COVID-19: Restructuring and insolvency solutions for your business

The Central Bank has announced that COVID-19 has "triggered an extremely severe economic shock" which is fundamentally different from anything the economy has been through before. 

In its latest Quarterly Bulletin, the Central Bank said the economy could shrink by 8.3% of GDP in 2020 and the unemployment rate could rise to around 25% per cent in coming months.

It is likely that a number of businesses will be unable to pay outgoings due to severe cash flow shortages in the coming months, if not already in trouble. We set out below some of the restructuring and insolvency solutions for business owners facing cash flow difficulties due to COVID-19.

Duties as a director of an insolvent company

While it is clear that we are operating in extraordinary times and tough decisions will need to be made, directors need to be careful not to act in a reckless or fraudulent manner. It is vitally important that decision-making processes are documented to show that considered thought is given and sound judgement applied to all decisions being made. In a previous article we have outlined directors’ duties in company insolvency.

Rescue and restructuring procedures

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:

• Write-downs of debts
• If 75% of your creditors vote in favour it can be imposed on dissenting creditors
• Liquidation is avoided 
• It is legally binding and requires limited court involvement and therefore reduced legal fees 

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.
 
3. Examinership
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:

• Write-downs of debts 
• Leases can be re-negotiated / disclaimed
• Staffing levels can be reduced in a cost-efficient manner
• Company continues trading and the directors retain control during the process
• Gives the company time to be restructured
• Liquidation is avoided
• Protection from creditors – a receiver or liquidator cannot be appointed

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. 

Liquidation 

As a result of the COVID-19 pandemic some businesses will not have the ability to pay off or settle creditors and remain trading. If company directors realise that the company does not have a reasonable prospect either of survival or of being restructured, they would be best advised to cease trading in a timely manner to protect the position of all creditors including employees and shareholders, and appoint a liquidator.

For many owner-managers, the right decision may be to wind up the existing insolvent operation. Then, with a clean slate, they may be able to look at new business opportunities as the economy emerges from the devastation of trading conditions created by COVID-19.

Next steps

Often a third-party overview from an insolvency and restructuring practitioner can bring clarity and help decision-making that preserves value. Acting quickly can often be the difference between saving some or all of a business or not. 

If you wish to discuss any of the matters set out above, or the potential restructuring of any aspect of your business during this difficult time, please do not hesitate to contact us. 

As we are conscious that businesses are experiencing cash flow pressures, all initial consultations will be on a no-obligations basis and of course completely confidential.