Ireland needs to tackle ‘zombie’ companies, says leading law firm

‘Awful lot of businesses with a broken balance sheets,’ says McCann Fitzgerald

Ireland needs to sort out a group of zombie companies that have survived on Government support during the pandemic, leading law firm McCann Fitzgerald says. And other "viable but broken" businesses that have built up debt through forbearance need to act now to protect their operations.

David O'Dea, a restructuring and insolvency partner at the Big Five law firm McCann Fitzgerald, says insolvency business in Ireland will return to normal levels after two years when company failure numbers fall back to the easy-credit Celtic Tiger era.

“Companies have been living in suspended animation over the past two years, if I’m honest,” Mr O’Dea said. “But now support arrangements are being pulled back, and creditors are looking at the situation where trading is returning to pre-pandemic levels. Forbearance arrangements with banks, landlords, creditors and the Revenue have to run out at some stage: the money has to be paid back.”

The issue of zombie companies is fairly straightforward, he said. They won’t survive and just need to be wound down.

“It is artificial: it doesn’t make sense at the moment. I think we will get back to 2018/19 levels of insolvencies, but there will be an onslaught.

“I couldn’t put a figure on it but you would have to suspect that, of the 4,500 business saved [by Covid supports], there are a fair chunk of those that fall into the first bucket – zombie companies. And out of the remaining batch, there are going to be ones that fail. But there are viable businesses there that can be saved.

Soaring inflation

“There are an awful lot of businesses with a broken balance sheet. It needs to be repaired because you need a healthy balance sheet to raise new debt, to grow, expand and to avoid the insolvency zone.”

He acknowledged that soaring inflation and energy costs are putting huge pressure on Irish businesses just as they are getting back on their feet and trying to organise repayment of debt built up over the Covid pandemic.

The issue is particularly acute for businesses in sectors worst hit by Covid – tourism and hospitality, aviation, live events and retail. But he also sees problems looming for manufacturers, many of which will have weathered Covid comfortably.

Supply chain issues have been exacerbated by the current zero-Covid strategy in Asia from which, he says, we still import significant amount of material.

He urges companies not to fear formal restructuring arrangements such as examinership which, he says, gives any viable business “a new lease of life”.

“You can cram down debt, you can terminate contracts, and you can start day one afresh then if you get the investment you need through the process.”

For the industry, he says, international cross-border work has filled the void left by the dearth of domestic restructuring. Ireland, he says, has become a jurisdiction of choice for cross-border work since Brexit, citing the restructuring of Norwegian Air – in which McCann Fitzgerald was involved – as well as pharma firm Mallinckrodt and US oil and gas services group Weatherford.