Cross-border restructuring between northern and southern Ireland
September 2022 | TALKINGPOINT | BANKRUPTCY & RESTRUCTURING
Financier Worldwide Magazine
September 2022 Issue
FW discusses cross-border restructuring between northern and southern Ireland with Gary Digney and Seamas Keating at FPM Accountants and Gary Daly and Seamus Hempenstall at Daly Khurshid Solicitors LLP.
FW: Reflecting on the last 12 months or so, how would you describe business conditions across northern and southern Ireland? To what extent are you seeing signs of distress, leading to a rise in restructuring and insolvency activity?
Keating: The combined impact of Brexit, the coronavirus (COVID-19) pandemic and ongoing price increases have severely impacted business conditions across the island of Ireland. Rising input costs and spiralling energy prices have made budgeting extremely challenging in some sectors. At the same time, Northern Ireland has suffered the absence of a functioning executive and continued uncertainty regarding the NI Protocol, while Brexit has impacted the availability of workers, reducing access to employees in some sectors. COVID-19 public health restrictions significantly reduced personal and corporate insolvencies in Northern Ireland, however we expect this to change in the coming months as the restrictions are removed. There has been an absence of statutory creditor petitions and changes to HM Revenue and Customs preferential status has reduced the number of business recovery actions, but liquidations and administrations remain evident in sectors such as construction where the impact of rising input prices is most severe.
Digney: Among Irish companies, the true level of distress has been masked by government support schemes introduced during the pandemic. This is particularly true in sectors such as retail and hospitality where the impact of public health restrictions was most keenly felt. However, in the first quarter of 2022 corporate insolvencies were up 8 percent on 2021, a trend we expect to see continue for the remainder of the year and beyond as the full impact of the pandemic and other macro challenges materialises.
“Among Irish companies, the true level of distress has been masked by government support schemes introduced during the pandemic.”
FW: How have both jurisdictions responded to the current debt levels faced post pandemic and post Brexit to facilitate business rescue and recovering?
Keating: The UK government introduced insolvency specific support measures via the Corporate Insolvency and Governance Act 2020. This aimed both to ease trading burdens as public health restrictions were imposed and to provide a mechanism for restructuring during and after the pandemic. It introduced measures covering recovery action by landlords and creditors, eased wrongful trading actions for a period and permitted remote meetings to allow business to progress. Meanwhile, a ‘business restructuring plan’ and a moratorium giving companies breathing space from creditors were also introduced. The restructuring plan was modelled on an existing scheme of arrangement whereby a company could agree a restructuring plan with creditors with possible debt cram down with support from the court. The process has not been widely used in Northern Ireland, partly because the cost and complexity make it more suited to larger entities. Winding up petitions have continued to be constrained in Northern Ireland at a local level.
Digney: In terms of support for restructuring, Intertrade Ireland provides financial support for restructuring plans, including a ‘business solutions voucher’ worth up to £5000 for businesses in Northern Ireland. In Ireland, a new rescue procedure called the small company administrative rescue process (SCARP) is available for SMEs with turnover below €12m, assets below €6m and fewer than 50 employees. This aims to enable viable business with excess debt to continue to trade. It incorporates an element of debt write down. Support for business restructuring is also available via Enterprise Ireland’s accelerated recovery fund, which is designed to assist Irish companies seeking to adapt their operations and business models to remain competitive and return to growth following the pandemic.
FW: In the months and years ahead, what issues do you expect to dominate restructuring and insolvency processes in northern and southern Ireland? How do you expect proceedings, and the legal framework around them, to evolve?
