.

To all intents and purposes, portfolios bought by foreign funds arising from bank deleveraging comprise loans that share certain characteristics. Assets securing loans to companies are still in negative equity, and they are personally guaranteed. The funds are unconcerned. They buy portfolios on the basis of mark to market value, in other words, the price at which the asset securing it could be bought or sold on the date the loan is bought. Having disposed of low hanging fruit by selling off non trading property assets, funds are now rummaging around to see what more they can squeeze from their SME borrowers

Irish SMEs

Irish SMEs are typically far smaller than their European or US counterparts. Their size would be classed as micro businesses in other territories. The proof of this is how few opportunities for investment there are for venture capital funds looking for companies turning over €50m (which is a typical SME abroad, but a medium sized company in Ireland).

In Ireland the reality is a very good company generates a good standard of living for one family. Typically it will have done so for one and a half generations, arising from which certain lifestyle and other decisions are made by its promoters. Among these are borrowing decisions; to upgrade properties, or to invest in new product lines. The recent Kenny’s of Galway car company receivership illustrates this.

In this case, Finn Funding Investments DAC (“FFI”) appointed a receiver on foot of a charge created to secure a loan taken out from Ulster Bank to upgrade their showrooms. The loan was sold by Ulster Bank to FFI. FFI now seek to recover money loaned (but for which they will have paid the then value of the property).

Two things impact on their ability to get as much back as possible; the value of the security, and the appetite (and ability) of the principals to dip into profits from future trade to repay a sum in addition to the value of the security. From FFI’s point of view, it is tempting to hold out – after all they have security over the assets of the Company, and also personal guarantees from the Directors for any deficit.

Personal guarantees

Personal guarantees for company debts are a peculiar feature of the Irish SME landscape. Originally they were part of the price paid by borrowers to avail of the buccaneering lending of Anglo Irish Bank. Their attractiveness quickly became apparent to Anglo’s more prosaic competitors and soon they became typical.

In the above circumstances, often the owner of the debt promises a Faustian pact with the guarantors; work with us on the principal sum, and we will “do what we can” on the remainder. In doing so they separate out two categories of debt, corporate and personal; divide and conquer. While this may have had some meaning when personal insolvency meant 12 years (and the rest) a bankrupt, in these more enlightened times there are better ways of handling this type of debt using the Family Home Protection Act 1976, Land and Conveyancing Law Reform Act 2009 and The Personal Insolvency Act 2012 (as amended).

Many Director/Guarantors believe taking on the owner of their debt is a recipe for disaster, but this is not so. Two things are typically critical to them; their ability to generate an income from the business, and to keep their family home.

In the Kenny’s case this is likely to play out in two ways. In relation to the company debt, the Directors have correctly moved to retain control of their business by seeking court protection with the appointment of Neil Hughes as examiner which trumps the receiver’s appointment. If the company’s application was unsuccessful and the receiver was re-instated, not only would the Directors lose the company, but they would also lose their current livelihood.

The examiner’s appointment gives the company 70 days (which can be extended to 100 days) in which to put a scheme of arrangement to its creditors. If the creditors are not “unfairly prejudiced” (i.e. if they would make more money if the company was put into liquidation), their grounds for opposing the scheme of arrangement are extremely limited. In relation to the Kenny’s example, FFI’s exit will be the value of the security they hold, which typically means the property or any assets secured with a floating charge.

“But what of the personal guarantees?” I hear you clamour! “Aren’t the Directors going to lose all?” you plead! Typically there has been a deficit between the value of security and the amount outstanding on the loan, and this amount is a personal liability of the guarantors. Recovering money on foot of this personal liability though, is proving to be more and more difficult.

Recent changes in the law

In the limited jurisprudence available following the additional protections afforded to the family home in the Personal Insolvency (Amendment) Act 2105 and elsewhere (in the particular circumstances of the case of Muintir Skibbereen Credit Union v Crowley & Anor and Muintir Skibbereen Credit Union v Hamilton & Anor) the Court of Appeal confirmed the High Court decision that an order under S31(2)(c) of the Land and Conveyancing Law Reform Act 2009 (an order for sale of land pursuant to a Judgment Mortgage and consequent distribution of proceeds) should not be made, as to do so would leave an innocent spouse who was not party to the loan or the security documents on foot of which the judgment mortgage was obtained, without a family home.

