Reconstructing, Rescuing and Examinership of Companies

 

As part of our ongoing series of articles and guides on Restructuring, Insolvency and Examinership, we recently spoke at length with Neil Hughes, managing partner of Baker Tilly Ireland. The team from Baker Tilly have completed over 250 Examinerships, making them the country’s leading Examinership practitioners. Sarah Jane O’Keefe from Baker Tilly recently made history in being appointed the first ever female examiner in the state. Neil’s insight and experience resulted in very interesting and useful advice to any company director whose business is struggling during the Covid19 Crisis.

Summary of the Current Position – The Time Is Now

You can listen to the full interview with Neil below and also read the full transcript of the interview at the bottom of this page. We’ve also taken the opportunity to highlight a number of sections which may be of particular interest to you below the video.

The following key points emerged from our chat with Neil:

  1. If you owe a creditor money, and can’t immediately pay them if they ask for payment now, your company is book insolvent. You are potentially eligible for the protection of the Courts under Examinership;
  2. The “Green Jersey” period is over. Creditors need money, and the domino effect of creditors looking for payment has begun;
  3. You need to plan now for the rest of 2020;
  4. There are a number of government schemes through Enterprise Ireland and your Local Enterprise Offices to fund investigation of whether Examinership is appropriate;
  5. If you don’t take action now, you could end up being restricted as a Director if your company subsequently goes into liquidation;
  6. There is no shame in a company being in difficulty, especially now. Pride cannot stop a director from exploring Examinership instead of just shutting up show and laying off staff;
  7. Over 15,000 jobs have been saved through Examinership schemes, but 98% of companies in difficulty opt for Liquidation over Examinership. This has to change;
  8. Examinership is not just for very large companies, and is particularly well suited to SMEs;
  9. Some Covid19 legislative changes are coming;
  10. The time to look at the possibility of restructuring, rescuing and Examinership is now. While things with your business might appear to be OK while everything is shut, what about when your business needs to get back up to full capacity? Will you be able to pay creditors up front to get stock and supplies? Will you have sufficient reserves to fund wages for the first few weeks back? If not, you need to think about what that reality is going to look like.

Full Interview – Company Restructuring, Recovery and Examinership

 

Examinership in 2020 – Extracts from Interview with Neil Hughes of Baker Tilly

 

  • What Is Examinership?

Examinership, it’s Ireland’s rescue framework for, you know, otherwise viable companies that find themselves in difficulty, but they have good, good prospects for survival if they can be restructured.

 

In fact, the test actually is only a reasonable prospect of survival and subject to certain conditions that if they can restructure themselves, they can still be there for the for the benefit, particularly of the employees, which is why the legislation was introduced in 1990. And secondly, then for the benefit of the community as a whole, that, you know, that the enlightened approach is that businesses should have a second chance, should be given a second chance if they are if they can be viable, if they’re restructured. So that’s what that’s what Examinership is.

 

  • How Successful Is Examinership?

 

For Examinership typically the success rates in securing Examinership would be probably 90, 95 percent and coming out the far end. And that really depends on the availability of investors. So if you take a sort of a broad average over the last few years and we’ve seen certainly the majority of companies, and I don’t have the exact figures to hand here, but I understand it’s of the order of 70 to 80 percent successful. And then even after a few years, the revenue did a review recently and they found that the majority of companies were still trading even a number of years after they came out of Examinership, which would demonstrate really that the process is working, perhaps underutilized, because only about 2 percent of insolvencies end up in Examinership and the equivalent rate would be about 22 percent of the US when it comes to chapter eleven. So it is an underutilized process and probably little known. But I have a feeling just because of the current crisis could well be that a lot more businesses have to get to know about formal protection processes and rescue processes like Examinership.

 

  • Why is Examinership Not Used More?

 

What has happened is that there isn’t a huge amount of information about that in amongst the advisor community. I know, for example, Leman Solicitors know Examinerships inside out. We here at Baker Tilly. We’ve done quite a few ourselves. But there are, I suppose, a lot the within the advisor community in Ireland, there are a lot of people who have not been exposed to turn around processes and Examinership processes. So they’re not really in a position to advise their clients to do that. That’s one reason. Second reason is sometimes directors leave it too late and they’re already, the doors are closed before they can actually react and try and deal with the situation. And then thirdly, in my experience, unfortunately, you have a sort of a pride issue that comes into it. And sometimes directors, typically male directors, I’ve found are not really happy to put their hands up and walk in and say, you know, I have a problem.

 

  • What Should People Be Doing Now?

 

The first thing that people need to do is to create a model for the rest of the year, their base case about what does getting to the end of 2020 look like.

 

And they they’ve got to be realistic about that, because unfortunately, we’ve been talking to a lot of people who have taken, say, their 2019 numbers and they’ve said, OK, we’re gonna be maybe 10 percent or 15 percent down on 2019. I mean, our view is that’s totally unrealistic in terms of what’s going on out there. What they need to do is they need to look at the key macroeconomic factors to try and to see what does 2020 look like for their business. Those factors are. Unemployment is predicted to be somewhere between 12 and 15 percent by December. OK. The PMI index first managers index is well below 50 percent. And the consumer sentiment index, that KBC run, that likewise has seen a massive drop. Now, the last time we saw statistics like that was in 2012. OK, so if you’re creating a model, then our advice to businesses, if you want to create that model to the end of the year, don’t use 2019. That’s gone. You know, there was full employment. You need to go all the way back to when last we saw those kind of macro economic factors at play in Ireland. And that’s probably 2012. So you need to take your 2012 turnover and map that into the projection to the end of the year and see what that looks like.

 

 

  • What Can Directors Do Now To Avoid Any Possible Accusation Of Failing To Act Reasonably And Being Restricted As A Director Down The Road?

