Examinership changes make it a more likely option for hotels in 2016
Much like every other business sector in Ireland, hotels have been badly scarred by the economic recession which hit this country in 2008. In fact, it is probably fair to say that the hotel sector has been hit even harder than other business sectors. This can be evidenced by the fact that approximately 140 of the 811 hotels in Ireland have been placed in receivership since 2008, representing 17pc of all hotels in Ireland. In the period 2008-2014 only 15 have gone into examinership. In the overall context, this represents under 2pc of all hotels.
There are a number of reasons why examinerships have not been used as widely to restructure ailing hotel businesses.
First, banks to date have preferred receiverships as they felt they were more in control and through personal guarantees they could influence the director of the business. Second, banks offered interest only arrangements which allowed these companies survive on extended creditor terms from the bank and other creditors. A third element was the relative lack of new equity available (a pre-requisite to securing approval for an examinership) that would be required to re-launch the business and pay a dividend to creditors. Finally, the expense associated with the examinership process was almost cost prohibitive by financial institutions.
A procedure unique to Ireland, examinership is a rescue process designed to help any struggling trading company to recover from insolvency. It involves the appointment of "Examiner" by the Circuit Court or High Court (depending on the size of the company) to guide the company through a breathing-space restructuring period of up to 100 days. The process usually results in creditor balances being reduced, while assets of the company are protected and investment is obtained to fund the examinership workout plan. The Companies Act 2014 has made changes to the existing process so that there is scope for it to be supervised by the Circuit Court, thus reducing the formality and costs associated with the process and making this a more attractive option.
For the five hotels that went through the examinership process last year, the companies in question were either under threat of the appointment of an receiver or had a receiver appointed. The appointment of an examiner could therefore be seen as a reactionary response rather than a planned strategy. All of these five hotels have ultimately successfully exited the examinership process and continue to trade today with the jobs and the business saved.
An important note to bear in mind when looking at these five hotels is the fact that in a number of cases, the control of the hotel was lost by the previous shareholders and directors. Mount Wolseley Hotel in Carlow went to Brehon Capital who purchased the hotel during the examinership. In the Killashee House Hotel was acquired again by Brehon Capital and Lawlors Hotel was purchased by a consortium assembled by ex-Irish international Niall Quinn.
In the case of the Waterside House Hotel in Donabate and the Station House Hotel in Co Meath, both owned by Ebonwood Limited, the appointment of a receiver was successfully overturned as a result of an examinership application. In this instance the family refinanced the bank loan and took control of the company.
With the changed financial, economic and legislative context, the fundamentals that now support the use of examinership to repair and restructure over indebted hotels are threefold. The first key element is the business case and profitability with returns across the sector increasing making fresh equity investment to fund the examinership more readily available. Legislative changes too have played a role. Recent amendments regarding the obligation to pay all property rates arrears and the more aggressive approach by local authorities in dealing with rates arrears will lead hotels to seek a permanent solution to a write down of legacy amounts which is only achievable from a court sanctioned process such as examinership. The final part of the jigsaw is grounded on hotels needing to remain tax compliant and hold a valid tax clearance certificate in order to renew their liquor licence. Hotels often fell into arrears of VAT and PAYE and put payment plans with the Revenue in place which may have stretched for up to three years as hotels struggled to survive the recession. Revenue can write off unpaid taxes as part of an examinership process.
The change in legislation around the Examinership process and the general improvement in hotel performance means hotels should consider this as a workable option for dealing with their company's legacy indebtedness and by taking a planned and organised approach whereby the required new equity is in place at the outset it should lead to a more positive outcome for hotel owners looking to restructure and stabilise their business.
There are many regional hotels who have survived the recession and where profits are improving but which still need to repair their over indebted balance sheet. The examinership process may now offer a viable solution and one we believe will be a key trend in the next 18 months.
Aiden Murphy is a partner in Crowe Horwath's Hotel, Tourism and Leisure practice group and author of the firm's annual Ireland Hotel Industry Survey