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Business owners face difficult decisions as lockdown eases

Published in Business Post - 7 June 2020

Due to the Covid-19 pandemic, many businesses in Ireland are currently experiencing hardship. Not all will survive, and some will require significant restructuring, says RBK’s Restructuring and Insolvency Partner, Brendan O’Donoghue.

As the phased exit from the Covid-19 pandemic restrictions gets underway, it is becoming clear that recommencing trade will not be viable for all businesses. Despite the welcome relief provided by creditor forbearance during the current crisis, and State supports such as the Temporary Wage Subsidy Scheme, difficult decisions lie ahead. Where companies cannot continue to trade due to accrued arrears, the loss of key staff and contracts, or an inability to observe social distancing, recourse to formal restructuring or insolvency may be necessary.

Schemes of Arrangement

Schemes of Arrangement can be a cost-effective option for SMEs looking to restructure or wind down their business. These Schemes, which are governed by Part 9, Chapter 1 of the Companies Act 2014, have been under-utilised to date. They facilitate an agreement between a company and its creditors to restructure the company’s liabilities over a prescribed period. The company does not necessarily need to be insolvent. While a Scheme of Arrangement does not protect a company from its creditors, if approved by 75% of creditors in value, it is legally binding on the remainder.

Examinership

The Examinership process is perhaps better known than Schemes of Arrangement. It affords a business protection from its creditors for a period of up to 100 days while a scheme is put in place to deal with its liabilities. As Examinership is a Court-driven process, the attendant professional and legal costs often put it beyond the reach of smaller business entities.

Risk of Trading Whilst Insolvent

Under Irish company law, allowing a limited company to trade when a director knows (or ought to know) that it is insolvent is considered reckless trading. Directors of limited companies can be made personally liable for a company’s debts if they allow the company to oversee the company engaging in reckless trading.

Where the impact of the Covid-19 pandemic triggers the collapse of a company, liquidators will need to be satisfied that directors’ efforts to balance continuing to trade and protecting jobs against creditors’ exposure were bona fide. Directors should bear in mind that a liquidator will also investigate actions taken in the pre-pandemic period.

In response to the Covid-19 crisis, the UK Government recently published a Bill containing measures suspending wrongful trading for a 4-month period from 1 March 2020. As such, companies can continue to trade whilst insolvent without the threat of personal liability in these special circumstances. To date, no such measures have been introduced in Ireland. Consequently, directors who are concerned about the potential for insolvent trading should implement risk mitigation measures without delay. Such measures may include increasing the frequency of board meetings, accurately documenting board decisions, preparing cash flow projections based on assumptions underpinning their decision to continue to trade, availing of emergency State supports such as the Temporary Wage Support Scheme, and seeking professional advice.

Helpline

If you are concerned about any of the issues discussed in this article it is advisable to obtain professional advice without delay. RBK has recently launched a dedicated, confidential Corporate Recovery Helpline on (01) 644 0103 to support directors, managers and owners at this difficult time.

Brendan O'Donoghue

Restructuring & Insolvency Partner

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