 

They have to get on top of the numbers and do it on a on a reasonable kind of basis. Like we said, go back to 2012/2013. Use those numbers. Use those turnover figures. Don’t use 2019. And if you do that. I think when it comes to somebody looking back and say, what did you do to try and mitigate the risk, what did you do to what did you do to minimize the losses to some of your key stakeholders, key creditors? Did you actually plan? And I think you need to be able to show that you did something, even if it’s not perfect and won’t be perfect. But you have to show you did something.

 

  • How Do You Fund An Examinership?

 

There’s four different ways you can fund an Examinership or scheme. OK, the first and probably the best way is new equity investment with new equity investors. And we’ll come back to that in a second. And secondly, then you talk about new financing and as in, you know, bank financing or interbank financing or else alternative lender financing. And now there is, as you know, the SPCI Covid loans that are available up to a million and a half, first half a million unsecured, no more than 4 percent costs. There are a number of businesses that do qualify for that, could qualify now. And really, the question being posed that some businesses are now posing the same, well, you know, if I get my hands on that funding, maybe I should use it as a war chest to fund a scheme of arrangement rather than pouring it into losses in the course of May, June or July and then have the terrifying prospect of reaching the last six months and having no having no cash and having this mountain of debt. So, I mean, that’s that’s the issue in terms of the key obvious issue in terms of lender financing for schemes of arrangement is the SPCI funding.  But then you also have a couple of other options in the sale of non-core assets. Some businesses are going to be consolidating back. They’re going to be shrinking their businesses down. They may be able to generate funds from the sale of assets which are deemed to be non-core. And that’s something they may need to do. And then the final way of funding schemes arrangement, probably the most challenging in the current environment, would be a trading surplus.

 

And in terms of businesses that, you know, because of the particular time of the year, this happens to be busy is their busiest time of the year. Now, there’s not that many businesses that are open that would be able to take advantage of that. So it’s not really going to apply in this circumstance. It’s normally, for example, retail businesses using the Christmas trade to fund a scheme of arrangement, as many retailers have done in the past, including the likes of Golden Discs for example, they would use the Christmas trade to form a scheme.

 

  • Will It Be Possible To Fund An Examinership In The Current Climate?

 

There was a lot of money available for projects just before the Covid crisis. So there was a lot of, you know, some of the alternative lenders and investors chasing the same projects. And it’s just the way the economy had turned like that that wasn’t the case of several years ago. But I think that for those who didn’t come in in a vulnerable way, that their portfolio I’m talking about investors now, you know, that their portfolio is OK, they may well be on the lookout for opportunities, they may well be looking for businesses to invest in. So I’m not so sure. And it’s not going to be the same as it was back in 2009, 2010, when we obviously had the banking collapse and we had banks that just disappeared overnight. And I think this is going to be different. It’s going to look and feel an awful lot more, I think it’s going to be more positive than the last time where there was basically a 100 billion euro hole in the economy, which was, you know, was a permanent loss, was a dead loss.

 

I don’t think that’s the case in this instance. And we’ve a chance to bounce back from it quicker as an economy and also SME businesses that find themselves struggling, they also have an opportunity to bounce back quicker if they take the right steps and if they do the right thing.

 

  • At What Stage Should Directors Be Considering If They Need to look at Examinership? What resources are available?

 

Yesterday, like they should know by now, they should know by now what the lay of the land is.

 

There’s been three or four weeks now for this to sink in. And I think, we go back to what is a director acting reasonably and a director acting responsibly. We think that if they haven’t actually got those projections done, if they don’t know where that pinch point is coming, that’s not being responsible because it’s not like, a lot of business are closed, so they don’t have time to dedicate some time to getting this done.

 

Likewise, there are grants available from Enterprise Ireland, for example, of 5000 euro to get this work done, to actually employ somebody, to employ the likes of ourselves or another firm, to bring them in and do a turnaround plan, a business plan, like a Covid19 business plan and the local enterprise office as well. Likewise, its making available grants of up to two and a half thousand euro to get business plans done. So I think people should have that done already, frankly, or should be working on it right now to be able to identify where the funding requirements are going to be and what does the restructuring plan is going to look like for their business.

 

  • Are The Creditors Coming Knocking Yet Or Is This Kind Of Collective Sense of Togetherness And “We’ll Get Through This Together” Holding?

 

The green jersey agenda is what you’re talking about. And unfortunately, that kind of lasted maybe three or four weeks. And now everybody is looking is looking for money. And the big issue is going to be when businesses try and reopen.

 

They have to actually go down through their list of creditors and say, right to reopen. I need stock from, you know, X supplier, Y supplier and so on. And I need to actually make a payment upfront for that. And cash is going to be so thin on the ground at that stage. It’s going to  be difficult for them to get those suppliers to fund them or to actually put stock upfront. And that’s where they’re really going see a solvency issue. They cannot make a payment on account even to get stock back in. Plus, they’re going to need a couple of weeks of wages set aside to even get back up and running again.

 

  • Examinerships Are Not Just for Very Large Businesses, But Is There A Perception It Is?

 

There is. And sometimes because people associate Examinerships,  I think, also with very high costs and high, sort of you know, high court costs. But obviously back in 2013, that process was brought into the circuit court. So it is possible now to take circuit court applications right the way around the country. You don’t have to travel to Dublin to take them in the high court. And I’m involved, for example, in Galway at the minute in a circuit court Examinership where the costs will be much more modest rather than a high court Examinership. So, it’s horses for courses. And again, that’s a perception issue. Maybe it’s not, there’s not a full understanding of how that how that can work. So it’s probably not from microbusinesses, I would say that. But certainly for SMEs, the vast majority of Examinerships in the last 30, 40 years, whatever it is since nineteen ninety ninety, so 30 years and the vast majority have been SMEs and the success rate is particularly strong in SMEs. So yeah Brian that certainly is a I think a common misconception that exists.

 

  • Are There Any Covid_19 Related Legislative Changes On The Cards for Examinership?