While the reasoning for the decisions in those cases had to do with the consequences of the personal guarantees being extended to the disposal of the family homes of the guarantors, their significance are the external circumstances the Court considered in assessing whether it was correct to do so.  

Directors of companies that have come through the worst of the recession but are still dealing with acute legacy debt are well advised to look past the vulture’s empty promises, and look for a comprehensive resolution of all liabilities in a constructive and meaningful way. The funds might also consider limiting their expectations, because less pleasant surprises might also lie in store for them.

Barry Lyons specialises in the area of commercial litigation, insolvency

and corporate recovery and can be contacted at , or 01 539 00600

The decisions of Mr Justice Clarke in In re Tony Gray & Sons Limited (“Tony Gray”)[1], and Ms Justice Finlay Geoghegan in In re Eylewood Limited and In re Woodman Inns Limited (“Eylewood and Woodman”)[2] spell out the entitlements of company promoters in companies in examinership having regard to typical roles they hold as directors, shareholders, employees, and as financiers, both as lenders and guarantors of company loans.

While it might appear that the interests of the promoter/shareholder/employee are so interlinked with the affairs of a company seeking Court protection so as to render their hostile removal impossible, it might be necessary to reduce their interests to manageable parcels to deal with them, albeit that the cost of completely extricating them from their employment with the company makes the investment opportunity presented to the investor commercially unattractive to third parties.

Shareholders

The issue of the entitlement of company promoters to retain their equity participation post examination was considered by Mr Justice Clarke in Tony Gray when the opposition of a creditor emerged at the confirmation hearing to the Examiner’s proposals for a scheme of arrangement (“the Proposals”).

In that case it was argued that the 5% dividend to the unsecured creditors was unfairly prejudicial in circumstances where the promoters were retaining ownership of the Company and where they were introducing no fresh equity. If it was unfairly prejudicial the Court was precluded by (s) 24.4(c) Companies (Amendment) Act 1990 (as amended) (“the Act”) from approving the Proposals.

In deliberating whether this was the case Clarke J first considered the fairness of the creditor’s position post examination as opposed to that if the company put into liquidation, where it was clear they would get nothing. He considered two matters; what would the company’s solvency position be post examination, which in turn would impact on the value of the company’s shares and the consequent benefit of any solvency to be derived by the shareholders retaining their shares whitewashed of all unsecured debts.

Having compared detailed (albeit contradictory) cash flows prepared by both the Examiner and the opposing creditor he concluded that there was no reason for concluding that the Examiner’s views were overly optimistic, and as a consequence that the prospect of saving the enterprise was not “remote, unlikely or unreal”.

In terms of the value of the company, the Court noted that the secured creditors’ agreement to a two year deferral of their liabilities limited the value of the shares because of the impact of the repayments on share value once recommenced.

Notwithstanding the lack of fresh investment (the Proposals provided for an internally funded scheme of arrangement paying a 5% dividend to the unsecured creditors, with the connected creditors waiving their claims against the Company and the secured creditors rescheduling their facilities), given that the return of shareholder value was limited, in particular after two years and taking into account the extent of the connected creditors writedowns, the Court held that the unsecured creditors had failed to demonstrate unfair prejudice and the Proposals were approved

In Eylewood and Woodman the Court considered the issue of shareholder entitlements to retain an interest in the Company in the context of a preferred investment proposal for all of the shares in the Companies that was hostile to the incumbent Directors and shareholders.

While the Court accepted that the provision in the Proposals which deprived the shareholders of their stake in the company represented an impairment of their interests as set out at (s) 22(6)(e) of the Act, when asked to consider whether this represented an unjust attack on the property rights of a member per Article 40.3.2 of the Constitution, Finlay Geoghegan J. said;

“Having regard to the nature of the property right inherent in holding shares in a company, it does not appear to me that shares which are worthless, in the sense of having no monetary value, do not continue to constitute a property right.”

