Is examinership lite the solution for SMEs facing restructure difficulties?
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