 

Yeah, I do know that the CLRG has made recommendations to the minister in terms of changing Examinership and we may see some changes over the next week or two in relation to that. I was asked for my opinion about that as to what practical issues there might be in terms of creditors meetings, in terms of, you know, posting schemes out schemes of arrangement to addresses which may not be open to creditors and may not get them and the use of electronic means, email, etc. So that that’s all kind of feeding into it. But on the flip side, I must say I have been in court in the last couple of weeks and the court system still is functioning. So it is still possible to avail of Examinerhips, and as long as the courts court system is open, I would have thought that that still works. I don’t know if there’s a really, if is there a fundamental overhaul needed of Examinership to make it into a more voluntary Examinership type model? And I’m not sure we’re going to achieve that this year. I think that’d be too far reaching. And I think if the restrictions start to ease, it might be become a bit more straightforward to just carry on as we were. A bit more time possibly would be useful. But then I’ve always had the view that 100 days plus 21 days to implement the scheme, 121 days. It’s four months. I mean, if you’re going to save a company, I think you’re going to save it within four months. I know in Cyprus, for example, the equivalent legislation is six months. I think it probably is more or less OK. And I’m not, certainly at the minute in the three cases that I’m working in currently, I don’t see any major blocks to getting a successful outcome for each of those three cases, even taking into account the Covid restrictions.

 

  • Is This A Particularly Good Time to Consider Entering Examinership?

 

I think that t he main reason why this is a good time to be looking at restructuring is because like I say everything is so calm. It is kind of strange serene calmness everywhere in the if you’re walking or even the streets of Dublin at the minute.

 

And so it’s it’s a very sort of a well-organised or it’s well organized maybe it’s the wrong word. It’s just that it might be a time whereby there’s not so much panic. There won’t be as much panic in terms of the actual business operation because of what’s going on. It might be just a more straightforward time to reorganize and the only thing is guys I’ll tell you of my experience though. Businesses tend to need a push to go into Examinership. You know, there’s always a trigger of some sort. It’s either the company running out of money, can’t pay the wages or a sheriff walking in or a receiver walking in. It’s just human nature. People tend not to be so forward thinking as to plan exactly the timing of their Examinership. And I think that’s going to be the big challenge in getting cases on. They’ll be in crisis before they actually do anything. In my experience they tend to find themselves in a crisis before they they actually push the button on Examinership

 

  • What Are The Practical Steps for Anyone Now Considering Examinership?

 

In practical terms people tend to come into our office. We have a look at it. If it seems like a good candidate we will say to them Listen you really need to get an IER prepared, that’s just a short report from an independent accountant to just set out what the issues the company is facing for the future, you know, what the future prospects are and critically does the company have what’s called a reasonable prospect of survival. It doesn’t have to be a certain prospect of survival, just to have to have reasonable prospects of survival. And so it’s quite a low bar initially to get into Examinership. And we would typically set that up for somebody. It can be the company’s auditor but we could sort of help them just getting that step in place. Then they obviously need legal advice in terms of making a petition to court. So those are the practical steps. But the first step is to speak to the nominee as examiners whether that be us or somebody else and get an IER commissioned. And normally takes a few days to get that done. So that’s the first step right.

 

  • If You Are A Company Director And Your Company is Trouble, What Should You Do?

 

The enlightened approach is to put the hand up. And so I couldn’t agree more. Like if people were to, if everybody that found themselves in difficulty, you know, we said 2% of companies go into Examinership. The other 98% go into liquidation. Like, I mean, I just find it astonishing that some of that 98 percent don’t put their hand up and say “Look is there any other option for me other than just closing the doors and laying off all my staff”. It’s extraordinary. In the last, you know, the tens of thousands, hundreds of thousands of jobs that were lost in the economy in the last 10 years. That could have been saved. And I just hope to God we don’t make those mistakes again in the next 10 years.

 

 

Examinership – Neil Hughes from Baker Tilly Interview – Full Transcript

 

Brian Conroy (Leman) – For a lot of company directors, whose businesses have been going very well up until the Covid19 crisis, Examinership is probably something that they have only come across in headlines in newspapers but not necessarily know that much about it, so for those directors or those finding their company in trouble for the first time in its history, what exactly is Examinership?

 

Neil Hughes (Baker Tilly) – Examinership, it’s Ireland’s rescue framework for, you know, otherwise viable companies that find themselves in difficulty, but they have good, good prospects for survival if they can be restructured.

 

In fact, the test actually is only a reasonable prospect of survival and subject to certain conditions that if they can restructure themselves, they can still be there for the for the benefit, particularly of the employees, which is why the legislation was introduced in 1990. And secondly, then for the benefit of the community as a whole, that, you know, that the enlightened approach is that businesses should have a second chance, should be given a second chance if they are if they can be viable, if they’re restructured. So that’s what that’s what Examinership is. It was brought in because of the collapse of the Goodman empire back in 1990, which represented 5 percent of Irish GDP in August 1990. But since then it has been used for, I think that the number now is approaching fifteen hundred companies over the course of the years and it would a pretty good success rate. It has to be said, the majority of companies that have gone through examinership have emerged successfully and are still trading. And so that’s what it is. It’s Ireland’s Chapter 11 process, generally seen as being more management friendly than administration would be, for example, because it’s a debtor in possession model and the insolvency professional doesn’t actually take over. The examiner is there to examine the business and come up with a scheme to allow for the survival of the business. That’s what it’s all about.

 

Ronan McGoldrick (Leman) – Generally in your experience, and you’ve a lot of it in terms of Examinerships, whats the success rate generally?

 

Neil Hughes (Baker Tilly) – First of all, going into court, you would see typically well over ninety, ninety five percent of businesses that apply for Examinership would actually secure the protection of the courts.

 

It’s very, very rare that a business that’s looking and that has an independent experts report prepared, it has the evidence to demonstrate to a judge that they are a good candidate.

