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Restructuring and Insolvency Legal Framework in Ireland

Ireland’s insolvency regime has a reputation for being creditor friendly. In the case of secured creditors, a receiver can be appointed without any procedures other than the execution of a deed of appointment once a right to appoint has arisen under the security. In the absence of a dispute, there is no court intervention at all in receivership.

Corporate restructuring and insolvency measures in Ireland are administered by a mixture of Statute law and precedent-based law. The main Statute is the Companies Act 2014.

European Union (Preventive Restructuring) Regulations 2022

Ireland implemented the European Union (Preventive Restructuring) Regulations 2022 on the 17th of July 2022. The Regulations set minimum rules for Member States to implement frameworks that aim to remove barriers to an effective preventive restructuring of viable debtors in financial difficulties across the EU. Ireland’s examinership framework was already regarded internationally as an example of best practice in preventive restructuring and already complied with the regulation in numerous respects.

A major change brought by the Regulations has amended the Companies Act 2014 to include additional Directors’ Duties:

  1. Early Warning System (EWS) – A company director should have an EWS to alert the company of a situation so that they can take steps to prevent or overcome insolvency.
  2. Director’s Duties to Creditors – A statutory basis will be included within the Companies Act where there is a duty to creditors in the period approaching insolvency.

What are the Rescue Procedures Available in Ireland for Restructuring a Distressed Company’s Liabilities?

There are three different types of formal rescue procedures available in Ireland:

  1. ARRANGEMENTS BINDING ON CREDITORS

This is a method for a company in financial distress to negotiate a legally binding agreement with its creditors to repay all or part of its debts over a set period.
The Companies Act 2014 has made this substantially less expensive and more flexible, making them a viable option for struggling businesses to consider. It can be done without going to court, although a disgruntled creditor can appeal to the courts within 21 days.

To avail of this procedure, the company must be about to wound up or in the course of being wound up.

The arrangements are normally led by the company, but they are usually prepared by an insolvency practitioner hired by the insolvent company, with the help of a legal counsel.

  1. EXAMINERSHIP

Examinership is a process in which the Circuit Court (or the High Court for major corporations) appoints an impartial person (the “Examiner”) to assist companies in financial distress. The objective of this process is to allow for a structured settlement with all creditors to avoid job losses and to allow enterprises with a potentially viable business model (but an unsustainable level of debt) to continue trading rather than going into liquidation.

Examinership begins with a petition to the court. The court must be satisfied that:

  • the company is insolvent or about to become insolvent,
  • No resolution or court order to wind up the company has been issued.
  • The company, including all or part of its undertaking, has a reasonable chance of surviving as a going concern.

The court cannot appoint an examiner if a receiver has been appointed for more than three days.

  1. SCHEMES OF ARRANGEMENT

This is a court-approved agreement between a company, its creditors, and or shareholders that can be used to affect a wide range of agreements, including solvent corporate reorganizations, mergers and de-mergers, and insolvent restructuring.

A company can commence a scheme of arrangement at any time, and it is not essential for the company to be insolvent to benefit from it.

Schemes must be approved by the court, which has complete discretion in this regard. Once a scheme is approved, it binds both assenting and dissenting creditors and can have several legal consequences, such as debt impairment and variation.

Informal Procedures

When fundamentally strong businesses face unanticipated difficulties, lenders’ temporary forbearance or change of terms has always been and continues to be the most widely employed strategy.

Following the financial crisis of 2008 in Ireland, appointing a receiver to realize secured assets became highly popular, particularly in situations where the value of much of the security had declined dramatically and was viewed as unlikely to recover in a reasonable time frame.

COVID-19, on the other hand, has significantly altered the situation, and many essentially sound companies have effectively been shut down for just over a year. a considerable number of such businesses have already benefited from landlord and bank forbearance, and we expect that once clarity on the timetable of a return to normalcy emerges, they will likely benefit from more organized informal restructuring.

Debt restructuring can be done informally by simple negotiation with one or two significant creditors, or by reaching an agreement with all creditors.

Small Companies Adinitrative Rescue Process (SCARP)

SCARP (Small Company Administrative Rescue Process) was signed into law on July 13th, 2021.

The purpose of the legislation is to create a specific rescue framework for small and micro businesses that is more cost-effective and can be completed in a shorter amount of time than examinership. Whilst Examinership is a flexible and well-travelled restructuring process for larger organizations, but it has been too expensive for many smaller businesses.

The bill aims to replicate aspects of examinership in an administrative setting, minimizing court oversight and resulting in increased efficiencies and reduced equivalent costs.

Who Qualifies for SCARP?

Small businesses that are unable or likely to be unable to pay their debts as they become due are eligible for SCARP. They must fulfil the following requirements:

  • 98% of Irish companies. SCARP is aimed at small and micro businesses, which make up 98 percent of all businesses in Ireland.
  • Companies with an average staff count of less than 50 people
  • The total amount on the balance sheet does not exceed €6 million.
  • The annual turnover is not more than €12 million.

The Process

  • A Statement of Affairs will be prepared by the directors in a defined format.
  • The process is overseen by an independent certified insolvency practitioner, known as the “Process Advisor,” who is responsible for putting up a rescue plan that creditors may agree on.
  • The Process Advisor will write a report on whether the company has a reasonable chance of surviving in their judgment.
  • Following the adoption of a resolution by the board of directors, the procedure will begin.
  • From start to finish, the process will take 70 days. 49 days for creditors to receive and vote on rescue options, and a 21-days cooling off period for creditors to submit concerns. A 60 percent majority of creditors and a simple 51 percent majority of value in respect of at least one class of creditors are necessary to support a proposed rescue plan.
  • Creditors must submit a Notice of Objection with the Process Advisor and the Court to oppose to a rescue plan.
  • The ‘Process Advisor’ is required to report to the ‘Office of the Director of Corporate Enforcement’ (ODCE) on the directors’ previous behaviour.

if have any questions about the information covered in this article or you need assistance restructuring in the face of insolvency please Contact Us today. Our expert team would be happy to assist you.