She added that where the Proposals were fair and equitable, and where they did not represent an unjust attack on the property rights of the members, then they were not unfairly prejudicial and could be put to the Court for approval. This is consistent with the Act which specifically envisages a member being “deprived” of his shares[3]. 

Employees

Where the examiner’s proposals are prepared with the consent of the promoter (either with the promoter staying in the company or exiting by agreement), typically the promoter will assist with any issues that may need to be resolved so as to ensure the survival of the company.

When the promoter’s continued involvement as shareholder is not provided for in the Proposals against their wishes (for example, where the promoter’s proposal is made in a competitive process where it is less attractive than that of a third party), the examiner has no authority to dismiss the promoters qua employees in Proposals put to the Court without making provision for them in the Proposals.

Following a proposal from a third party which was preferred by the examiner in Eylewood and Woodman it was submitted by one of the shareholders that (s) 24 of the Act;

“does not provide that a scheme of arrangement, when confirmed by the Court, is binding on directors or other office holders, as it does in relation to members and creditors”.

In that case evidence of the promoter’s office as employee (managing director) of the Companies in the form of an employment contract and PAYE/PRSI returns had been entered into evidence, and as the Proposals made no provision for the shareholder’s continued employment the Proposals were seriously undermined.

Following the Examiners acceptance of an investment proposal that was hostile to that of the shareholder/directors In re Map Dance Limited t/a Jackie Skelly Fitness, until a last minute intervention by the secured creditor rectified the position, the Court indicated that because the Proposals submitted to the Court for approval made no provision for the directors it was unfairly prejudicial to their interests and could not be confirmed.

Guarantors

Most insolvent SMEs have bank debt which is personally guaranteed by company promoters. In cases where an examiner favours an investment proposal which envisages the takeover of the company against the wishes of the promoters (as guarantors), special care must be taken regarding the treatment of this debt.

In Eylewood and Woodman the Proposals envisaged a takeover which was hostile to the directors and shareholders of the Companies who also had guaranteed significant amounts of company debt. Unusually, the director/shareholders were seeking to collapse the examinership in the hope of buying back the assets at a cheaper price through either receivership or liquidation.

Once the required notice seeking to rely on the guarantees are served on the guarantors in accordance with (s) 24A(1)(c) of the Act, the guarantees given by the promoters survive the examination period and they become personally liable for the debt so guaranteed.

The Proposals put to the Court for confirmation made no provision for a dividend to the guarantors, notwithstanding their entitlement arising from their subrogated claim against the companies. Finlay Geoghegan J relied on Chitty on Contracts Vol. II[4]

“A surety is in principle entitled to be indemnified fully for monies paid to a creditor in respect of a principal debtor’s liability”[5] and

“A surety who pays the creditor is subrogated to the creditor’s rights as against the debtor. This means, inter alia, that he is entitled to the benefit of all securities belonging to the debtor and charged with the liability which the surety has been called on to meet. As in the case with the right to an indemnity and/or contribution, this right does not arise until actual payment by the surety, but the surety’s potential right is recognised even before payment “[6] (emphasis added)

She went on to say that it is permissible for the examiner to include, as contingent creditors, persons who have given guarantees of the debts of the company in examinership, and then to write down the contingent liability of the company to the guarantor arising out of the guarantor’s right of indemnity against the company.

The investment proposal envisaged a substantial write down of a debt secured by way of a fixed and floating charge by agreement with the secured creditor, with the result that this was the contingent subrogated claim against the company by the guarantors regarding which no provision had been made in the Proposals. The examiner argued that (s)24 A(1)(d) of the Companies (Amendment No 2) Act 1999 specifically wrote down any subrogated claim; however the Court found that it did not.  

If the debt was written down per the Proposals, the going concern values in the scheme for the assets were greater than the lower values that the Bank had accepted as part of the Proposals. The Court held this was further unfair prejudice to the shareholder who had given personal guarantees and refused to confirm the Proposals.

