If you believe that you still have a viable business, but that current creditors and additional losses incurred during the COVID-19 crisis will hamper you from continuing to trade, there are a number of processes which are available:
1. Consensual restructuring of liabilities
This is an informal approach to dealing with your liabilities and involves open and frank communication with your creditors. This option may involve the extension of credit terms, an agreement to put payment plans in place, or even discounts applied to liabilities to allow for some payment to be made from available cash flows.
Given the current uncertainty, we believe many creditors will be open to such discussions as opposed to a formal restructuring process where they are much less likely to get paid at all.
It is very important to keep lines of communications open with your creditors, especially the key suppliers and institutional creditors such as banks, Revenue, etc. While banks, local authorities and Revenue are agreeable to providing deferment of some payments, as directors you need maintain a close review of future cash flows to ensure the ability remains to clear any liabilities that may accrue.
2. Scheme of arrangement
This often underused formal restructuring procedure was considerably updated with the introduction of the Companies Act 2014 and allows for an agreed write-down of a company’s debt with its creditors. In a scheme of arrangement, a proposal about payment of all or part of a company’s debts over an agreed period of time is prepared and a meeting of the creditors convened to review and vote on the proposed compromise of debts.
If 75% of creditors of the company vote in favour of the scheme, it is then approved by the High Court and the company’s debts are written down.
Advantages of a scheme of arrangement include:
Given the current crisis and consequent cash flow impacts within businesses, suppliers, creditors and funders are likely to be more supportive of proposals presented as a solution to an extreme event which is no fault of the directors.
Examinership is a process whereby the protection of the court is obtained to assist the survival of a potentially viable company.
Under examinership legislation, a business can obtain the protection of the courts for up to 100 days to allow a rescue plan to be presented, which is then sanctioned by way of a court order. This gives a business time to reorganise and restructure around the remaining viable aspects of the business and emerge with a solvent balance sheet.
Examinership allows for onerous leases, expensive payroll overheads, costly litigation from either suppliers or customers, Revenue debts, property rates, etc. to be extinguished by paying a dividend to creditors.
The process turns an insolvent balance sheet into a solvent one. The company must be able to show it is a viable business with the ability to attract fresh investment. The appointed examiner works with the business to ensure these requirements are met.
Advantages of examinership include:
It is important that companies considering examinership as a potential solution start planning now to have a business plan ready to go with a source of new investment identified. While the courts are closed (other than for emergency cases), the coming weeks can be used to prepare the groundwork that will ultimately underpin the relaunch of the damaged business.