 

For Examinership typically the success rates in securing Examinership would be probably 90, 95 percent and coming out the far end. And that really depends on the availability of investors. So if you take a sort of a broad average over the last few years and we’ve seen certainly the majority of companies, and I don’t have the exact figures to hand here, but I understand it’s of the order of 70 to 80 percent successful. And then even after a few years, the revenue did a review recently and they found that the majority of companies were still trading even a number of years after they came out of Examinership, which would demonstrate really that the process is working, perhaps underutilized, because only about 2 percent of insolvencies end up in Examinership and the equivalent rate would be about 22 percent of the US when it comes to chapter eleven. So it is an underutilized process and probably little known. But I have a feeling just because of the current crisis could well be that a lot more businesses have to get to know about formal protection processes and rescue processes like Examinership.

 

Brian Conroy (Leman) – Can I ask Neil do you have any insight or opinion as to why it’s been so underutilized? Because that’s something that’s puzzled me for a long time. It seems that it would be an obvious choice for a lot of companies that have since gone into liquidation because they didn’t pursue this avenue?

 

Neil Hughes (Baker Tilly) – Yeah, I totally agree with you, Brian. I think that we should probably have rates similar to the US as we do have a similar sort of entrepreneurial type of market based economy. And so, there’s no reason to me that it shouldn’t be. But I think what has happened is that there isn’t a huge amount of information about that in amongst the advisor community. I know, for example, Leman Solicitors know Examinerships inside out. We here at Baker Tilly. We’ve done quite a few ourselves. But there are, I suppose, a lot the within the advisor community in Ireland, there are a lot of people who have not been exposed to turn around processes and Examinership processes. So they’re not really in a position to advise their clients to do that. That’s one reason. Second reason is sometimes directors leave it too late and they’re already, the doors are closed before they can actually react and try and deal with the situation. And then thirdly, in my experience, unfortunately, you have a sort of a pride issue that comes into it. And sometimes directors, typically male directors, I’ve found are not really happy to put their hands up and walk in and say, you know, I have a problem.

 

You know, I think maybe it’s a perhaps an Irish male thing or phenomenon. And you find, in fact, my experience, you find female directors tend to be much more practical, common sense about these things. But that is an issue as well, certainly. And it seems like sometimes if an option is there just to wind the damn thing up. And regrettably, a lot of Irish directors take that option where, you know, there are a lot of jobs that perhaps could have been otherwise saved because, you know, the statistics show that well over 15 thousand jobs have been saved in SME businesses in the last 10 years, and that’s not including some of the bigger companies, some of the, for example, Eircom, you know, some of these large company Examinerships, just looking at SME businesses, well over fifteen thousand jobs saved, which would have cost hundreds of millions to the state if the state had to pick up the tab for those redundancies.

 

Ronan McGoldrick (Leman) – In listening to your answer on that question, Neil, and before you got to the third part, which was pride, I was nodding my head vigorously for those of us who can’t see us in relation to that. It was something that always struck me where the sense of the matter should have dictated taking on the Examinership route but pride really was what was standing in the way. We know that Examinership can result in a successful turnaround for company. We’ve seen all the examples that point towards that. So what can we do? I suppose it’s those people who are advocates of this process to try the explain the benefits to a wider audience to make sure that the pride factor sort of takes a back seat, as it were, or how we really do that. And can we overcome human nature or the culture that brings male directors in Ireland?

 

Neil Hughes (Baker Tilly) –  Yeah, I think it might be it might be a bit easier to in this crisis. You know, I mean, I think perhaps there’s a lot of business owners now, this is their second very serious recession that they’re going through. So, I think maybe they learned a lot from the last time and maybe they learned this. You can’t eat pride at the end of the day. You don’t, I mean, you can’t you can’t really be governed by that. You have to leave that at the door when it comes to making decisions in relation to the future of your business. And I think it might be a bit easier this time. I think we do have to keep talking about it. I mean, any opportunity I ever get, I will say, I always try and share our business and having, you know, been involved in 250 Examinerships in the last 15, 18 years, whatever it is,  and some of the success rates we’ve had and some of the stories, when people actually see some of the stories and the fact that they do have a second chance, OK. There might be other investors will come into the business. We always say to people, look, don’t rule anything in, don’t rule anything out because you’re on the verge of closure.

 

So you need to have an open mind going into an Examinership. But, yeah, I think the more that we can talk about it, the more we kind of share those stories about what has happened and some of the good news stories and those success stories. I think the more prevalent it will be and the more normalized it will be and the people will start thinking of rescue first rather than closure. And people, we have to be in the hope business, guys. We have to give people a bit of hope and give them options when, even they think that the thing looks like Mount Everest for them. When they look at their creditors list, I mean, we need to be able to sort of say no, actually, you know what, If you break this down into some very basic steps and if you put in place a rescue framework such as appointing an examiner, a 100 day framework, you know, that a lot of other options will open up for you. So, yeah, I think it’s really positive, even really positive, you know, we’re having this chat because I think it should help if people are listening into us.

 

Brian Conroy (Leman) – Neil, when you talk about “rescue”, I mean, the two things you’ve struck on, you’ve said a company that needs to be rescued and the danger of directors leaving it too late. So if you’re a company director and you’re listening to this now, like at what point do you say, I need to talk to an examiner. Would you be recommending people pick up the phone to you now even if it they’re hoping to avoid Examinership, if they’re hoping to avoid any intervention. But they need information so that in two weeks, three weeks, four weeks, depending on how this pans out is now the time to start finding out more about this?

 

Neil Hughes (Baker Tilly) – I tell you what, I have a very clear view on that, Brian, because the first thing that people need to do is to create a model for the rest of the year, their base case about what does getting to the end of 2020 look like.

