The Corporate Enforcement Authority (“CEA”) has issued its first information note of 2023 on the topic of the European Union (Preventative Restructuring) Regulations 2022 (the “Regulations”) which came into effect on 27 July 2022 (the “Information Note”).
The Regulations were transposed into Irish law to give effect to EU Directive 2019/1023, or the Preventative Restructuring Directive (the “PRD”). The PRD is to ensure that, across the EU, there are restructuring frameworks in place to assist viable business that are in financial difficulty to continue to operate. The PRD sets down minimum rules for Member State preventative restructuring frameworks, in order to remove barriers to effective preventive restructuring of viable debtors in financial difficulties across the EU.
Both the PRD and the Regulations are designed to assist struggling companies with restructuring frameworks aimed at keeping companies fluid and functioning without the need to enter insolvency processes.
The Regulations amend Parts 5, 10 and 11 of the Companies Act 2014 (the “Act”). In particular, they insert Chapter 7 into Part 5 of the Act, which comprises of just one short Section 271A:
“(1) A director may have regard to early warning tools.
(2) For the purposes of this section, an early warning tool means a mechanism to alert the directors of the company to circumstances that could give rise to a likelihood that the company concerned will be unable to pay its debts and can identify the restructuring frameworks available to the company and signal to such directors the need to act without delay”.
The Regulations also detail pre-existing common law duties owed by directors to creditors where the directors believe or have reasonable cause to believe that the company is or is likely to be unable to pay its debts.
The PRD introduces the concept of an “early warning system” in Statute. The Information Notice provides some guidance on the tools that directors may use in identify indicators of financial difficulties.
The Information Note provides some helpful guidance to directors of companies to assist in identifying potential insolvency situations and sets out the options available to companies when they find themselves in financial ill health. Importantly, the CEA provide set out two lists which outline: in the first instance, some of the key indicators of financial difficulties, and secondly, the key content for restructuring plans.
Indicators of financial difficulties
The Information Note sets out some of indicators of financial difficulties, which may prompt some companies to assess their current financial situation and consider potential restructuring steps. When a company can spot financial difficult coming down the line and catch it early, there will be a higher chance of success for restructuring options. The areas which the Information Note focuses on includes trends in revenue and sales, such as declining sales, loss of key contracts and new increased competition. Interestingly, the Information Note also sets out a growing number of dissatisfied customer complaints.
Other key areas to monitor are less subtle, such as unstainable increases in business expenses, increasing aged debtor profiles, loss of key suppliers, stock issues, high turnover of staff, and issues with cash-flow.
While many of the matters on the list may seem obvious, the Information Note will be useful for directors to focus minds on various issues which may be predictors of much larger problems down the line.
Content of Restructuring Plans
Once problems do emerge that indicate financial problems for the company, putting in place robust restructuring plans is the next step in attempting to avoid potentially more significant or even fatal corporate insolvency processes. The Information Note outlines the information that should be considered in restructuring plans, as set out in Article 8 of the PRD and Article 15 of the Regulations, amending Section 539 of the Companies Act 2014.
Having regard to the “early warning tools”, it may be the case that the Company will need to consider entering more formal arrangements to restructure its debts. These include the new Small Company Administrative Rescue Process, or SCARP, under the Companies (Rescue Process for Small and Micro Companies) Act 2021, which are becoming increasingly popular for smaller companies for which examinership or schemes of arrangement may not be suitable.
It is very important to carefully consider the plan in consultation with financial and legal advisors.