Survival of many Covid-hit small businesses rests on new legal framework

Many endangered firms will not be able to afford going down the examinership path

A mural at the Science Gallery in Dublin city centre. Photograph: Gareth Chaney/Collins

A mural at the Science Gallery in Dublin city centre. Photograph: Gareth Chaney/Collins

 

We are only just getting a handle on the likely cost of the Covid-19 crisis to businesses and workers. Last week the Central Bank of Ireland predicted that 100,000 of the 450,000 left out of work by Covid-19 lockdown restrictions would permanently lose their jobs.

Given that most people in the Republic work for small and medium-sized businesses, it’s a fair guess that the majority of those left unemployed as the crisis recedes will be former staff of companies that fall into those categories.

It makes sense, then, that our insolvency architecture includes a cheap, tailored regime for these businesses, which could not afford the expense of an examinership.

The Company Law Reform Group (CLRG) last year proposed what it called a “Summary Rescue Process”, which largely dispenses with the need for expensive court appearances, expert reports and batteries of lawyers.

Instead directors can vote to enter the process, on the advice of an insolvency practitioner that the company can reasonably survive. They then continue to run the business, hold talks with creditors and ultimately work out a restructuring plan. In common with examinership, once a business enters this process, creditors cannot take action against it while it continues.

For the purposes of the new law, the CLRG says that to qualify as small, businesses must meet two of three requirements: a yearly turnover of €12 million, total balance sheet of €6 million or 50 or fewer workers.

In one way the most important requirement of all is that the company have a “reasonable prospect of survival”. That could be easy to determine in some cases. But in many others, it could depend on how much leeway creditors are prepared to give the company.

In some ways that is what the proposed system is about: allowing creditors and debtors to find some common ground. Essentially it puts a framework on what a lot of organisations will have to do as the Covid crisis fizzles out: sit down with creditors, agree that everyone takes some pain, work out how this burden is shared, and then get on with their respective businesses.

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