Time is of the Essence
Company directors and restructuring opportunities
Company Directors continue to ignore examinership and restructuring as a means of company survival.
Irish company directors traditionally do not have a strong history of looking to restructuring as a potential route out of financial difficulties, with fewer than two per cent of Irish corporate insolvencies being examinerships. Looking at our international peers, we see that approximately 14 per cent of corporate insolvencies in the UK are done by way of a formal restructuring and approximately 33 per cent in the USA. There is a strong need to change this statistic and move away from the high levels of liquidations and receiverships seen in Ireland and move more in line with these other countries. Many companies that go into liquidation or receivership have solid underlying businesses, but excessive debt that could be re-negotiated either through a traditional examinership process or one of the simplified schemes of arrangement that have been brought in under the Companies Act 2014 (the “Act”). A critical point to remember, however, is that the window of opportunity to take advantage of these options is brief and company directors are urged to take remedial action before it is too late.
Insolvency statistics for 2015 published by www.insolvencyjournal.ie showed that there were a total of 1,049 corporate insolvencies last year. This represented a 10 per cent decrease on 2014 and continued the trend of a year-on-year decrease in the total number of insolvencies since 2012 (1,684). Of these corporate insolvencies, creditors’ voluntary liquidations accounted for the vast majority, with 729 recorded in the year (69 per cent). This is consistent with 2014, when creditors’ voluntary liquidations accounted for 67 per cent of total corporate insolvencies. Receiverships accounted for 251 (24 per cent) of the total corporate insolvencies in 2015, down by 48 from 299 last year. There were 50 court liquidator appointments in 2015, down from 68 in 2014.
However, when we look at examinerships, take-up continues to remain at disappointingly low levels, with only 19 examiners appointed in 2015 out of the 1,049 corporate insolvencies recorded (i.e just two per cent). This level of examinership take-up is consistent with comparable years and shows that the introduction of new legislation in early 2014 has still not had the anticipated effect of encouraging struggling SMEs to avail of this more cost-effective and accessible option.
In 2014, “Examinership-Lite” was introduced. This aimed to help smaller SMEs that are entrenched in debt to emerge in a stronger and healthier position. The most significant change introduced was that smaller companies meeting certain criteria could apply for examinership to the Circuit Court instead of incurring the higher costs of a High Court process. An additional benefit is that, by keeping the process local to the company’s own geographical area, judges are more familiar with the companies in question and their importance to the community.
Additionally, now that the Act has introduced changes to the existing schemes of arrangement, this process is much more accessible for struggling companies. Schemes of arrangement can be used by companies to reach a legally binding agreement with their creditors to pay all, or part, of existing debts over an agreed period of time. The changes under the Act have reduced the level of High Court involvement and now court approval is only required towards the end of the process if members and creditors have voted in favour of the scheme. This makes the process much more affordable.
The statistics show, however, that despite the introduction of the new legislation that should make these processes more accessible and affordable, company directors continue to wait until the point of no return before seeking professional help around the survival of their business. Poor timing in seeking help is the number one reason why so many companies go into liquidation or receivership each year. This reluctance to act while there is still a chance of survival may be due to human factors and the critical importance of the type of leader in place during times of financial crisis. From working with business psychologist and author James Conboy-Fischer, three key traits can be identified in company directors that could actually hinder them from seeking assistance for their troubled companies in time, despite these traits contributing to their company’s success during more prosperous times:
Dealing with ambiguity
Business leaders are used to dealing with ambiguity day in and day out and are well versed in managing the uncertainty that comes with running a business. However, when ambiguity becomes normalised and a financial crisis develops, the early warning signs may be perceived as yet another version of normal and directors can fail to realise the severity of the problem until it’s too late. By the time the help is finally sought, it is too late for examinership and the company goes into liquidation.
Being able to think independently and standing alone from their teams is a key characteristic of business leaders. When financial troubles develop, this tendency can mean they are generally slow to seek advice. This may be due to many factors such as fear of failure, fear of letting their team and employees down or simply paralysis due to the unrelenting pressure they find themselves under. Again, company directors fail to act on time, resulting in company failure.
Running a business requires perseverance and the ability to never give up. This characteristic is related to stubbornness, however, which is dangerous when a company’s future is at stake. Company directors need to let go of extremes of perseverance and learn to be more creative and flexible and to evolve with changing business needs. They need to recognise that perseverance with what has previously failed to work is not an option for the future and that they should make changes while they still can.
An example of a recent successful examinership is that of Ladbrokes’ Irish companies (“Ladbrokes Ireland”). In April 2015, Ken Fennell of Deloitte was appointed examiner over Ladbrokes Ireland, which included around 200 betting shops and over 800 employees. By appointing an examiner, Ladbrokes Ireland was able to significantly reduce its annual rent costs through negotiations with landlords and disclaiming several unprofitable leases resulting in significant future cost savings.
Ladbrokes UK Limited, the parent company of Ladbrokes Ireland, was the successful investor.
Despite the fact that many of the more well-known examinerships are larger companies, with the introduction of “Examinership-Lite” and changes to schemes of arrangement it is possible for directors of SMEs to successfully restructure their business and come through a financial crisis successfully. The timing of seeking help though is crucial if business leaders are to ensure the survival of their companies.