The basics of turnaround and restructuring in Ireland
Here we hear from Dillon Eustace partner Jamie Ensor on the intricacies of turnaround and restructuring in Ireland. What might be the options for taking over a business and how can they strive for the best possible outcome?
For those who don’t know, could you please explain the difference between turnaround, restructuring and insolvency?
Turnaround is the term most commonly used to describe the turnaround and reorganization of a company that has performed poorly without necessarily having become insolvent. The turnaround generally involves the implementation of action plans involving measures such as, for example: cost reduction plans, renegotiation of credit facilities, change of management and refocusing of the activity.
Restructuring is the term generally used to describe an insolvent or threatened company that restructures its debt, whether this is done on a consensual basis or through one of the three statutory restructuring processes available in Ireland. They are; Review, Schemes of Arrangement and Restructuring Process for Small and Micro Enterprises (referred to as “SCARP”). Schemes of arrangement can, however, be used to restructure a business without it necessarily being insolvent.
Business insolvency is a state of financial difficulty in which a business is unable to pay its debts as they come due (cash-flow test). The question of whether a company’s total liabilities are greater than its total assets should also be considered (the “balance sheet” test). The Irish courts have not favored either the cash flow test or the balance sheet test, nor have they taken a position on the appropriateness of one test over another or on the application of an amalgamation of these criteria. Courts have generally taken a holistic view of corporate finances, using both tests to determine whether a company has reached the point of no return.
The turnaround generally involves the implementation of action plans involving measures such as, for example: cost reduction plans, renegotiation of credit facilities, change of management and refocusing of the activity.
What are the factors that often cause turnarounds to fail?
There can be a number of reasons why turnarounds fail. Generally speaking, the causes stem either from a failure to identify the right changes to make, or from a failure to fully or correctly implement the necessary changes. Other reasons turnarounds fail may include, for example; poor communication with stakeholders such as employees or customers, lack of management buy-in or resistance to change, or under-allocation of funding or capital requirements needed to properly implement the recovery.
What actions can be taken against a bankrupt company?
The legal actions that can be taken against a bankrupt company depend to a large extent on what action, if any, the company may have taken as a result of its insolvency. The company may have done nothing, considered itself permanently insolvent and put itself into liquidation, or sought to avail itself of one of the legal restructuring procedures mentioned above.
If the company has done nothing, a creditor of the latter may apply to the court for the liquidation of the company and have the court appoint a liquidator responsible for realizing the assets of the company to be distributed in order to satisfy its creditors in accordance to the priority order in Irish law. Once a company is put into liquidation, whether voluntarily or by court order, no legal proceedings can be initiated or continued without the permission of the court.
If the company is in one of the three statutory restructuring processes, then the following will apply:
Exam: There is an automatic stay of the issuance of a legal action against the company. For legal proceedings that have already started, the insolvency practitioner (called the examiner) can ask the court to stay them.
Layout plans: There is no automatic stay of legal proceedings. However, during the proceedings, the company may apply to the court for a stay of proceedings or prevent the opening of new proceedings. All enforcement actions by creditors, such as the appointment of a receiver, cannot be stayed.
ESCARPMENT: There is no automatic stay of legal proceedings. However, in the course of the proceedings, the company, its directors or the appointed insolvency practitioner (known as the procedural adviser) may ask the court to suspend the legal proceedings or to restrict further proceedings to such conditions as the court can decide. judge just and fair.
There can be a number of reasons why turnarounds fail. Generally speaking, the causes stem either from a failure to identify the right changes to make, or from a failure to fully or correctly implement the necessary changes.
How do you help your insolvency clients achieve the best outcome?
First, it’s important to understand your client’s business and get an accurate picture of why the business is insolvent as quickly as possible. Early intervention can be essential to enable clients to make fully informed decisions with the maximum information and options available to them. The more time clients leave to speak to advisors with experience in the area, the more likely it is that the company has reached the point of no return, so that restructuring is no longer an option.
If a client is a viable candidate for restructuring, your role is often to guide the client through the process, which in most cases will be an entirely new and often stressful experience. In other cases, the sad reality is that the business is terminally insolvent and the only option is for it to go into liquidation. In these circumstances, you help your customers by being honest but empathetic.
What parts of your job do you find the most difficult? Which parts do you find the most rewarding?
Managing the expectations of clients in financial difficulty can be difficult. Unfortunately, not all insolvent customers are viable bailout candidates. Similarly, even for those who may be suitable candidates, sometimes the required level of investment or creditor support cannot be achieved. Particularly in the case of established or family-owned family businesses, it can be difficult to watch a business close and the effect this may have on customers personally.
Advising clients on the successful restructuring or turnaround of a business that otherwise would have had to close is always very rewarding. It is rewarding to deliver a positive outcome to those at the leadership level with whom you have worked so closely. It is also very satisfying to consider that the successful restructuring of a company will generally save jobs and the resulting positive ripple effect on the livelihoods of employees and the well-being of their families.
Jamie Ensor, Partner
33 Sir John Rogerson’s Quay, Grand Canal Dock, Dublin 2, D02 XK09, Ireland
Tel: +353 1 673 1722
Email: jamie.[email protected]
Jaime Ensor is a partner at Dillon Eustace and head of its Restructuring and Insolvency team. He regularly advises insolvency practitioners, secured and unsecured creditors, companies, shareholders and directors in all aspects of restructuring and insolvency, and also has extensive experience representing domestic and foreign banks – as well as non-bank lenders – on the application of securities and actions for the recovery of distressed assets. He also lectures on restructuring for the Law Society of Ireland’s Professional Practice Courses.
Dillon Eustace is a leading Irish law firm. It focuses on asset management and investment funds, banking and capital markets, corporate and mergers and acquisitions matters, and a range of other services. The company is based in Dublin, with further offices in Tokyo, New York and the Cayman Islands. Its team provides expert legal advice across a range of industries, enabling Ireland’s development as a leading global financial services centre.