Examinership not best model to save SMEs
Published in the Irish Examiner on 6 May 2013
The Government’s decision to allow companies apply for examinership in the Circuit Court rather than the High Court is a small step in the right direction, but it falls a long way short of its stated aim of providing affordable and accessible restructuring options for SMEs.
Fortunately, we do not have to look very far to find a workable model that could ensure the survival of struggling small companies.
Some of the 5,000 companies which have gone into insolvent liquidation since 2009 had no prospect of survival, but many could have been rescued if directors had the right tools available to them.
In Ireland the main legislative basis for corporate rescue is the examinership process introduced in 1990 to deal with the insolvency of the Goodman group of companies. By appointing an examiner a company can have its debts written down and be released from onerous contracts including leases. Since 2009, 111 large companies have been allowed a second chance by following the path into examinership taken by Goodman.
Examinership works well for large companies, but the cost and complexity involved make it inaccessible for most SMEs which are often liquidated instead.
When the Fine Gael/Labour coalition were elected they acknowledged the need for corporate rescue to be made accessible to SMEs. Indeed, their Programme for Government says, “We will introduce new legally binding voluntary commercial debt plan structures to allow small businesses to restructure debts without recourse to expensive court procedures.”
The Coalition have made a small first step in this direction by including a provision in the draft Companies Bill that will allow SMEs to apply for examinership in the Circuit Court instead of in the High Court. Mr Bruton says that this will make it “cheaper and easier for businesses to restructure their debts”.
I disagree with Mr Bruton. The only change proposed is that a different court where lawyers are paid slightly less will hear examinership applications.
The need for a company to engage an examiner, have a detailed independent accountant’s report prepared, and for several separate legal teams to be engaged, all remain. The entire process is also supervised by the court, whose wide discretion makes it difficult to forecast the outcome of any examinership application.
Consider the approach taken by Britain to deal with the same problem. There a process called “administration” exists to achieve approximately the same purpose as examinership. Prior to Sept 2003 a British company needing to restructure had to go through an expensive legal process to have an “administrator” appointed. It was recognised that this placed an unfair obstacle in the way of rescuing troubled SME’s. This obstacle was removed by amending the law so that a company can elect to go into “administration” without involving the court. It was considered at the time that the need to ensure fair and honest dealing by administrators could be met by requiring appointees to be licensed and closely supervised. This approach has been successful and administration is now widely used to rescue companies of all sizes in Britain.
If the Coalition is serious about allowing small businesses to restructure then it is difficult to understand why the draft Companies Bill doesn’t provide for a process akin to administration in Britain.
The Coalition has failed to deliver the promised restructuring options for SMEs. Whilst this is disappointing, directors shouldn’t despair unnecessarily.
One of the restructuring approaches that is accessible for SMEs is the procedure provided by Section 201 of the existing Companies Acts. This provides a mechanism for balances due to a class of creditors to be written-down. Another restructuring approach could be described as a pre-pack liquidation. This is an arrangement where a liquidator seeks creditors’ approval to sell the insolvent company’s assets to directors for market value. The Coalition has not yet acted on its promise to make restructuring mechanisms accessible to SMEs. Until it does, troubled SMEs must continue fighting for their own survival. If directors of troubled companies are proactive in seeking out and implementing rescue solutions they can avoid liquidation becoming a necessity. By so doing they benefit not only themselves, but also their employees, suppliers and the exchequer.