Business Plus - Corporate Recovery and Insolvency Survey

Take advice early and reset to identify opportunity says Paddy O'Connell, head of Restructuring Advisory who has taken part in the Business Plus Corporate Recovery and Insolvency Survey. 

Firstly, can you tell me something about yourself and your restructuring/insolvency experience?

I am a Consulting Partner at RSM Ireland and lead the Restructuring Advisory service offering, I am a Licensed Insolvency Practitioner with 25 years Restructuring Advisory and Formal Insolvency experience. I am a member of RSM’s European Restructuring Group and have a proven track record, advising on profile restructuring assignments, acting as Receiver on corporate and fixed charge appointments, being appointed Liquidator for creditors voluntary and Court liquidations, with a specialism in multi-jurisdictional insolvency assignments working with colleagues across RSM’s global network.

I have applied my Restructuring Advisory expertise across a range of sectors including real estate, construction, manufacturing, motor, IT, and retail, preserving value and maximising returns for stakeholders. I have also undertaken IBR’s for Financial Institutions and overseen structured wind-downs for indigenous clients. I have extensive property experience and I am the Real Estate and Construction Industry lead within the firm, and a member of RSM’s European Real Estate Group.

Though insolvency numbers increased in Q1 2023, in general companies with stretched balance sheets are proving more resilient than anticipated. Do you concur with that analysis?

Fundamentally businesses need to maintain revenues, margin levels and bottom-line profitability. In most cases short term losses can be absorbed if the business has adequate reserves to see it through a difficult period. Government supports, creditor forbearance, revenue warehousing gave businesses breathing space to see them through the pandemic but were not intended as life supports for what has followed with supply chain issues further affected by the war in Ukraine, inflation and increasing interest rates, if the underlying business is not profitable there could be a rocky road ahead.  A balance sheet is a financial picture at a point in time. Having access to accurate timely financial information and projections which capture the impact of interest rates and inflation which are affecting businesses today. If inflation and interest rates persist (which they are likely to do) and result in some level of global recession these problems will only increase. By waiting for quarter-end or year-end balance sheet will be too late. Those directors who are proactive and strategic, will take advice early, review and reset their business model not just mitigate but identify opportunity from the current upheaval. Directors who bury their heads in the sand and do not act simply saying they can trade through the difficulties could find themselves explaining their actions or inaction to their creditors and a liquidator.

About 74,000 businesses were availing of Revenue’s debt warehousing scheme in September 2022, relating to c.€2.6 billion in tax debt. Phased Payment Arrangement have to be agreed by May 2004. Is this situation leading to more engagement with your restructuring professionals?

Ultimately, companies will have to address their Revenue liabilities. The Revenue have facilitated business with a warehoused facility at a favourable rate of 3% compared with market interest rates for working capital facilities. The extension of deadline to agree payment arrangements to May 2024, has the effect of kicking the can down the road. It has not encouraged businesses to take proactive steps to address the very significant liabilities and engage with their professional advisors to address the liabilities at an early stage.

Companies will need to plan for the repayment of their warehoused liabilities, while also discharging current tax obligations as they fall due. Failure to do so will have consequences for businesses and may result in enforcement action by the Revenue. There is no prospect of an amnesty in respect of warehoused Revenue liabilities as that could potentially Contravene EU state aid rules.

With increased costs hitting businesses, the effect of inflation, increased interest rates, the requirement to repay Covid accrued Revenue liabilities, working capital management will be critically important for businesses in the coming period. Directors need to engage with their business advisors at an early stage to ensure they have an appropriate working capital model to meet these demands on cash or risk cashflow insolvency.

The SCARP process got off to a slow start. Are there any signs that interest in the rescue process is picking up?

The uptake of SCARP has been underwhelming.  While there has been a pick-up on the number of SCARP’s there has been benefits of the legislation beyond those numbers. In certain scenarios the availability of a formal process such as SCARP has assisted Restructuring Advisors, in their engagement with key creditors of distressed companies, encouraging participation in alternative restructuring solutions. These creditors recognise the reality of the impact of Covid and the current economic climate and are prepared to take a pragmatic approach, outside of a formal process, in dealing with historical liabilities.

Embarking on a SCARP restructuring does not guarantee a positive outcome, with a potential for the process being brought into Court by dissenting creditors or those opting out of the process. A small or micro business requiring a restructure will be challenged in securing new finance without the promotors taking on additional personal borrowing, topping up their mortgage, or seeking investment from family and friends. Some smaller companies are insolvent and having struggled through the last few years, do not have the resilience of complying with a SCARP scheme for potentially several years, with some giving in or liquidating and starting afresh.

In your corporate recovery role, what’s your view on the availability of non-bank alternative finance to assist firms to trade through their difficulties?

While interest rates are rising and established lenders are growing more cautious, there are opportunities among alternate funding providers with private equity and venture capital looking for good sources of return. Given the unprecedented levels of capital seeking investment opportunities, these investors have become increasingly flexible in recent years.  Since the last downturn there is an increased number of equity investors and alternate lenders in the market, providing more opportunities to refinance. Resetting a business model as part of a restructuring will require strengthening the balance sheet to maximise investment or to ensure a more efficient deployment of capital, and it could mean looking at available alternative funding options. However, a word of caution, alternative lenders operate to strict terms which need to be actively monitored, a breach of a loan covenant will result in penalties and/or increased interest charges.

Anything else that occurs not covered above?

A Director who is concerned about their Company’s finances, should be brave and seek advice from a Restructuring Advisor. It’s a difficult conversation to have. The issues are real, and people are involved, Directors will be concerned about the impact on shareholders, employees, the revenue, creditors who they have traded with for many years, and indeed for themselves as officers of the Company who are accountable for their actions. The earlier they engage the more time the Advisor will have to formulate an appropriate strategy that not only looks at the current financial predicament, but the future of the business, taking account of the interests of all stakeholders. If the last few years have taught us anything, it is that the world is unpredictable and timely responses are crucial. With so much uncertainty, there has rarely been a greater need for organisations to re-examine their underlying business models. The numbers of corporates looking to restructure are growing fast. Doing so can not only enables struggling enterprises to address losses and forge a way forward but enables others to take advantage of the opportunities that a fast-changing environment presents. Businesses that do not address these issues will fall by the wayside.

As published in Business Plus Magazine June/July 2023