Saving viable business - practical steps that should be taken now
As Irish businesses continue their efforts to mitigate the impact of the Covid-19 pandemic, many face severe liquidity challenges. These challenges, in turn, are forcing directors to make difficult decisions. But while Covid-19 continues to have a negative impact on businesses, it does not follow that companies should be forced out of business.
To alleviate working capital challenges, the Government has announced various stimulus packages for Irish business of varying sizes. While these Government measures are to be welcomed, certain companies may not find themselves eligible for funding or may not consider the incurring of further debt at this time – albeit at low interest rates – to be in the best interests of the company and its creditors.
Faced with the challenges, companies are looking at their financial position and where they stand with their creditors. A consensual solution with creditors is most beneficial to all stakeholders. If this cannot be achieved, rescue procedures are available in Ireland that allow struggling companies of all sizes and across all sectors an opportunity to come through the present difficulties. Often, the prospect of these “Plan B” remedies being available can create important negotiating leverage to gain concessions from creditors in distressed situations.
Out-of-court debt restructurings take many forms and vary in complexity and can range from a simple standstill agreement to a more involved negotiation of the terms of the debt documents. But there is always a common goal – finding a mutually acceptable solution for a company and its creditors.
The two stand-out benefits of a consensual restructuring are cost and privacy. Costs are typically far lower than a court process and a consensual arrangement avoids publicity for the company which can be very beneficial.
The obvious drawback with a consensual restructuring is that it can be difficult to get unanimous buy-in from all creditors and stakeholders. In those circumstances, companies may opt for a court process such as examinership or scheme of arrangement. A lower approval threshold will nonetheless bind all creditors, including hold-out creditors. Quite often, the threat of a formal process can be enough to bring dissenting creditors into line to consummate the restructuring.
Examinership has been available in Ireland since 1990 and allows a struggling business to maximise value, preserve jobs and operations, and weather a crisis. It offers an attractive one-stop shop insofar as it enables debt compromise and change in ownership – where required – within a prompt timeframe.
Control of the restructuring vests largely in the examiner with management typically retaining operational control of the business throughout the process.
To be eligible for examinership, the company must be insolvent, or close to it, and have a reasonable prospect of survival. Once the court is satisfied with those two elements, an examiner is appointed and the company
Examinership helps firms maximise value and protect jobs
enjoys protection from its creditors for 70 days. That may be extended by further 30 days.
On appointment, the examiner will test the market for investment interest in the company and draft a reorganisation plan which is considered at a meeting of creditors and shareholders. If accepted by one class of creditors, the plan may then be sanctioned by the court. Where the court confirms the plan, it is binding on everyone concerned, including any creditors that voted against the plan.
For any company considering examinership as an option, there are a number of considerations before filing.
In the first instance, cash flow is vital. The company will need sufficient working capital to survive through the period of protection. While the examiner has the power to raise finance during examinership, companies can face an uphill battle in examinership if there is no clear line of sight from the outset as to how the process will be financed.
While examinership offers the ability to cram down a company’s creditors, an examiner will only proceed with a reorganisation plan if the company has a sufficiently good underlying business to take advantage of a debt restructuring and trade on successfully.
Although the legislation does not stipulate that examinerships must result in jobs being saved, this is always a key factor in the court’s consideration as to whether to grant the company protection.
Shareholders of a company going into examinership need to appreciate that the company is effectively “in play” from an acquisition perspective and this may result in a change of control.
Not every company is a suitable candidate for examinership. Examinership is primarily reserved for trading entities with an identifiable undertaking – business operation, employees, etc.
There is an alternative for a company seeking to restructure – the scheme of arrangement. Schemes particularly lend themselves to financial restructurings and adjustments to capital structures and are not dependent on the company having an identifiable undertaking, as is the case with examinership.
A scheme is a restructuring procedure which permits a company to enter an arrangement or compromise with its members or creditors which, if court approved and sanctioned, will bind all creditors.
The recent restructuring of $1.6bn (€1.6bn) of New York law governed notes in the Ballantyne Re plc scheme of arrangement confirmed Irish schemes as effective to implement the most complex of financial restructurings, and that the Irish judiciary will take a pragmatic approach to facilitate scheme sanction and implementation.
While companies who might avail of this procedure are likely to be fewer in number, nevertheless there is another option available to help companies in distress.
A scheme is not a formal insolvency process which may make its use more appealing to directors wishing to avoid any perceived insolvency-related stigma. In addition, the court will allow the release of guarantee claims against the scheme company if it is necessary to give effect to the scheme – something not available in examinership.
The High Court has discretion to stay all proceedings and restrain further proceedings against a company in respect of which application is made for such period as to the court seems fit.
Out-of-court and in-court restructurings should not necessarily be viewed as two distinct concepts. Companies should have a clear understanding of the alternative solutions that are available when entering negotiations with creditors to allow a pivot to a formal process at any stage.
The current economic landscape is changing from day to day and companies are finding it difficult to assess whether breaches in their financial covenants in debt or other agreements can be avoided.
In the meantime, directors need to be aware of all options which might be available to deal with the distress they find themselves in.