SME Restructuring - sfa.iefile/SME+Restructuring.pdf · Business Reviews Consensual Restructuring...

2014

www.pwc.ie/corporate-recovery-and-insolvency

SME RestructuringA formula for growth

SME Restructuring - A formula for growth2 SME Restructuring - A formula for growth 3

PwC Ireland helps organisations and individuals create the value they’re looking for. We’re a member of the PwC network of firms in 158 countries with close to 169,000 people. We’re committed to delivering quality in advisory, assurance and tax services. Tell us what matters to you and find out more by visiting us at www.pwc.com/ie

Contents

Welcome 5

What is examinership? 6

Take a closer look 8

Why examinership? 9

Case studies 10

Suitability Check 11

FAQ 12

How can we help? 16

Your local office 17


Did you know?

Welcome

Examinership accounted for less than 2% of all formal insolvency processes in Ireland in the last 4 years.

This compares unfavourably with company rescue mechanisms available in other territories such as the UK and US.

Underutilised

Used by less than 2% of Irish companies entering an insolvency process compared to 15% and 20% in the UK and US respectively.

Small and medium sized businesses make up over 99% of enterprises in Ireland and account for almost 70% of people employed in the State. Despite Ireland’s reputation as one of the world’s most globalised economies, 60% of private sector workers are employed by indigenous, non-exporting SMEs.

These numbers highlight the importance of domestic demand for sustaining and generating employment in the SME sector.

The government recently announced the fast-tracking of long-awaited legislation allowing firms looking for court protection, via the examinership process, to apply through the Circuit Court rather than the High Court.

The new legislation is aimed at offering a route out of difficulties for SMEs who, despite having high growth and job creation potential, are constrained by legacy debt or property related problems.

This publication is designed to outline the examinership process, particularly for SMEs given the recent legislative changes. Its purpose is to introduce you to the potential benefits examinership can bring in restructuring your business.

Over of Companies entering examinership in the last two years successfully restructured their debt

Declan McDonaldPartner, Restructuring & Insolvency

Contact: +353 1 792 6092 [email protected]

% of Examinerships in formal insolvency processes

70%


What is Examinership?Overview

What is Examinership?Recent changes for SMEs

Process

• Restructure debts of a Company

• Deal with onerous contracts and leases entered into by the Company

• Protect future prospects and viability

• Protect employment

• Critical for a successful outcome

• Can come from external or internal sources

• Important to identify potential investors and investment requirements in advance

• Dividends – Payments required to fund the scheme with creditors

• Professional Fees – Examiner and legal fees, often funded by new investment in the Company

• Fail to secure investment

• Dispute over valuation of security

• Unsuccessful exit may lead to receivership or liquidation

• Court Protection for a maximum period of 100 days

• Creditors unable to take legal action against Company during protection period

• Provides a window to secure investment and agree a scheme with existing creditors

• Directors retain day to day control of business during period of court protection

• Examiner sources investor to fund a Scheme of Arrangement with creditors to facilitate the survival of the Company

• Circuit Court applications for “Small Companies”

• The result of applying to the Circuit Court is reduced legal and professional costs for the applicant Company

• Introduced in the Companies (Miscellaneous Provisions) Act 2013. Signed in to law on 24 December 2013

• Must satisfy any 2 of the following criteria to be considered a “Small Company”

• New legislation will finally open up Examinership as a viable restructuring solution to smaller companies where liquidation may otherwise be inevitable

Investment

ProcessPurpose

Cost Risks

Who Does What?