 

And they they’ve got to be realistic about that, because unfortunately, we’ve been talking to a lot of people who have taken, say, their 2019 numbers and they’ve said, OK, we’re gonna be maybe 10 percent or 15 percent down on 2019. I mean, our view is that’s totally unrealistic in terms of what’s going on out there. What they need to do is they need to look at the key macroeconomic factors to try and to see what does 2020 look like for their business. Those factors are. Unemployment is predicted to be somewhere between 12 and 15 percent by December. OK. The PMI index first managers index is well below 50 percent. And the consumer sentiment index, that KBC run, that likewise has seen a massive drop. Now, the last time we saw statistics like that was in 2012. OK, so if you’re creating a model, then our advice to businesses, if you want to create that model to the end of the year, don’t use 2019. That’s gone. You know, there was full employment. You need to go all the way back to when last we saw those kind of macro economic factors at play in Ireland. And that’s probably 2012. So you need to take your 2012 turnover and map that into the projection to the end of the year and see what that looks like. And that probably is going to result in a real pinch point in and around June or July.

 

That’s likely the case from our from what we’re discussing with a lot of clients. And that means that you have to make decisions around the fact that you now have visibility on what the pressure is going to be. And it could well be that this is an ideal time. And this is what we’re hearing from a couple of clients, that this could be an ideal time during the lockdown to actually put in place a restructuring of the business, a formal restructuring, because, for example, if you’re construction, it means your site is already closed and it’s locked up if you’re in retail or in in a restaurant business. It means that there’s very little disruption in terms of your trading because you may have kind of a skeleton crew in any other business. You might just be a skeleton crew or in fact, you may not be open at all. You might be planning for a reopening. So the planning needed for that reopening could involve getting the, I suppose, the ingredients of a scheme of arrangement together so that you have this when it comes to reopening your list of creditors doesn’t look like Mount Everest anymore. It looks like something that you can get over. You can scale that. You can try and just scale a mountain of debt that’s in front of you. And that’s some of the things we’re hearing from from some of the clients we’re speaking to.

 

Ronan McGoldrick (Leman) – Neil that takes me to a point in terms of basic directors, fiduciary duty and obligations. These are exercises that directors of ongoing companies to which continue to trade have to do in any event, because if they’re doing this in terms of understanding where they are now with a view possibly to looking at Examinership, if that’s what they decide is needed, that’s a very positive thing. What if they haven’t done this and the worst happens, which is a liquidation, may happen in the future? Well, then they can put themselves in a much more difficult position as directors of companies.

 

Neil Hughes (Baker Tilly) – Yeah listen, I totally agree. I think what the difficulty for the directors involved first of all, it’s very, very difficult to plan because we don’t really know when the economy’s going to reopen. So that’s the first difficulty. But secondly, a lot of them don’t have the skills Ronan, and that’s the bottom line. Like they’ve never been called upon to produce detailed cashflow projections by store. If they have a number of stores, for example, in retail and right through to the end of the year, taking into account all of the variables that are there. The government supports that they might get subsidies, for example, and, you know, holidays that they might get from some creditors, revenue, etc. It’s a complex financial model that they need to produce, but they’ve really got to get a command of those numbers. They have to get on top of the numbers and do it on a on a reasonable kind of basis. Like we said, go back to 2012/2013. Use those numbers. Use those turnover figures. Don’t use 2019. And if you do that. I think when it comes to somebody looking back and say, what did you do to try and mitigate the risk, what did you do to what did you do to minimize the losses to some of your key stakeholders, key creditors? Did you actually plan? And I think you need to be able to show that you did something, even if it’s not perfect and won’t be perfect. But you have to show you did something. And so I totally agree.

 

Ronan McGoldrick (Leman) –  Yeah. You have to show that you’ve acted reasonably. I mean, honesty is going to be taken as a given at this stage. And reasonable or what was reasonable or what is reasonable is always most entirely subjective. And that is what take the court time in dealing with restriction applications is what in the particular circumstances do you do, which was reasonable to that Director at that time and that’s very difficult to predict now what a court might find in years to come if we find ourselves with restriction applications in years to come. Coming out of this Covid crisis process, I would suggest from a personal point of view, I would say that there won’t be as many of those as people might suspect. I think it would be quite harsh to start imposing further liabilities on directors faced with this crisis. But Neil, I wanted to take you back to something you said earlier on in terms of one of the fundamental pillars of Examinership which is finding the funder to take you through. I might just go into that a little bit because obviously there’s two things that arise. Firstly, the practicalities of when do you seek the funder? Do you want your funder lined up before you get to Examinership? Do you seek it after Examinership. That’s the first thing. And then secondly, I suppose, is the tricky question, which is in the current environment, of course, there are going to be fewer funders potential than you would ordinarily find for a going concern. What would you say, would you agree with that?

 

Neil Hughes (Baker Tilly) – Not Necessarily Ronan, and I’ll tell you why. There’s four different ways you can fund an Examinership or scheme. OK, the first and probably the best way is new equity investment with new equity investors. And we’ll come back to that in a second. And secondly, then you talk about new financing and as in, you know, bank financing or interbank financing or else alternative lender financing. And now there is, as you know, the SPCI Covid loans that are available up to a million and a half, first half a million unsecured, no more than 4 percent costs. There are a number of businesses that do qualify for that, could qualify now. And really, the question being posed that some businesses are now posing the same, well, you know, if I get my hands on that funding, maybe I should use it as a war chest to fund a scheme of arrangement rather than pouring it into losses in the course of May, June or July and then have the terrifying prospect of reaching the last six months and having no having no cash and having this mountain of debt. So, I mean, that’s that’s the issue in terms of the key obvious issue in terms of lender financing for schemes of arrangement is the SPCI funding.  But then you also have a couple of other options in the sale of non-core assets. Some businesses are going to be consolidating back. They’re going to be shrinking their businesses down. They may be able to generate funds from the sale of assets which are deemed to be non-core. And that’s something they may need to do. And then the final way of funding schemes arrangement, probably the most challenging in the current environment, would be a trading surplus.

