Notwithstanding the phased return to some level of normality, some businesses will continue to be significantly affected, particularly those in the leisure, travel/tourism, retail and hospitality sectors. These sectors will face longer term challenges due to social distancing requirements, consumer unease and the likely absence of international travel for many months, or perhaps even longer. However, these are not the only sectors that will suffer. The newly published Programme for Government, “Our Shared Future”, frequently references the significance of supporting SMEs to ensure as many as possible remain viable.
There are a lot of options open to otherwise good businesses facing cash-flow and other financial issues as a result of COVID-19. For example, some businesses may have no alternative but to alter their business model and/or operate at reduced capacity for some time.
In that context, it is important to consider how a business has been affected and how long those effects will last. Measuring the fixed cost base and debt obligations against potential future revenues is a key element that cannot be an exact science. Businesses that simply cannot return to normal may determine that the business is no longer viable but in many instances it may be feasible to look at some form of restructure, formal or informal. Balanced against that is the challenge for directors who may be concerned at making decisions which ultimately transpire to be incorrect.
Cash is key
A business needs to avoid running out of cash before completing any necessary restructuring.
Where feasible, a current cash positive position should not be eroded simply to support on-going 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?
As the crisis unfolds, a business, or a portion of it, may find itself in a position where it is unable to trade profitably but 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
Closed a portion of the business, either temporarily or permanently
Renegotiated leases priced above the current market rate
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.
Additional funding and/or re-negotiating existing arrangements
Frequently it is possible to reach agreement with banks in terms of senior debt obligations.
Early discourse with banks is typically the best option. In our experience to date, businesses and their lenders have 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.
At that point the following issues will need to be examined:
Term of loan, interest margins, amortisation frequency and size
Financial covenants, both testing and levels
Information flow to the bank going forward – a tightening of information requirements to balance any leeway provided on repayments and covenant levels
Representations as to default – repetition and tweaking to accommodate different trading dynamics
Asset disposals, prepayment criteria and associated fees
Cross defaults and supply chain impacts, and
Default triggers and timing
Re-documentation of debt arrangements will have a timing component, in particular where updated information is required or where third parties need to be involved in the process. Where government schemes or other sources of income have been used during the crisis, it will be necessary to examine whether revised arrangements need to simply acknowledge the occurrence of these or accommodate them on a go forward basis.
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 executed 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 degree of creditor approval required varies from case to case. Invariably, however, it will require the consent of all secured creditors, as they will need to release their security over secured assets. In practice, this process is usually led by secured creditor(s).
The process has a number of advantages: it is cost and time effective, and the senior creditors negotiate and settle the sale documents with a buyer so that the business assets can pass immediately upon enforcement. It also 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, as only the assets are sold, the junior / unsecured creditors are typically left unpaid.
At present, there is no current legislative basis or detailed guidelines for a pre-packaged sale in Ireland and they can be perceived as opaque arrangements, depending on the circumstances. There has been some high profile litigation arising from these arrangements but, with detailed planning and the appropriate commercial environment for the business, it is often possible to utilise the process successfully.
The length of the process can vary significantly depending on the assets to be realised. It can be completed as soon as the receiver is appointed but statutory time limits and notice requirements may attach to a sale of assets to a connected party.
Examinership and schemes of arrangement
Examinership can, in appropriate circumstances, facilitate a business in taking any or all of the above steps, if they result in the survival of the company and all, or part of, its undertaking as a going concern.
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, including solvent corporate re-organisations, mergers or de-mergers and insolvent restructurings.
We discuss these in more detail in our article entitled, Restructuring Viable Businesses in Ireland
When the business is no longer viable
Regrettably, there probably will be some casualties in many sectors, with predictions suggesting that the hospitality sector may be particularly affected.
Therefore, 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 as soon as this becomes clear.
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.
For example, although there are 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.
As with any plan, on-going consideration of the possible impact is key to the solutions. Given the fluidity of both domestic and international lockdown restrictions, the degree of uncertainty remains high for most businesses.
Any business that believes its viability will be impacted should consider the range of tools under Irish law. To the extent possible, 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.
Should you require further advice in this area, please contact a member of our Restructuring & Insolvency team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.