• Balance Sheet <€4.4m (a given if insolvent)

• Turnover < €8.8m

• Less than 50 employees

Examinership Lite

- BlueBay Ireland €450m

- Carlyle Cardinal €350m

- Better Capital Ireland €100m

- Total €900m

NPRF SME Funds

Irish Government Action Plan for Jobs

- Unlock growth potential in SMEs

- Create mechanism to resolve legacy debt problems faced by SMEs

- Save jobs in SMEs

- Reduce costs associated with an application for examinership

“New Legislation is aimed at reducing the costs associated with an application for examinership and enabling increased numbers of businesses – in particular SMEs – to apply for examinership as a route out of difficulties”

Minister Richard Bruton TD; October 2013


VA

LUE

TIME/CONTROL

Independent Business Reviews

Consensual Restructuring

Corporate InsolvencyExaminership

Business Decline

Corporate Insolvency Receivership

Corporate Insolvency Liquidation

Property Decline

Take a closer look

2,400 Est. SME jobs

saved in last 3 years

850975

575

65%

of Examinerships in last 2 years would qualify under new legislation

LARGE CO.

MEDIUM CO.

SMALL CO.

65%

13%22%

17

98

8

5

32

11

2012 & 2013Examinerships by Industry

Why Examinership? Early intervention is key

• It is Ireland’s only formal insolvency option available for restructuring all of a Company’s debts.

• It had a 70% success rate in the last 2 years.

• The examinership process has helped save almost 12,000 jobs in the last 3 years 2,400 of which were in SMEs.

• It provides a mechanism for restructuring onerous contractual arrangements, including leases.

• It can help restructure debts to a sustainable level going forward.

• It provides a better outcome for creditors than the usual alternative – liquidation.

• Early intervention is key to maximise potential for a successful exit from examinership

Examinerships - top 5 counties in the last 2 years

28 Dublin

4 Galway

4 Waterford

5 Kildare

3 Wexford


Some of our recent casesCase Studies / Success Stories

Is your company suitable for Examinership?

“Today’s encouraging plan is a great relief…we look confidently forward to a sustainable future. We are more committed than ever to our operations in Ireland, and our loyal customers and employees”

Brian Mooney, CEO.

Owner Geert Hof thanked McDonald and his company PwC. He also paid tribute to the staff and suppliers at McSweeney for their “continued support and tremendous efforts” during the process.

“This agreement and court approval will enable Monsoon to move ahead on a sound footing and continue to serve its customers in Ireland for many years to come...this plan is the best possible outcome to secure the future of the business”

Gail Ford-Hills, Retail Director

PwC appointed Examiner


B & Q Ireland

Monsoon Accessorize

640Jobs

Saved


McSweeney Pharmacy Group

95Jobs

Saved

200Jobs

Saved

• Reduced Customer Demand - Sales down >25%

• Difficult trading environment

• Margin Reductions

• Certain loss making stores

• Upward only leases

• Unsustainable rents

• Closure of several stores expected

• Excessive staffing levels

• Future viability of Company restored

• Investment received

• Some stores planned for closure saved

• Overall liabilities reduced

• Cost reduction plan implemented

Common Issues Faced

Other PwC Examinerships include; Atlantic Homecare, Bestseller Retail and Fate Park Group

Successful Outcome

Is the company insolvent? (different tests available – see page 12)

Does the company have a reasonable prospect of survival if certain conditions are met?

Does the company have sufficient cashflow for the examinership period?

Does the company have the support of key stakeholders? (secured creditor, customers, employees, key suppliers)

Is new investment likely to be available?

Are “Small Company” eligibility requirements satisfied? (see page 7)

Your six point checklist

1

2

3

4

5

6


Examinership FAQsBusiness Owner Perspective

Examinership FAQsBusiness Owner Perspective (continued)

What does “insolvent” mean?

This is taken to mean that the company is unable to pay its debts or is likely to be unable to pay its debts. A number of tests can be performed to establish this -

• the company is unable to pay its debts as they fall due, or

• the value of the company’s assets is less than the value of its liabilities (incl. contingent liabilities), or

• a demand pursuant to s.214 of the Companies Act, 1963 remains unsatisfied 21 days after service

What are the formal steps for a company to enter examinership?

• An Independent Accountant’s Report must first be commissioned. This will usually take a number of days to weeks to complete depending on the complexity of the business and the quality of the company’s financial information.

