BUSINESS UPDATE Restructuring Viable Businesses as Impact of Pandemic Bites Examinership and a new scheme – the Small Company Administrative Rescue Process – are options for businesses that have hit troubled waters “The issue of company rescue has become ever more urgent as companies struggle with the continued impact of Covid-19” - Robert Troy, Minister of State for Trade Promotion, Company Regulation and Digital. Since, the onset of the pandemic in early 2020, most businesses have prioritised survival. In general, 2018 and 2019 were good years for Irish businesses. Before the onset of the Covid-19 crisis in early 2020, businesses had healthy balance sheets, robust trading figures, and growth aspirations for the year ahead. Suddenly, the world was thrown into the midst of a pandemic, forcing businesses to shelve growth strategies and prioritise survival. Whilst the Government supports (particularly the Temporary/Employment Wage Subsidy Scheme [T/EWSS] and the Covid Restrictions Support Scheme [CRSS]) provided essential assistance to struggling companies, certain industries have had their doors closed for over 14 months and have continued to accrue a portion of their fixed overheads. Many of these struggling businesses will now have an unsustainable level of debt and need to formulate a coherent strategy to navigate their way out of this situation. The 2021 insolvency statistics in Ireland remain artificially low for several reasons. To survive the recovery phase, struggling businesses should be aware of their options and reach out to experts for help regarding restructuring tools available, including the well-established examinership and the newly proposed Small Company Administrative Rescue Process (SCARP) for small and micro businesses.
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EXAMINERSHIP: Introduced in 1990, Examinership aims to save viable businesses from closure, thus saving the jobs of those working for them. Although examinerships have helped to save over 16,000 jobs in Ireland during the last decade, it is still underutilised as only around 2% of corporate insolvencies end up in examinership. There are two requirements to qualify as suitable for examinership: 1. Balance sheet or cash flow insolvent 2. Reasonable prospect of survival During an examination, the protection of the Court lasts 70 days which can be extended by applying to the Court to 100 days (150 due to the Companies [Miscellaneous Provision] [Covid-19] Act 2020). In comparison to a
receivership or liquidation, directors maintain executive control of the business, while the examiner conducts an analysis of the company’s affairs with the process typically resulting in a scheme of arrangement with creditors, while safeguarding the company’s assets. For the Scheme of Arrangement to be successful, one impaired class of creditors would accept before the examinership can be brought before the Courts for approval, the dividend creditors receive must be higher than the amount they would receive in a winding up, and all creditors within the same class must be treated the same way. SMALL COMPANY ADMINISTRATIVE RESCUE PROCESS (SCARP): SCARP is a newly proposed corporate rescue mechanism which was recommended by the Company Law Review Group in October 2020. The proposal came as the perceived legal costs associated with Examinership are seen a deterrent for small and micro companies (as defined by the Companies Act 2014) that employ over 788,000 people in Ireland. What are the key elements of the proposed legislation? •
Seeks to arrive at a conclusion within 70 days.
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Commenced by resolution of directors rather than by court application.
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Overviewed by an insolvency practitioner.
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Approved by majority in value of an impaired class of creditor with a 21-day cooling off period when creditors can object to the court.
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Safeguards against irresponsible and dishonest director behaviour that apply to liquidations will apply to SCARP.
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No automatic stay on proceedings.
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State creditors will be able to exclude themselves from the process on limited and specified grounds e.g., in relation to the potential abuse of the process for tax avoidance.
SCARP is a huge step forward in the right direction to allow SMEs greater access to a low-cost restructuring option similar to an Examinership. It is expected to be passed into law before the Summer recess in August 2021. Entering into these types of formal restructuring mechanisms should only be considered if all else fails and other options have been exhausted. But it should give hope to businesses adversely affected by Covid-19 that options do exist, and help is out there. Neil Hughes – Baker Tilly