 

And in terms of businesses that, you know, because of the particular time of the year, this happens to be busy is their busiest time of the year. Now, there’s not that many businesses that are open that would be able to take advantage of that. So it’s not really going to apply in this circumstance. It’s normally, for example, retail businesses using the Christmas trade to fund a scheme of arrangement, as many retailers have done in the past, including the likes of Golden Discs for example, they would use the Christmas trade to form a scheme. So, and going back to the equity investors, there was a lot of money available for projects just before the Covid crisis. So there was a lot of, you know, some of the alternative lenders and investors chasing the same projects. And it’s just the way the economy had turned like that that wasn’t the case of several years ago. But I think that for those who didn’t come in in a vulnerable way, that their portfolio I’m talking about investors now, you know, that their portfolio is OK, they may well be on the lookout for opportunities, they may well be looking for businesses to invest in. So I’m not so sure. And it’s not going to be the same as it was back in 2009, 2010, when we obviously had the banking collapse and we had banks that just disappeared overnight. And I think this is going to be different. It’s going to look and feel an awful lot more, I think it’s going to be more positive than the last time where there was basically a 100 billion euro hole in the economy, which was, you know, was a permanent loss, was a dead loss.

 

I don’t think that’s the case in this instance. And we’ve a chance to bounce back from it quicker as an economy and also SME businesses that find themselves struggling, they also have an opportunity to bounce back quicker if they take the right steps and if they do the right thing.

 

Ronan McGoldrick (Leman) – That’s a very interesting response and a very positive response to hear. And then in terms of the practicality of directors thinking about funding or alternative funding as part of an Examinership process , at what stage do they need to start thinking about that?

 

Neil Hughes (Baker Tilly) – yesterday, like they should know by now, they should know by now what the lay of the land is.

 

There’s been three or four weeks now for this to sink in. And I think, we go back to what is a director acting reasonably and a director acting responsibly. We think that if they haven’t actually got those projections done, if they don’t know where that pinch point is coming, that’s not being responsible because it’s not like, a lot of business are closed, so they don’t have time to dedicate some time to getting this done.

 

Likewise, there are grants available from Enterprise Ireland, for example, of 5000 euro to get this work done, to actually employ somebody, to employ the likes of ourselves or another firm, to bring them in and do a turnaround plan, a business plan, like a Covid19 business plan and the local enterprise office as well. Likewise, its making available grants of up to two and a half thousand euro to get business plans done. So I think people should have that done already, frankly, or should be working on it right now to be able to identify where the funding requirements are going to be and what does the restructuring plan is going to look like for their business.

 

Brian Conroy (Leman) – Can I just ask Neil a little bit about what I’m called book insolvency in terms of like, again, I’m just thinking. I’m a director. I’m listening to this. You would imagine that everyone knows whether the company is solvent or not. But again, you have to assume that until three or four weeks ago, there is plenty of Directors for whom the question of solvency never arose because it was trading perfectly. So how do you know what book insolvent is? How can I, as a director know immediately whether I’m in serious, serious trouble or whether I meet the test, even for Examinership in terms of the solvency requirement?

 

Neil Hughes (Baker Tilly) – I think they’re going to know, I mean, in terms of meeting their debts as they fall due. That’s the key test. You know, and the difficulty, I suppose, with a lot of cash flow businesses is that they tend to pay, they tend to pay for last week’s problems with next weekend’s takings. In other words, whatever supplier pressure arose last week, they deal with it by making a payment from next weekend’s takings. Now, next weekend’s takings just didn’t happen. So therefore, that long list of creditors has crystallized and now are all looking for money.

 

Brian Conroy (Leman) –  Do you have any sense on the ground, are the creditors coming knocking yet or is this kind of collective sense of togetherness and “we’ll get through this together” holding?

 

Neil Hughes (Baker Tilly) –  That lasted about three or four weeks. I mean, the green jersey agenda is what you’re talking about. And unfortunately, that kind of lasted maybe three or four weeks. And now everybody is looking is looking for money. And the big issue is going to be when businesses try and reopen.

 

They have to actually go down through their list of creditors and say, right to reopen. I need stock from, you know, X supplier, Y supplier and so on. And I need to actually make a payment upfront for that. And cash is going to be so thin on the ground at that stage. It’s going to  be difficult for them to get those suppliers to fund them or to actually put stock upfront. And that’s where they’re really going see a solvency issue. They cannot make a payment on account even to get stock back in. Plus, they’re going to need a couple of weeks of wages set aside to even get back up and running again. And, you know, the news coming through in terms of pubs, for example, from the minister for health. That’s a really scary prospect, that it might even be longer before we start to see proper reopening of pubs. And that’s, I mean, I it’s a terrifying prospect for the for all of the members of the vintners association.

 

So, yeah, the solvency issue, Brian, I think businesses will know themselves. And as soon as they make that plan and say, what does it take to reopen and where do I have the cash? Can I pay my debts as they fall due? The answer is going to be no for a huge amount of businesses in the state. And yes, the forbearance, OK, but that only lasts so long, unfortunately, because at the end of the day every business needs to get paid. Circulation of money has to keep going. So there’s gonna be a lot of pressure, especially in the months I think of June, July, August, there is going to be a huge amount of businesses under a lot of pressure at that stage.

 

Brian Conroy (Leman) –  I mean, It’s sort of a domino effect, isn’t it? Because if you ask for money for me, I have to pass it on and ask for it from you. Or it’s like being on an airplane and someone puts their seat back. You have to put your seat back, and backwards it goes.