• A petition is presented in the Central Office of the relevant Court and, provided the Court registrar is satisfied that the Petition is in order, he will appoint the return date for the hearing of the Petition.

• Court protection is automatic from the time of the filing of the Petition.

• There are various parties who may present a petition for examinership – these include the company itself, the directors of the company and a creditor of the company.

What are the key stages of the examinership process?

These include the following –

Lodge Petition and subsequent Hearing - this is the hearing at which the Court will determine if it will permit a company to enter examinership. The Court must be satisfied that the company and the whole or any part of its undertaking must have a reasonable prospect of survival as a going concern.

Interim Report – after an initial 35 days, the Examiner advises the Court of the progress of the examinership and the prospects of investment in the company being sourced.

Creditor Meetings – in circumstances where the Examiner has sourced investment he will formulate a scheme of arrangement, send it to creditors and hold creditors meeting. The scheme of arrangement will be voted on by creditors.

Confirmation Hearing – provided at least one class of impaired creditors votes in favour of the scheme, the Examiner will seek Court approval of the scheme at a Section 24 Hearing.

What does the Independent Accountant do?

• The Independent Accountant’s report is a key document for the Court in forming a view as to whether the company and the whole or any part of its undertaking has a reasonable prospect of survival as a going concern.

• It is imperative that the Independent Accountant conducts a thorough review of the company’s business and satisfies himself as to the matters that are included in his report.

• The Independent Accountant will opine as to whether the company or any part of its undertaking would have a reasonable prospect of survival as a going concern and the conditions which he considers are essential to ensure such survival.

Will I, as the existing business owner, lose control of my business?

No, not necessarily. This will depend on the individual circumstances of each case. In most successful examinerships the pre-existing shareholders retain full or partial control of the business post examinership.

How are employees dealt with?

This will depend on whether the examinership is successful. The main objective of the legislation is to save jobs.

What are the main risks of examinership?

• The key risk is that the company will not exit examinership successfully and subsequently enter liquidation or receivership.

• It is essential that the company has considered its investment requirements for a scheme of arrangement prior to entering examinership. The scheme of arrangement must provide for a better outcome for creditors that the alternative scenario i.e. liquidation, receivership.

• Another risk is that the company may run out of cash during the examinership. It is essential that the company has sufficient cashflow to continue to trade during the examinership process. (See checklist Page 11).

What is the impact on customers?

• In our experience there is little or no impact on the day to day trading of an SME or Fast Moving Consumer Goods business when it enters examinership.

How does the company exit examinership?

• The Examiner must source sufficient investment monies to fund a scheme of arrangement for creditors.

• The scheme of arrangement must be approved by one class of impaired creditor and the Court.

• The company then exits examinership, creditors are paid their dividend entitlement under the scheme of arrangement, the company’s debts reduce and the company continues to trade.


Examinership FAQsCreditors Perspective

Examinership FAQsAdvisor & Investment Perspective

What is the effect of Court protection?

The company is under the protection of the Court and creditors of the company are unable to take action against the company. These creditors include, for example, secured creditors, trade creditors, landlord creditors.

How will suppliers react?

Certain creditors may react badly to the news of an examiner’s appointment. It is common for disgruntled creditors with claims for retention of title to move to repossess their property. The company resists these claims with the protection afforded by the Court, thus forming a sound platform for the company to continue to trade and for the examiner to attract investment to provide for the survival of the company. In practice, suppliers often continue supply on a cash or reduced credit basis.

Contracts & Leases

• The Act permits the company itself, with the Court’s approval, to repudiate (or affirm) any contract where the Examiner is to formulate proposals for a compromise or Scheme of Arrangement.

• The Court has held that leases are contracts that are capable of being repudiated.

• In practice, this improves the bargaining position of a company in examinership, as tenant, to restructure onerous leases with landlords.

I have personally guaranteed the company’s debts. How are personal guarantees dealt with?