Conclusion

Very serious practical difficulties still exist to the complete removal of promoters from a company in examinership, in particular where they are employees and have guaranteed the debts of the company.

In such circumstances, and where liquidation is the only other alternative, it must be the examiner’s role to seek to agree by consent a package of measures to allow the company to transition to new owners if this is in the best interests of the Company and the general body of employees whose livelihoods depend on its survival.

[1] Ex tempore decision of Mr Justice Clarke dated 26th November 2009

[2] Unreported, 5th March 2010

[3] (s) 22(6) (e) Companies (Amendment) Act 1990 (as amended)

[4] Specific Contracts (30th ed). Sweet & Maxwell 2008

[5] Ibid at para.44.116

[6] Ibid at para 44.128

While further amendment of the provisions of the Companies (Amendment) Act 2013 (“the Act”) would provide greater clarity for all stakeholders in the process, once the changes that were introduced in 2013 and enacted in 2014 filter further into the vernacular of how business is conducted in Ireland, the benefits will be seen to outweigh its shortcomings.

Background

Historically examinership has been tainted with a number of criticisms; it is expensive, complicated, and in certain cases the outcome of the process is by no means certain. While the law is the same in both jurisdictions, the rules that direct applications by companies to the Circuit Court (limits on turnover, number of employees etc.) which would previously have been heard in the High Court mean that certain costs are avoided or minimised. In particular, suitably experienced solicitors can deal with most (if not all) stages of the process thereby changing the practice for barristers to act at all aspects of the case. This significantly reduces the costs.

In addition, whereas the High Court is a court of strict proofs which require the input of significant time by insolvency professionals with the resultant costs implications, judges in the Circuit Court are more prepared to take a view on the whole of the application without such rigid requirements for formal proofs.

Circuit Court

Particularly for practitioners dealing with significant numbers of cases, from the examiner’s point of view cases being heard in the Circuit Court also reduce the time and costs involved. Smaller companies using the process have simpler financing arrangements and less complex provisions with creditors, both of which mean problems with their resolution are less acute and therefore less time consuming. It is also anticipated that as more companies use the new processes and the mystique surrounding the process falls away, internal efficiencies will become apparent and in turn this will drive further costs savings, but we have as yet to see this level of activity.

Previously, if an insolvent company were to restructure using the process, in corporate finance terms the examinership costs (or transaction costs) would usually be completely disproportionate to the investment made to ensure the survival of the company. The current position changes this, and if used correctly is a very potent tool to assist companies.

Taking as a given that the legal tests can be satisfied, the key measure of whether a company is a suitable candidate for the process is simply whether on a current basis (ignoring legacy issues, including problem debt, revenue liabilities etc.) it trades profitably. If the answer to this is positive, examinership should be explored as a process in which a company works through its problem debt.

Somewhat counter-intuitively, it makes sense for creditors to also consider the benefits of this. If a bank has lent a company money to buy and install a widget machine over which it has security and the company goes into receivership or liquidation, it is inevitable that the maximum asset value destruction will follow by the fire sale of the asset. If there are also outstanding revenue, or intractable trade creditor liabilities, all problems are addressed using the process and there will be some return to the creditors because of the going concern basis of the sale, in circumstances where the alternative is inevitably very poor.

Overtrading causing insolvency

That “he who forgets the lessons of history is bound to repeat them” is apposite here. Having survived a number of downturns in Ireland, accountant Anthuan Xavier who was the founder of BDO in Ireland and is now Chairman of restructuring specialists Baker Tilly Hughes Blake has thoughts on the timing of demand for formal restructures. He says that at the end of a recession, as companies’ trade recovers, very frequently directors miss the requirement for additional cash flow for the increased trade. In time the companies cannot meet their obligations, become insolvent from overtrading, and require restructure.

Topical

With the divestment by "vulture" funds of the loans bought over the past few years, their sometimes unrealistic expectations of recoveries of secured debt against SME's can be managed using this process, and in fact this may well be a critical weapon in the SME armoury to manage the outcome from onerous debt. Clearly, a conversation with suitably qualified solicitor or accountant will be needed to see whether examinership is such an appropriate tool.

