Facing Insolvency is a Traumatic Experience
How busy has restructuring activity been for your firm?
We have been busy with insolvencyrelated matters. The hospitality and licensed trade in particular has been very challenging. Clients in this sector have found the cost of living has reduced discretionary spending, and remote working has certainly reduced footfall, so turnover is down. Margins are squeezed by higher energy costs, the increase in the VAT rate and the increase in the minimum wage.
Which sectors are most under pressure?
Clients facing difficulties and challenges are mainly concentrated in the hospitality and licensed trade. Construction is difficult too. Rising costs are the main concern, and another issue is difficulty attracting labour. The cost and shortage of accommodation is a major issue for firms trying to attract staff.
The other main issue is rising interest rates. We have clients who had to restructure loans with various credit providers arising out of the financial crash. While a restructure at the time saved those businesses, the interest rates are now simply not affordable.
We have managed to assist many of these clients to refinance again with the pillar banks at significantly reduced rates and very attractive three-year fixed rates in some cases. Assisting clients prepare and agree a phased payment arrangement with Revenue in respect of warehoused tax liabilities is the other area that has kept us busy.
What’s your view on the Small Company Administrative Rescue Process (Scarp)?
While Scarp is an attractive restructuring mechanism, depending on a company’s particular circumstances, the uptake to date has probably been lower than expected.
Like any restructuring tool, it requires new capital to formulate a scheme. I think the Revenue debt warehouse has played a part in the low uptake to date.
There may well be an increase in Scarp cases over the coming months for companies that have been unable to agree a PPA with Revenue for their warehoused tax liabilities.
What has been your experience of dealing with Revenue over PPAs?
We certainly had a few skirmishes but, to be fair, Revenue were more than willing to give flexibility and consideration in all cases. There was a clear willingness to facilitate taxpayers who engaged with the process honestly and transparently. Obviously, Revenue requires sensible proposals underpinned by realistic projections and cash flows.
Taxpayers will need to keep their current taxes filed and paid up to date to retain their agreed warehouse facility. Taxpayers in the warehouse will have to remain profitable, and therefore, lossmaking businesses will be the first casualties.
As well as keeping current taxes paid, a taxpayer with €100,000 in the warehouse over 60 months clearly needs an extra €1,700 per month or €20,000 per year to stay afloat. This will be the challenge. I think this was recognised by the government a few months back.
To levy interest on the warehoused debts would likely be counterproductive and perhaps even crash the scheme.
There will be a surge in insolvencies for taxpayers who have failed to agree to a PPA. These taxpayers could account for some €500m of taxes. Time will tell the success or folly of the scheme.
What holds back company directors from facing into corporate restructuring with advisers?
For the vast majority of directors, facing insolvency is a traumatic experience. The majority are hardworking, honest, industrious risktakers, who fall foul of the many difficulties and uncertainties in a complex, risky, competitive, and everchanging world of commerce.
I have seen cases where directors have remortgaged their homes and risked whatever savings they may have to try and save a failing business. By nature they are optimists, otherwise they would never have set up their businesses.
Businesses can make losses and survive for a time. However, they can only run out of cash once. Directors are now legally obliged to take particular care when their companies are facing insolvency. It is imperative that they engage early with suppliers, Revenue and employees and face up to the warning signs. There are possible solutions provided action is taken early.
Restructuring mechanisms like examinership are comparatively expensive for small owner-managed companies. Even Circuit Court examinership is an expensive process. For many financially distressed small companies, the only insolvency solution is liquidation.