Company law change could throw struggling firms a lifeline
IT HAS been an unfortunate fact in Ireland over the last two years that companies across nearly all sectors have struggled to stay alive, and many have gone out of business at a huge cost both to the owners and to their employees.
In the good times, many businesses could thrive despite weaknesses in their business plans or underlying finances. Now, the downturn is exposing any problems a company may have. Many business owners are confronted with a failing business and may lack the necessary skills to get their company back into profit.
It is into this environment that that it is proposed to open an Irish Chapter of the Turnaround Management Association (TMA) .
The TMA is a professional community dedicated to corporate renewal and turnaround management for failing companies.
It has 46 chapters or affiliates worldwide and some 9,500 members. There is a chapter in the UK, but none so far in Ireland.
The TMA uses the expertise of people across a wide spectrum, from bankers and barristers, to academics and liquidators. It aims to create a new advisory community alongside traditional insolvency practitioners, which may mean the arrival of an Irish chapter may not be to everyone's liking.
The idea is being promoted by management consultancy Catalyst Management Partners (CMP) and solicitors Lavery Kirby Gilmartin solicitors. They say there is a need to develop a new professional community to provide advice to businesses needing assistance, as well as to professionals specialising in corporate renewal.
Christiane Hutchinson, managing director of CMP, believes an Irish TMA will be invaluable to companies here and has called on the government to amend company law to allow struggling small businesses more breathing space from creditors and a chance to turnaround their business.
"Irish law is very strict on insolvency. If you cannot pay your debts on time then you are under a legal obligation to liquidate your firm, otherwise you become personally liable."
At the moment there are few provisions in Irish law that allow a company to get protection from its creditors while it undergoes an internal restructuring.
CMP say that in many cases viable businesses can get into difficulty due to short term cash flow issues rather than because of a catastrophic failure of the business.
The laws on examinership do allow this protection but in practice that can be an expensive process. It goes through the High Court with significant amounts of court involvement which inevitably leads to substantial legal costs.
This is a road that few small businesses can afford to go down. CMP and Lavery Kirby Gilmartin would like to see the law amended to give greater scope for internal restructuring of businesses.
In January they submitted a proposed amendment to company law that would allow for a Company Voluntary Arrangement (CVA) or a form of light examinership, similar to what already exists in the UK.
At the moment, small firms are truly at the mercy of their creditors. A relatively small creditor can veto a rescue plan for a company if it is not satisfied with receiving, say 60c in the euro of what it is owed.
Under a CVA, a company could receive temporary protection from creditors and restructure its debts and business. Crucially, the CVA as proposed would force minority creditors to accept the restructuring terms if three quarters of those who are owed by the business are satisfied with the deal. It would also cost a fraction of a conventional examinership hearing, which can run to hundreds of thousands of euro.
"Light examinership could be an option for smaller firms. Their difficulty is the expense incurred of going through a full legal process. We feel that some sort of cut off, perhaps €5m, could apply to businesses," says Ms. Hutchinson.
If a light examinership option was introduced, especially for small business, then a restructuring, or turnaround process, would follow once the courts had accepted an application from the business. It is here, that the Irish chapter of the TMA would step in.
"We see the TMA as being a vehicle for this type of work, which is quite different from insolvency. It is not just about the law, but about turning companies around. Setting up an Irish TMA will allow us to tap into that international experience of the other chapters," says Ms. Hutchinson.
It is difficult to argue against her logic. With the economy still shedding jobs and unemployment hovering in the low teens, the Government should be encouraging as many businesses to restructure and recover, rather than shut down and add to the queues at dole offices around the country.
A form of light examinership and a TMA could benefit small businesses, even when economic data tells us the country is returning to growth.
"Past experience shows that bankruptcies peak in the recovery phase after a downturn. I worry that this will happen if we don't prepare now.
"We are a small country and every business matters. To be honest it's already a bit late," Ms Hutchinson says.
Already a bit late, but better late than never. Last year nearly 1,600 firms went into liquidation, examinership or receivership. In May three companies went bust every day in an indication that the pace of collapse was showing little signs of slowing down.
"The current legislative framework is not satisfactory for the economic conditions that are now faced," says CMP. "An alternative method has to be agreed."