• Not only is a company protected from its creditors while it is in Examinership, but any third party who is liable in respect of a debt owed by a company in examinership to a creditor, “whether under a guarantee or otherwise” is also protected, and no steps may be taken to enforce against the third party for so long as the company is under the protection of the court.

• The liability of the guarantor shall however not be affected or reduced by the write down of the company’s liabilities under a scheme of arrangement.

• Particular attention must be paid when acting for a creditor of a company in examinership who has the benefit of a third party guarantee to ensure that the benefit of the guarantee is preserved during the examinership.

Some suppliers have provided goods under retention of title clauses. What happens such goods?

With regard to retention of title goods, the law specifically provides that such goods cannot be re-possessed by the supplier without the consent of the Examiner.

In practice, the Independent Accountant’s Report (a necessary proof for a company to enter into examinership) may deem the use of the goods subject to retention of title as necessary for the survival of the company as a going concern and, in this instance, the goods are paid for as used.

How are secured creditors dealt with?

With investment, their debts cannot be written down below the value of their security.

In practice, it will be difficult for a company to exit examinership successfully without the support of its secured creditor(s).

What are the costs of examinership?

These will vary depending on the complexity and duration of each examinership.

The table below outlines the usual costs incurred in a successful examinership.

Any investment requirement will consist of the dividends payable under a scheme of arrangement and the professional costs associated with the Examinership process.

What investment opportunities exist?

There are specific funds which were recently established to provide investment in SMEs. Examples include the NPRF SME Equity and Turnaround Funds (see page 7), and the MML Growth Capital Partners fund. These funds currently amount to c. €900m.

The Examiner will actively seek investment through media and other outlets.

Interested parties will be assessed and screened and have to sign

non-disclosure agreements before company particulars are released. The Examiner is then responsible for identifying a preferred investor to fund a scheme of arrangement.

How is my shareholding diluted if external funding is sourced?

Generally, the new investor will negotiate with the existing shareholder and any dilution will depend on the circumstances of each individual case and the requirements of the new investor.

Can the company’s accountant or advisor prepare the Independent Accountant’s Report?

Yes. It is common practice for the company’s auditor or advisor to prepare the Independent Accountant’s Report.

What work is involved for the Company advisor / accountant (pre, during and after examinership)

In addition to the IAR, the company’s accountant may be involved in advising the company’s management or shareholders during the examinership.

There may also be accounting, tax and other post-implementation requirements arising out of a successful exit from examinership.

In practice, the company’s accountant plays an important role during the process and works closely with management before, during and after the examinership.

• Working Capital

• Cost of Dividend Payments

• Independent Accountant

• Examiner

• Examiner's solicitor

• Company's solicitor

• Property/specialist valuer

Investment (Exit)

Total Cost of Examinership / Investment Required

Professional (Entry)


How can PwC help you?

Your local office...

How can we help?

• We are local to your business. Regional presence across 7 office locations.

• Free initial consultation with Directors and/or Advisors

• Initial assessment of suitability for examinership.

• Preparation or advice on Independent Accountant’s Report and other pre-petition requirements.

• Available to act as Examiner.

• Confidentiality / Discretion guaranteed.

• Impartial / Independent advice.

Why PwC?

• Proven experience and demonstrable track record in examinerships.

• Dedicated SME examinership team and multi-disciplinary wider team – restructuring, tax and corporate finance.

• Access to SME funding vehicles and new markets.

• Expertise across all key SME industries.

Declan McDonald

Partner, Insolvency & Restructuring (01) 792 6092 [email protected]

Ken Tyrrell

Director Insolvency & Restructuring (01) 792 5184 [email protected]

Michael O’Regan

Director (Regions) Insolvency & Restructuring (021) 425 4089 (061) 212 361 [email protected]

Galway

Limerick

Dublin

Kilkenny

WexfordWaterford

Cork

PwC Office Locations

Dublin

Regions

SME Restructuring - A formula for growth20

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.© 2014 PricewaterhouseCoopers. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. 04984

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