Restructuring your future

This article by Declan de Lacy, a director in our Advisory & Insolvency Department, was originally published in the June 2013 edition of Business Ireland the journal of the Dublin Chamber of Commerce.

It has been a good few weeks for big retail in Ireland. Both B&Q Ireland and Pamela Scott have emerged from examinership after having their debts written down and their rents reduced.

The success of these cases demonstrates that examinership can effectively address problems faced by large retailers. This will provide little comfort to their smaller competitors, for whom examinership is made inaccessible by the costs involved.

A business that emerges from examinership is generally leaner and more efficient. Smaller businesses will rightly point out that their larger rivals gain an unfair competitive advantage by using examinership to write-down their debts and have rents reduced.

It is likely that many viable small businesses have failed because they were at a disadvantage to larger rivals who used examinership to obtain a lower cost base. One response to this unfairness might be to object to examinership on grounds that it distorts competition. Another response would be to demand removal of the obstacles to small businesses going into examinership. In an environment where businesses of all sizes are at risk of insolvency the latter response is likely to yield better results for society at large.

There is no novelty in suggesting that examinership be made easily available for all businesses. Indeed the Fine Gael / Labour Programme for Government expressed an intention to go much further by making out of court debt restructuring available to small businesses. Unfortunately, this proposal has been watered down and they now propose to allow small companies apply for examinership in the Circuit Court instead of in the High Court.

It is easy to understand why the Coalition watered down their original proposal on examinership when you consider that the State (through NAMA and the nationalised banks) is the country’s largest lender and commercial landlord.

Whilst examinership is unlikely to become an option for troubled small businesses, it would be a mistake to assume that no restructuring options are available to them. It is possible for small businesses to make creative use of existing legislation to achieve many of the same ends.

One approach that might be used is to implement a scheme of arrangement under Section 201 or 279 of the Companies Act 1963. These schemes can provide for the balances due to all creditors to be written down where at least 75% of creditors are in agreement.

Another approach to restructuring small companies is to organise a pre-pack liquidation. This is a mechanism whereby a troubled company goes into liquidation, and the liquidator seeks consent from creditors to sell the trade and assets for market value to the directors’ new company. The new company will not be bound by leases or other agreements entered into by the old company, and can negotiate new terms with landlords. The terms of the sale to the new company might even provide for payment to be made by instalments based on the new company’s profit.

The directors of troubled small companies frequently aren’t aware that it is possible to restructure without resorting to examinership in the Courts. A consequence of this is that good businesses as well as the employment and tax revenue they produce are lost. If this is to be avoided then it is essential that directors of troubled small businesses get advice on the restructuring options available to them.