Early Warning Tools & Corporate Restructuring Options
by Mark Ryan
 

In response to the financial challenges being faced by companies located in the State the Corporate Enforcement Authority (CEA) published an information note in January 2023.

 

The purpose of this Information Note is to assist company directors in understanding certain aspects of the Regulations i.e., those aspects having a particular bearing on directors’ duties and responsibilities.

 

 

Early Warning Signs of Business Failure

 

One main area of focus would be if the directors are not maintaining adequate accounting records on a timely basis, they will not have a sufficient and up to date understanding of, amongst other things:

• whether the company is profitable (i.e., whether the business is actually generating profit),

• whether the company is generating cash and, if not, why not,

• the level of the company’s debts and whether the company can discharge those debts as they fall due.

 

In this regard it is advised that timely and accurate management information – including management accounts, budgets and cashflow projections - will allow company directors assess the current financial position of the company and then assist them to look to the future and to plan accordingly.

 

That, in turn, will allow directors to determine whether, for example:

• current lines of business should be discontinued, and others explored,

• short/medium/long term funding is likely to be necessary into the future, and if so to make the necessary arrangements,

• whether surplus cash is likely to accumulate in the business and, if so, to make appropriate investment decisions.

 

 

Indicators of Financial Difficulties

 

At the end of the guide under APPENDIX 1 the CEA have listed some of the INDICATORS OF FINANCIAL DIFFICULTIES, with specific examples under a number of different headings (sales, expenses, debtors, stock, creditors etc.)

 

Given the expected challenges facing businesses over the next 12/24 months this maybe a useful guide for the directors to refer to when reviewing the annual accounts and management accounts with the company accountant or external business advisor.

 

 

Business Rescue Scheme for SME’s (SCARP)

 

The guide also summarizes the restructuring options available to directors if the company runs into financial difficulties. i.e., examinership, SCARP etc.

           

This is even more important due to businesses ceasing to receive government subsidies post covid and at the same time they need to engage with both revenue, suppliers and financial institutions on debts that have built up over the last number of years. This would be very relevant to businesses that have warehoused significant amounts of tax debts with Revenue.

 

Initially we would suggest that this financial review could be as simple as discussing the current situation with a friend or trusted confident, in some cases it could be a discussion with your accountant if you are concerned.

 

Following this initial review, it may be advisable to seek the advice of an Insolvency Practitioner who will be in a position to review the current position of the business and set out the options available to the directors and shareholders of the company.

 

Early Intervention is critical.

 

It is essential that if the company directors are concerned then they need to ensure they assist and prepare the company to prepare for failure. As with anything of this nature early intervention is the critical part to ensuring the survival of any business.

 

Unfortunately, the statistics from the CRO indicate that this intervention is being sought too late and at that late stage there is no other option other than the liquidation of the company.

 

In most cases had the advice been sought 6 to 12 months previously then other options could have been available before it was too late.

 

 

SCARP Business Rescue Process

 

The SCARP scheme was introduced by The Companies (Rescue Process for Small and Micro Companies) Act 2021 to give help to certain companies who are viable, yet Insolvent.

 

The scheme applies to small and micro companies and:

  • allows companies to restructure their debts.
  • helps companies avoid liquidation.
  • ensures creditors get a better outcome than they would under a liquidation.

 

SCARP should be considered by any company that believes they will have an issue in paying debt warehoused with Revenue. The only situation that Revenue can write off/down tax debts is through a Formal Insolvency Arrangement.

 

As a Process Advisor must make a request for Revenue to participate in a rescue plan it is essential that the directors would engage with Revenue well in advance of the due date for payment of any warehoused debt.

 

Regards

Mark Ryan 

Partner - Quintas