New proposals to rescue small businesses in the wake of the Covid-19 crisis must focus on those with viable futures, a leading insolvency practitioner has warned.
The Company Law Review Group (CLRG) has been seeking views on proposals for a scheme to rescue financially-troubled small businesses that avoids the need for court hearings but, like examinership, gives the enterprise temporary protection from creditors.
The scheme will become a fixed part of Irish insolvency law but is expected to play a key role in aiding businesses grappling with liabilities they are likely to face as the pandemic passes and the Government’s financial supports are withdrawn.
David Van Dessel, partner, financial advisory at accountants Deloitte, which has made a submission on the proposals to the CLRG, warned at the weekend that candidates for the scheme "must be viable businesses" with a reasonable prospect of survival.
“And they should only be allowed access the process within a certain period of time ,” he said, adding that this would remove the temptation for some businesses to use the system repeatedly.
As a further safeguard against this, Mr Van Dessel said that the companies who so use the system should be obliged to report this to the Office of the Director of Corporate Enforcement.
The CLRG proposes that the “Summary Rescue Process” should be apply to companies that satisfy two of the following requirements: annual turnover of up to €12 million, a balance sheet total of up to €6 million, or 50 or fewer workers.
The directors should vote to enter the process on the advice of an insolvency practitioner that their business has a reasonable prospect of survival.
Mr Van Dessel explained that this would eliminate the need to hire an independent expert and to go to court.
Once the process begins, he says that the company should simply notify the courts, and there should be an immediate moratorium on creditors taking any action against the entity.
He also argued against excluding some creditors from the process. The CLRG proposed excluding the Revenue, meaning that any debt due to it would have to be settled in full.
“They already have preferential status. They are already first in the queue for a lot of small businesses,” he said.
Mr Van Dessel said it would be unrealistic for a company to say it could not pay some creditors and then settle in full with others.
Any restructuring plan could be agreed by a straight majority of one class of creditors. The courts should only be involved in exceptional cases, according to Mr Van Dessel, with the directors and insolvency practitioner dealing directly with creditors.
In its submission to the CLRG, Deloitte argues that anything short of these proposals would leave the scheme open only to a small number of companies, missing the opportunity to save a larger number of viable enterprises.
Examinerships, which allow companies to seek court protection from creditors while an examiner puts together a rescue plan, only account for around 5 per cent of all insolvency cases in the Republic.