Covid-19: What Restructuring Options Do Companies Have?
Business restructuring can be undertaken in numerous ways and should not be stigmatised, writes Frank Flanagan of Mason Hayes & Curran
Covid-19 has negatively affected most businesses in Ireland. Not even the wiliest of company directors could reasonably have been expected to predict its sudden arrival and devastating impact. As such, there should be no stigma or claims of moral hazard if businesses seek to avail of restructuring options to survive.
As Ireland emerges from lockdown, most businesses don’t know what the future holds. In the circumstances, every business should firstly have in place a realistic plan, which considers how the business would respond in a number of possible scenarios, including a possible second lockdown or the need for a significant number of staff to self-isolate. If the business plan shows no need for any additional money in all reasonably foreseeable scenarios, it can be shelved.
However, for many companies, the plan will show that they have or will have cash-flow difficulties. If a company cannot pay its debts as they become due, it is insolvent. While the directors of a company normally owe a duty to act in the best interests of the company, where the company is, or is likely to be, unable to pay its debts, those duties are owed to creditors.
When a company is unlikely to be able to pay its debts and the directors take any action that is likely to make the position of the creditors as a whole materially worse, they are trading recklessly. If the directors believe the company is doomed, they should take immediate steps to wind it up.
However, if the directors honestly and reasonably believe that the company can trade out of its difficulties, whether with extended credit, investment, or more fundamental restructuring, this should be considered. Extended credit may be sufficient to get a company back to full trading. This may be available from the company’s bank, deferred tax payments (which Revenue is offering), or other stakeholders.
Directors should actively engage with anyone from whom credit is sought while the company is verging on insolvency. Banks, in particular, will appreciate a realistic business plan. Another option is to issue shares, potentially to landlords or other suppliers, effectively converting money they are owed to shares.
Four options are available if more fundamental restructuring is required.
An informal arrangement can be agreed with some creditors, which will not be binding on any other creditors.
A formal arrangement binding on all creditors can be agreed, with the support of three-quarters in number and value of the company’s creditors. This does not need court approval but can be appealed by a creditor alleging unfair treatment.
A company can seek the appointment of an examiner. The examiner will formulate proposals for a scheme of arrangement, which facilitates the survival of the company and the whole or part of its undertaking. The scheme must be approved by one class of creditor and must be approved by the court. Creditors can’t enforce debts during the examinership period.
A formal scheme of arrangement can be put in place which can, subject to certain conditions being met, become binding on creditors. It is very flexible and does not require that a company be, or is likely to be, insolvent, but it requires two applications to court, takes time to put in place and does not offer protection from creditors during the process.
Selecting an appropriate restructuring option will depend on a number of factors, including cost. Professional advice should be obtained before committing to a course of action.
Frank Flanagan is a Restructuring & Insolvency Partner in Mason Hayes & Curran www.mhc.ie/restructuring
Frank Flanagan, Mason Hayes & Curran