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2021 continues to test the resilience of businesses across all sectors. Judith Riordan (pictured), a Restructuring & Insolvency Partner in law firm Mason Hayes & Curran LLP, outlines the options available to companies undergoing financial stress
The business and economic landscape since March 2020 has presented previously unseen challenges for all businesses. The start of 2021 also served as a stark reminder that the previously omnipresent issue of Brexit has not gone away.
Many businesses have managed to adapt well, but as the initial months of 2021 likely do not hold much in the way of normality due to the pandemic, some businesses will continue to be significantly affected. Slightly longer term, it also remains to be seen how affected the commercial and residential property markets will be, as the future demand for office and residential space may be altered indefinitely.
Many businesses have managed cashflow by significantly cutting costs, which may only remain feasible while the business is closed or partially trading. Businesses may also have had the benefit of forbearance from lenders or other creditors, including landlords and suppliers. Neither presents a long-term solution for businesses that are fundamentally affected by Covid-19 or Brexit. When forecasts indicate that cash is or will be a problem, many businesses should legitimately question their ability to resume or continue trading.
Decisions
There are a lot of options open to otherwise good businesses facing cashflow and other financial issues. In the first instance, it is important to consider how a business has been affected and how long those effects will last.
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Businesses that simply cannot return to normal in the short to medium term may determine that the business is no longer viable. In many instances it may be possible to look at some form of restructure, formal or informal. Balanced against this is the challenge for directors who may be concerned at making decisions that ultimately transpire to be incorrect.
Cash is Vital
A business needs to avoid running out of cash before completing any necessary restructuring. Incurring liabilities that may not be paid presents serious risk for directors. Where feasible, a current cash-positive position should not be eroded simply to support ongoing losses. Equally, new funds should not be injected to support these losses before careful consideration has been given to using that cash to complete any necessary restructuring.
Is Restructuring an Option?
Restructuring a business can mean anything from agreeing temporary revised loan terms at one end of the scale to a wholesale, formal and court-supervised restructuring at the other end. To take the more straightforward options, a business, or a portion of it, may find itself in a position where it could be returned to viability, if for instance it:
- Renegotiated or avoided the obligation to pay its debts in full
- Renegotiated the terms of its bank loans
- Renegotiated rent or other lease terms
- Closed a portion of the business, either temporarily or permanently
- Made a number of staff redundant.
Restructuring a business needs to be done quickly. One of the key issues is to know what liabilities are problematic, whether all or just part of the business is viable and what options are available.
Dealing with Lenders
Repayment terms are typically agreed based on trading projections and cashflow. So when those projections are interrupted for whatever reason, the loan can very quickly go into default, with the consequent risk of enforcement action by lenders. However, frequently it is possible to reach revised agreements with lenders.
In our experience, businesses and their lenders moved quickly in the early phases of the pandemic to ensure that appropriate waivers, payment moratoria and other terms and conditions were negotiated to avoid default scenarios. As those arrangements come to an end, further discussions will be necessary and fuller restructures, amendments and restatements of existing terms will need to be considered.
Receivership
It is possible to restructure businesses by way of a ‘pre-pack’ receivership, in which the sale of a distressed company's assets and business is negotiated before it is placed in receivership and implemented shortly after the receiver is appointed. The process may be initiated by the secured lender or the borrower, sometimes with a view to a satisfactory commercial outcome for both parties.
The process has a number of advantages: it is cost- and time-effective, and it avoids material interruption to trading and a protracted insolvency process. It can be particularly useful in a business where a high degree of customer confidence is required.
Pre-pack receivership sales can be perceived as opaque arrangements, depending on the circumstances. There has also been some high-profile litigation arising from these arrangements, but with detailed planning and the appropriate commercial environment for the business, it is very often possible to utilise the process successfully, for the benefit of all affected stakeholders.
Examinership and Schemes of Arrangement
Examinership can, in appropriate circumstances, facilitate a business in significantly reducing debt levels or other restructuring measures, if they result in the survival of the company and all or part of its undertaking as a going concern.
Consideration is being given to implementing a simplified examinership-type process for smaller enterprises. If such measures can be introduced promptly, they may well offer smaller businesses a lifeline. It may ultimately prove to be a very important restructuring option for many businesses. Another option to investigate is a court-approved compromise or arrangement between a company, its creditors and/or shareholders that can be used to effect a broad range of compromises or arrangements.
When the Business is no longer Viable
Regrettably, there will be some casualties in many sectors. Some businesses will have faced financial pressures prior to the pandemic, so even with a return to normal trading conditions they simply will not be viable. If there is no reasonable prospect of survival, it is incumbent on the directors to ensure that the business ceases trading, that no further debt is incurred and steps are taken to wind up the business.
A Brighter Future: The Option of a Fresh Start
However, even in the bleakest case where insolvent liquidation of the company is inevitable, there may still be options for the future. Subject to certain restrictions, there is usually nothing to prohibit the directors of a company acquiring some or all of the assets of the company from the liquidator. This may be something to consider if there is a viable underlying business that could benefit from a fresh start.
But in order to preserve this as an option, it is imperative that directors act in the best interests of the company and/or the creditors in the period prior to liquidation. Any attempt to derive personal gain to the detriment of the company or creditors may expose an individual director to personal liability.
Conclusion
As with any plan, ongoing consideration of the possible impact is key to the solutions. Given the fluidity of both domestic and international lockdown restrictions, coupled with the impact of Brexit, the degree of uncertainty remains high for most businesses in the short term at least.
Any business that is impacted should consider the range of tools under Irish law. The business should retain the flexibility to react quickly and implement the most appropriate plan for the situation as it unfolds to ensure the interests of all stakeholders, including the directors, are adequately protected.
+ Judith Riordan is a Restructuring & Insolvency Partner in Mason Hayes & Curran LLP