Whereas in the past the transaction costs for such a restructure would have been a very significant impediment to it taking place, it appears the new rules have been implemented in a timely manner to provide a new background to the problem of corporate insolvencies, their effect on jobs, and on the economic recovery generally.

Barry Lyons specialises in commercial litigation, insolvency and corporate restructuring. He acted for the examiner in Celbridge Playzone Limited which was the first Circuit Court examinership. Contact him on 01 539 0060 if you have any queries on this or any other insolvency or corporate restructuring related matter

The Help to Buy (HTB) incentive is designed to assist first-time buyers with obtaining the deposit required to purchase or self-build a new house or apartment to live in as their home. The incentive provides for a refund of income tax and DIRT paid over the previous four tax years to first-time buyers.

The contractor/developer will be part of the HTB process where the buyer is purchasing a new house or apartment (conversely the contractor/developer will not be involved in the case of a self-build).

There are 2 stages to the process:-

First Time Buyer ApplicationFirst Timer Buyer Claim

Qualifying Contractors are involved in the last stage of the HTB process; by verifying the property sale. For a contractor to become part of the HTB process, they must first apply to Revenue to register as a Qualifying Contractor. They do this by submitting a completed HTB1 form (obtained on Revenue website), through MyEnquiries in ROS, as Help to Buy Scheme – Contractor Approval.

The documentation relevant to the application includes details of the proposed qualifying residences with their planning permissions. A scanned PDF of each planning permission is included with the completed HTB1 form. In addition to planning permissions, the following details need to be furnished in the application:- 

Address/locality of works,eRCT Site Identifier Number (if the works have commenced),Sale price of each of the units,If the works will be phased, and if so, over how many phases,Expected completion date of works, including completion date for phases if any,Details of the title in the land on which the qualifying residences are to be constructed, including a scanned PDF of the folio for the land, and any other relevant information about its title.

Once a contractor has submitted their application to be registered as a Qualifying Contractor it will be processed by Revenue. If all the details of the application are in order, Revenue will confirm the contractor is a registered HTB Qualifying Contractor by publishing the contractor’s name and Tax Reference Number (TRN) on Revenue’s website.

If there are issues/queries with respect to the details submitted by the contractor Revenue will issue a response through MyEnquiries. If the developer/contractor wants to include additional residences because of a variation to planning permission allowing an intensification of the use or additional units, if not previously submitted to Revenue, the above information will need to be furnished in respect also of the additional units. 

After the application (stage 1) is completed by the first time buyer the Mortgage Query tool available on the Revenue’s website (at ros.ie/help-to-buy-web) can be used by the applicant’s lending institute or the developer/contractor to confirm the maximum relief available to an applicant prior to signing any contracts. This is done by entering the HTB Application number and HTB access code (provided by the first time buyer).

Contractors/developers need to be aware the HTB refund may change once the purchase price of the property is confirmed.

If you have any questions about this, or any other aspect of property development, I would be delighted to assist - just give me a call on 01 539 0060 to arrange to meet or to discuss the issue.

The remarkable decision in the case reported in this recent newspaper article;

http://www.independent.ie/irish-news/worker-banned-from-going-to-lunch-or-tea-with-colleagues-awarded-40k-35342950.html

highlights the importance of the proper processes and procedures dealing with managing out an employee – notwithstanding the clear risks of serious injury to her arising from her disability in accessing and participating in the workplace, the failure by the council to provide an appeals process in which she could present her side of the argument meant that the dismissal was unlawful and give rise to the grounds of claim.

Setting up the appropriate procedures is easy; there are any number of resources that are available to small businesses and lay people who might otherwise be intimidated by what can be a technical process.

What is less straightforward though, is correctly adhering to the procedures, or applying the correct procedures to the relevant circumstances.

If you are a start up and haven't caught up with yourself in terms of backfilling your systems so as to manage risks such as this, contact me for advice about how to do so.