Here, we hear from Dillon Eustace partner, Jamie Ensor on the finer points of turnaround and restructuring in Ireland. What might a company’s options for recovery be, and how can they strive to achieve the best possible outcome?
For those who do not know, would you please mind explaining the difference between turnaround, restructuring, and insolvency?
Turnaround is the term most commonly used to describe the recovery and reorganisation of a company that has been performing poorly without necessarily having become insolvent. Turnaround is usually achieved through the implementation of action plans involving measures like, for example: cost-cutting plans, renegotiating loan facilities, management change and re-focusing the business.
Restructuring is the term typically used to describe a company that is insolvent or facing impending insolvency that restructures its debt, whether that is done on a consensual basis or through one of the three statutory restructuring processes available in Ireland. They are; examinership, schemes of arrangement and the restructuring process for small and micro companies (known as ‘SCARP’). Schemes of arrangement can however be used to restructure a company without the requirement for it to necessarily be insolvent.
Corporate insolvency is a state of financial difficulty in which a company is not in a position to pay its debts as they fall due (the ‘cash-flow’ test). The question of whether a company’s total liabilities are greater than its total assets is also to be considered (the ‘balance sheet’ test). The Irish courts have not favoured either the cash-flow test or the balance sheet test, nor have they adopted a position as to the appropriateness of one test over another or the application of an amalgam of them. The courts have generally taken a global view of the company’s finances, using both tests in order to ascertain whether a company has reached the point of no return.
Turnaround is usually achieved through the implementation of action plans involving measures like, for example: cost-cutting plans, renegotiating loan facilities, management change and re-focusing the business.
What factors often see turnarounds fail?
There can be any number of reasons why turnarounds fail. Broadly speaking the causes arise from either a failure to identify the right changes to be made or a failure to fully or correctly implement the changes needed. Other reasons turnarounds fail can include, for example; poor communication with stakeholders such as employees or customers, a lack of buy-in or resistance to change from management or an under-provision of the funding or capital requirements needed to properly implement the turnaround.
What legal proceedings can be taken against a company in insolvency?
The legal proceedings that can be taken against a company in insolvency 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, may have taken the view that it is terminally insolvent and placed itself into liquidation, or it may have sought to avail of one of the statutory restructuring processes referred to above.
If the company has done nothing, a creditor of that company may petition the court to have the company placed into liquidation and have the court appoint a liquidator to realise the assets of the company to be distributed to pay down its creditors in accordance with the order of priorities under Irish law. Once a company is placed into liquidation, whether it be on a voluntary basis or on foot of a court order, no legal proceedings may be started or proceeded with unless with the permission of the court.
If the company is in one of the three statutory restructuring processes, then the following will apply:
Examinership: There is an automatic stay on the issuing of legal proceedings against the company. For legal proceedings already commenced, the insolvency practitioner (called the examiner) may apply to the court to have them stayed.
Schemes of arrangement: There is no automatic stay on legal proceedings. However, during the process, the company can bring an application to the court for a stay on court proceedings or prevent new proceedings from being issued. Not all creditor enforcement, such as the appointment of a receiver, can be stayed.
SCARP: There is no automatic stay on legal proceedings. However, during the process, the company, its directors, or the appointed insolvency practitioner (who is called the process advisor) can bring an application to the court for a stay on court proceedings or to restrain new proceedings on such terms as the court may deem just and equitable.
There can be any number of reasons why turnarounds fail. Broadly speaking the causes arise from either a failure to identify the right changes to be made or a failure to fully or correctly implement the changes needed.
How do you help your insolvency clients achieve the best outcome?
In the first instance it is important to understand your client’s business and to get an accurate picture of the reasons why the business is insolvent as quickly as possible. Early intervention can be critical in allowing clients make fully informed decisions with the benefit of as much information and options available to them as possible. The longer clients leave it to speak to advisors with experience in the area, the more likely it is that the business may have reached the point of no return such that restructuring may no longer be an option.
If a client is a viable candidate for restructuring, then often times your role is to bring the client through the process, which in most instances will be an entirely new and often stressful experience. In other cases the unfortunate reality is that the business is terminally insolvent and the only option is that it be placed into liquidation. In those circumstances you help your clients by being honest but empathetic.
What parts of your job do you find the most challenging? What parts do you find the most rewarding?
Managing the expectations of clients in financial difficulty can be challenging. Unfortunately not all insolvent clients are viable candidates for rescue. Similarly, even for those that may be suitable candidates, sometimes the required level of investment or creditor support cannot be achieved. Particularly in the case of established family-run or -owned businesses, it can be difficult to see a business close and the effect that can have on clients personally.
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Advising clients on the successful restructure or turnaround of a business that otherwise would have had to close is always very rewarding. It is rewarding to deliver a successful outcome to those at executive level with whom you have been working so closely. It is also very satisfying to consider that the successful restructure of a business will usually save jobs and the resulting positive knock-on effect that will have on the employees’ livelihoods and the welfare 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
E: jamie.ensor@dilloneustace.ie
Jamie Ensor is a partner at Dillon Eustace and head of its Restructuring and Insolvency team. He regularly provides advice to insolvency practitioners, secured and unsecured creditors, companies, shareholders and directors in all aspects of restructuring and insolvency, and also boasts extensive experience in representing domestic and foreign banks – as well as non-bank lenders – on security enforcement and distressed asset recovery actions. He also lectures on restructuring on the Law Society of Ireland’s Professional Practice courses.
Dillon Eustace is a leading Irish law firm. Its focus is on asset management and investment funds, banking and capital markets, corporate and M&A matters, and a range of other services. The firm is based in Dublin, with further offices in Tokyo, New York and the Cayman Islands. Its team provides expert legal advice on a range of industries, enabling Ireland’s development as a leading global financial services centre.
