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

Business Plus - - LEGAL -

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.

Reck­less Trad­ing

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.

Re­struc­tur­ing Op­tions

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 & Cur­ran­struc­tur­ing

Frank Flana­gan, Ma­son Hayes & Cur­ran

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