 

Neil Hughes (Baker Tilly) –  Exactly. It is it’s like a merry go round. The only answer is to try and get back to some sort of functioning normality. The state is doing what it can at the minute. But I think the missing piece of the jigsaw here is, I think, there’s going to have to be some sort of reopening grant. And I think there’s talk of soft loans at the minute, I’m just not sure if that’s enough. I think actually that, you know, for those who took the hit on behalf of the state and I’m talking with pubs and restaurants, it’s a lot like they really took a hit early on in order to try and save the health and save the HSE. And I think that there has to be some “per unit” grant to assist in businesses reopening. And if there isn’t, and that’s it’s a form of helicopter money, obviously, but if there isn’t, I can see a lot of them just really struggling to reopen it all. They just won’t have the cash flow to reopen. So that’s something that’s necessary, I think, from the government at this stage.

 

Ronan McGoldrick (Leman) –  And of course, new you’re talking about more and more of these crises coming to light in June, July and August, of course, five weeks in, we’ve already seen our first high profile Examinership application over the course of the weekend and yesterday. And I’m sure Brian was certainly segwaying from airline seats into that story. And we saw the Examinership application of Cityjet.

 

Neil Hughes (Baker Tilly) –  Yet that’s right on Sunday. I think the airlines are particularly challenged, that sector obviously, but also anything tourism related is going to be hugely challenged, like not just the airlines, but also the tourism businesses themselves. I mean, most agents, for example, travel agents, etc. They have just written off 2020 like They’re focusing on 2021 now. They’re looking at damage limitation for 2020 and trying to rebuild their business in 2021. And I’m acting as examiner myself of a couple of food distribution businesses which found its its customer base, you know, being restaurants, pubs, etc. It just fell by seventy five percent more or less overnight. Their turnover just collapsed overnight. And we’re and I would hope will be in a position to rescue those businesses, one in Dublin, one of Wexford. So I mean, for me, guys, I must say, it kind of feels a bit like the calm before the storm, because it’s this is kind of slightly surreal situation, you know, you see so many businesses that are closed, you just know that they’re going to struggle to reopen. You know, that that’s gonna have a domino effect on other businesses. But yet all of that work just hasn’t just started yet. All of that kind of restructuring work just hasn’t started yet. But it seems inevitable that has to start happening not just in airlines or in restaurants, hospitality, tourism, but like right the way across. It touches pretty much every sector. Very few sectors are doing well out of this. You know, you might say some medical supplies companies, some of the logistics businesses, such as, some of the courier businesses, for example, that are absolutely flat out. And they’ve seen 30 percent, 35 percent increases when people shopping online. And so there are some limited sectors that are booming. But by God, it’s it’s so few compared to the ones that are suffering.

 

Brian Conroy (Leman) – Can I just ask Neil, then? I suppose I keep putting my Directors hat back on. And what I see is the only time Examinership necessarily makes the big news is when it is a massive one. A Debenhams, a Cityjet. So I wonder, do people think, well, the Examinership is for massive companies, Not for me. Do you think there’s a danger of that?

 

Neil Hughes (Baker Tilly) – There is. And sometimes because people associate Examinerships,  I think, also with very high costs and high, sort of you know, high court costs. But obviously back in 2013, that process was brought into the circuit court. So it is possible now to take circuit court applications right the way around the country. You don’t have to travel to Dublin to take them in the high court. And I’m involved, for example, in Galway at the minute in a circuit court Examinership where the costs will be much more modest rather than a high court Examinership. So, it’s horses for courses. And again, that’s a perception issue. Maybe it’s not, there’s not a full understanding of how that how that can work. So it’s probably not from microbusinesses, I would say that. But certainly for SMEs, the vast majority of Examinerships in the last 30, 40 years, whatever it is since nineteen ninety ninety, so 30 years and the vast majority have been SMEs and the success rate is particularly strong in SMEs. So yeah bring that certainly is a I think a common misconception that exists.

 

Ronan McGoldrick (Leman) –  I’ve noticed in the recent weeks the legislature in the UK has sought to amend certain insolvency legislation to deal specifically with the crisis. We’ve seen changes in legislation across Europe dealing with the support of airlines, for example, in certain sectors. In your view, is the legislation we have in terms of Examinership Robust enough to deal with the current crisis. Are there any changes that you might see or would welcome?

 

Neil Hughes (Baker Tilly) – Yeah, I do know that the CLRG has made recommendations to the minister in terms of changing Examinership and we may see some changes over the next week or two in relation to that. I was asked for my opinion about that as to what practical issues there might be in terms of creditors meetings, in terms of, you know, posting schemes out schemes of arrangement to addresses which may not be open to creditors and may not get them and the use of electronic means, email, etc. So that that’s all kind of feeding into it. But on the flip side, I must say I have been in court in the last couple of weeks and the court system still is functioning. So it is still possible to avail of Examinerhips, and as long as the courts court system is open, I would have thought that that still works. I don’t know if there’s a really, if is there a fundamental overhaul needed of Examinership to make it into a more voluntary Examinership type model? And I’m not sure we’re going to achieve that this year. I think that’d be too far reaching. And I think if the restrictions start to ease, it might be become a bit more straightforward to just carry on as we were. A bit more time possibly would be useful. But then I’ve always had the view that 100 days plus 21 days to implement the scheme, 121 days. It’s four months. I mean, if you’re going to save a company, I think you’re going to save it within four months. I know in Cyprus, for example, the equivalent legislation is six months. I think it probably is more or less OK. And I’m not, certainly at the minute in the three cases that I’m working in currently, I don’t see any major blocks to getting a successful outcome for each of those three cases, even taking into account the Covid restrictions.

 

Brian Conroy (Leman) – Is there a case to be made for doing this now when you’ll get a better scheme because you know, everyone is so desperate for money? Like if you let’s say you wait and go into Examiner ship 3 or 4, you know when it’s starting to rise again. Would it be harder to get a scheme of arrangement across the line because people would be holding out for more money?

