Examinership may be a restructuring option to consider

The impact of Covid-19 has left many businesses across the Irish economy vulnerable and uncertain about their future and Tom O’Brien, Head of the Financial Advisory Services Division and Managing Partner at Mazars says this may be the ‘calm before the storm’.

“We are seeing companies who experienced a decline in activity levels and had been sustaining themselves through this period by availing of the various supports in place since the onset of the virus, such as the deferral of tax liabilities, bank forebearance measures, wage subsidies and rates freezes.

“These measures greatly assisted many companies but it is what happens when they are ultimately removed that is worrying many business owners. Many businesses have accumulating significant liabilities over this period and when these supports are removed and businesses have to stand on their own feet again, we will see a lot of businesses with working capital difficulties and liquidity issues.”

But despite the negative outlook, O’Brien says there are options for many businesses who are in distress.

“Given the prevailing trading conditions and the nature of the liquidity issues which will face many companies, Examinership may be an appropriate restructuring option to consider. Examinership allows vulnerable but viable companies to restructure through a combination of right-sizing their balance sheet and new cash investment,” he said. “I expect there will be an increase in the number of Examinerships over the coming months and into next year as Companies seek to come to terms with the new normal and address pent up liquidity issues. The Covid situation may also have highlighted other areas of the business which require action such as property arrangements that are now onerous or surplus to requirements that can also be addressed as part of the Examinership process.”

Taking timely professional advice is critical as the process is complex with varying impacts on different stakeholders and there are many variables to be considered before making a decision to proceed.

O’Brien says there are many advantages to the Examinership process such as the company continuing to trade, jobs being maintained and preserved, and creditors faring better than they would if the company was placed into liquidation.

“It is in many cases a positive outcome for everyone concerned.”

He also says that Examinership is not only an option for larger companies with companies that meet the definition of a small company capable of availing of Examinership through the Circuit Court.

“The Circuit Court process has not been availed of as widely as was expected when it was first introduced a few years ago maybe due to lack of awareness or perhaps a perceived stigma around the process, but I think that will change now and smaller companies will avail of it,” he said. “It is a really useful option for smaller companies as there is a significant difference in cost compared to the High Court option.

While the insolvency and restructuring expert says many companies will be eligible for the Examinership route and will emerge ‘at the far side’ completely restructured and with appropriate working capital and funding to sustain themselves into the future, there will inevitably be others that are not viable and may have to look at liquidation. 

“Examinership is not suitable for all businesses as some will be beyond saving,” said Mazars partner, Hilary Larkin. “In these circumstances, it is important that directors and business owners move in a timely manner to protect all stakeholders - employees, creditors, banks, and the directors themselves.

“From a governance perspective, directors must be able to demonstrate that they have acted responsibly, showing that they have properly assessed the options open to them including taking independent legal and financial advice, formally recording meetings of directors and management and being careful not to expose creditors to further losses in the period preceding the liquidation. Obviously great care should be taken with any payments from the business in order to ensure that issues of preferment do not arise.

“This is all very important as in the final analysis, the liquidator is required to review the conduct of the directors over the period leading up to the liquidation and report to the ODCE on this. Directors should be able to demonstrate that their conduct was responsible and appropriate in the circumstances.”

But despite all the negativity, Tom O’Brien says it is also important to be positive and take the right steps.

“In my experience, the banks have been very supportive to customers and are willing to try and assist customers to restructure and get through this period,” he said. “So I would encourage companies to seek independent and competent advice as soon as possible.

“Don’t bury your head in the sand, talk to your bank in a proactive manner, and don’t leave things until you are really under pressure. Approach them early as they are very willing to try and put solutions in place to help customers get through this period.”

This article first appeared in Accountancy Ireland.