A new rescue option for SMEs
With the passing into law of the Companies (miscellaneous provisions) Act, 2013 last Christmas Eve, Examinership-lite, as it is now called, was born. Its effect is to make corporate rescue through examinership more accessible to struggling small and mid-sized companies and give them a real alternative to liquidation or receivership.
These new rules should help many SMEs mired in unsustainable levels of debt to be completely restructured so that they are able to emerge from the process in a much stronger and healthier position.
The key change introduced by the Act is that smaller companies can now apply for examinership through the Circuit Court, where previously they would have had to go to the High Court. This should make examinership both cheaper and more accessible to SMEs and, as a result, enable more companies to take advantage of Ireland’s main corporate rescue process.
The main advantage to SMEs of Examinership-lite is that legal costs should fall dramatically, but an additional benefit is that companies will have access to judges who are more familiar with the companies applying and their importance to the community in which they operate.
Before these changes, it is fair to say that while examinership has proved effective at restructuring large companies that have run into trouble, it has been too expensive for many SMEs in need of help. This can be seen by the fact that only 21 companies entered examinership last year, compared to 1,342 companies that went in to either liquidation or receivership. In other words, for every company that was able to use examinership’s recovery mechanism, over 60 other companies could not.
The new changes should help address this and the initial signs look good. Examinership works particularly well for struggling companies tied into unsustainable property leases, with upward only rent reviews. The fact that the examiner can repudiate such leases enables him re-negotiate such leases down to reasonable market levels. This often delivers very significant savings for companies, enabling them to survive and thrive into the future.
SME retailers, who have seen many of their larger competitors use this process to successfully re-negotiate leases down to current market levels, are showing particular interest.
The entry requirements for an SME to access the Circuit Court for examinership are that it must satisfy at least two of the following conditions:
- Have a balance sheet of less than €4.4million
- Have turnover of less than €8.8million
- Have no more than 50 employees
Examinership is regularly used by companies where excessive debt, usually a legacy of the country’s recent economic turmoil, masks a solid underlying business. The fact that a company is protected from its creditors during the process, gives it the breathing space to find fresh investment while it continues trading.
This, in turn, enables the examiner put a proposal to its creditors which typically involves rents being reduced, unprofitable parts of the business being sold or closed and a significant amount of the company’s debts being written off. If successful the company will emerge from the process in a much stronger financial position.
It is important to realise that, as a company’s financial position deteriorates, effective rescue options, such as Examinership-lite, are available. However, the window of opportunity to take advantage of this can be brief, often only a matter of months, so quick action is critical.
Examinership-lite should provide SMEs with a cheap and effective method of recovery which before now was not open to them. This has the potential to save companies, save jobs and help speed up Ireland’s economic recovery. While further improvements are needed to this area, the introduction of Examinership-lite should be welcomed and the more companies that can be saved through this process, the better.