 

Neil Hughes (Baker Tilly) – And so this is, I suppose, this is the hypothesis that you should never allow a good crisis go to waste. That you should use it to deal with all of the problems you have there and then. And because it’s the best time to do it. And I mean that that argument is being, I think it’s being put forward. I know that certain principals are thinking, OK, there’s more likely to be less kind of hostile takeovers in Examinerships because a lot of their competitors, for example, have the exact same issues that they have so they don’t have to fear that somebody will come in from the outside and whether that’s true or not I don’t know. As I said to you we always encourage directors to rule nothing in and nothing out when it comes to the investment side of things because companies in Examinership need investment so they can’t rule anything out at an early stage. So I think it could well be, I think that the main reason why this is a good time to be looking at restructuring is because like I say everything is so calm. It is kind of strange serene calmness everywhere in the if you’re walking or even the streets of Dublin at the minute.

 

And so it’s it’s a very sort of a well-organised or it’s well organized maybe it’s the wrong word. It’s just that it might be a time whereby there’s not so much panic. There won’t be as much panic in terms of the actual business operation because of what’s going on. It might be just a more straightforward time to reorganize and the only thing is guys I’ll tell you of my experience though. Businesses tend to need a push to go into Examinership. You know, there’s always a trigger of some sort. It’s either the company running out of money, can’t pay the wages or a sheriff walking in or a receiver walking in. It’s just human nature. People tend not to be so forward thinking as to plan exactly the timing of their Examinership. And I think that’s going to be the big challenge in getting cases on. They’ll be in crisis before they actually do anything. In my experience they tend to find themselves in a crisis before they they actually push the button on Examinership

 

Brian Conroy (Leman) –  So I will let you go in minute Neil. But just that might be one point that is worth exploring. On a technical point. For anyone who does find a receiver walking in, The possibility of a receivership effectively being set at naught or set aside it is within three days. So I think it can be easy enough. I would see that as well with food law where there’s a closure order that you have the option to appeal to the district court within seven days. But, you know, if a receiver walks in and you’re in such a flap that you might necessarily get yourself together within three days. So I suppose that’s what the message would be. If you are one of these businesses and a receiver walks in and Examinership is an option pick up the phone fast because you’ve got three days, so move.

 

Neil Hughes (Baker Tilly) –  Yeah, the three days is so short. If you want to get an independent expert’s report and petition. I mean it is possible to do it certainly but it is far far easier to do it if you have it ready in advance and I think it’s less likely the pillar banks are going to be sort of appointing receivers but there are a lot of loans still owned by funds which have no long term interests in Ireland and I think they could well have an eye for the main chance and see that this might be the time to seize the assets of the business which could close that business down. And so yes it certainly is a very very relevant point at the minute for businesses that are vulnerable because they’ve got too much debt.

 

Brian Conroy (Leman) –  Everything is suggesting the phone should be ringing off the hook. I mean is the reality that they’re just not yet. People just that they’re not catching onto it. You said you’ve got three on the go at the moment.

 

Neil Hughes (Leman) –  Yeah three on the go, and three more more other kind of potentials. But if everything is mothballed there’s no cause there’s no trigger. Yeah. It’s like they’re like OK hang on a second I don’t really know what the hell is going on so let’s wait until I have to actually confront my reopening or I have to ring my bank or I have to ring the fund that I owe money to, I have to ring Goldman Sachs or whoever it is and I’m like we’re just in this kind of really funny sort of period of time but there could be an enormous amount of restructuring work available in the last six months and, everybody I’m talking to is telling me you are just going to be out the door with restructuring cases. Like that. That’s just what I’m told. Like people in the industry. My former chairman and the head of retail excellence Ireland. They just feel that, it just doesn’t work. The economy doesn’t work if it’s just running along at 60 percent or 50 percent because the cost base is set up a hundred percent. So if you’ve only got 50 percent coming in and the top line and it’s a grim grim picture, do you know what I mean of the economy generally. So and this is hugely important. I think Examinership is going to be massively important in the next few months.

 

Brian Conroy (Leman) – The procedural steps. If I’m a director and I I’ve listened to this I think right, actually, I need to look at Examinership. Do I call my lawyer? Do I call my accountants? Do I call Neil Hughes directly. An independent expert’s report you mentioned. Like who sets what up is in practical terms?

 

Neil Hughes (Baker Tilly) – Good question right. In practical terms people tend to come into our office. We have a look at it. If it seems like a good candidate we will say to them Listen you really need to get an IER prepared, that’s just a short report from an independent accountant to just set out what the issues the company is facing for the future, you know, what the future prospects are and critically does the company have what’s called a reasonable prospect of survival. It doesn’t have to be a certain prospect of survival, just to have to have reasonable prospects of survival. And so it’s quite a low bar initially to get into Examinership. And we would typically set that up for somebody. It can be the company’s auditor but we could sort of help them just getting that step in place. Then they obviously need legal advice in terms of making a petition to court. So those are the practical steps. But the first step is to speak to the nominee as examiners whether that be us or somebody else and get an IER commissioned. And normally takes a few days to get that done. So that’s the first step right.

 

Ronan McGoldrick (Leman) –  Can I just say there on that point. We spoke a little bit earlier about Directors and the cultural disinclination to hold their hands up and say there’s something wrong here. But in reality putting your hand up to say there is something wrong is actually the braver choice. And that’s really what directors need to look to do.

 

Neil Hughes (Baker Tilly) –  Yeah. That’s the enlightened approach is to put the hand up. And so I couldn’t agree more. Like if people were to, if everybody that found themselves in difficulty, you know, we said 2% of companies go into Examinership. The other 98% go into liquidation. Like, I mean, I just find it astonishing that some of that 98 percent don’t put their hand up and say “Look is there any other option for me other than just closing the doors and laying off all my staff”. It’s extraordinary. In the last, you know, the tens of thousands, hundreds of thousands of jobs that were lost in the economy in the last 10 years. That could have been saved. And I just hope to God we don’t make those mistakes again in the next 10 years.