Hempenstall: The issues dominating restructuring and insolvency processes will likely revolve around the pandemic response of governments both in the north and in the south. The initial response in Ireland included the introduction of the Companies (Miscellaneous Provisions) (COVID-19) Act 2020, which included an extended timeline for the completion of an examinership and increased the threshold at which a company is deemed insolvent. The Act will remain in force until at least 31 December 2022. In addition, the Companies (Rescue Process for Small and Micro Companies) Act 2021 commenced on 8 December 2021, introduced the SCARP, which has been described as an informal examinership and involves the appointment of a ‘process advisor’ who oversees the development and approval of a rescue plan. In Northern Ireland, the initial response included the introduction of the Corporate Insolvency and Governance Act 2020. This Act introduced temporary and permanent measures, including a moratorium period, a new restructuring plan and restrictions on the presentation of winding up petitions. The permanent changes introduced are like the Chapter 11 rules in the US. The main issues that will dominate will be how the legislation introduced to combat the COVID-19 pandemic will fare once all government support is withdrawn. We anticipate the newly introduced measures will be heavily relied upon in both pursuing and opposing insolvency processes, and we anticipate that the temporary measures, once they have expired, will be carefully reintegrated into permanent legislation in the coming years.
“Where HMRC debt is not the key problem, it is likely that CVAs will continue to be utilised to resolve historical liabilities such as landlords and trade creditors.”
FW: In what circumstances may Irish courts recognise orders of foreign courts, such as insolvency proceedings originating in the UK? How might this affect the time, cost and complexity of the process?
Daly: To recognise UK orders and insolvency proceedings in Irish courts, the Recast Insolvency Regulation applies, but only in the case of insolvency proceedings instituted in the UK before 1 January 2021. The primary issue in this legislation is determining the company’s centre of main interests (COMI) within the EU. Where the regulation applies, it provides for automatic recognition in Ireland. To date, Ireland has not adopted the United Nations Commission on International Trade Law (UNCITRAL) Model Law on cross-border insolvency proceedings, with no statutory mechanism for the recognition of UK restructuring or insolvency processes post-Brexit. Insolvency cooperation is not covered by either the Belfast Agreement or the NI Protocol annexed to the Withdrawal Agreement with the EU. For companies that do not have their COMI in the EU, including the UK, an application can be made to the High Court for an order recognising the proceedings. In Norwegian Air, Judge Quinn gave very helpful guidance in relation to cross-border insolvencies, particularly companies whose COMI are neither within the state or within the EU. Pursuant to the Withdrawal Agreement, it is likely that the UK will recognise insolvency proceedings commenced in EU member states before 1 January 2021, but this has yet to be clarified. Phase one of the Preventive Restructuring Directive has been transposed into Irish law, and it is largely aligned with the current Irish examinership regime. Under phase two, the department will undertake a review of the optional articles as part of a wider review of the current examinership regime. Some of the optional provisions are significantly different to the existing examinership framework in Ireland, both in scope and operation. The role of employees and their representatives is also impacted by some of the optional articles. Recognition of EU and UK judgments and proceedings and insolvency proceedings in the Irish courts is, in general, a straightforward, and relatively cost-efficient, process if initiated prior to 1 January 2021. Insolvency proceedings initiated in the UK after that date require an application to the Irish High Court, application of which will be grounded upon the principles of common law and would therefore be far less predictable in terms of time, cost and complexity.
“Asset value maximisation is not feasible unless there is effective coordination and cooperation between practitioners north and south of the border.”
FW: What advice would you offer to insolvency practitioners in terms of the best approach to executing a successful cross-border restructuring involving northern and southern Ireland?
Daly: In this post-Brexit landscape, insolvency practitioners must learn to adapt to the current economic climate, with targeted decisive strategies to ensure they are prepared for cross-border insolvency systems. Insolvency practitioners should look to principle eight of the EU ‘Cross-Border Insolvency Court-to-Court Cooperation Principles and Guidelines’, concerning the debtor’s assets in cross-border insolvency cases. The insolvency practitioner must “seek prior agreement from any other insolvency practitioner to matters concerning proceedings or assets in that practitioner’s jurisdiction”. Effective coordination is essential to keeping intact the ability of insolvency actors to act rapidly, if necessary. Guideline 12, paragraph two of the ‘European Communication and Cooperation Guidelines for Cross-border Insolvency’ suggests that insolvency practitioners should minimise conflicts between procedures of the north and south of Ireland and instead maximise “the prospects for the rehabilitation and reorganisation of the debtor’s business or the value of the debtor’s assets subject to realisation”. Asset value maximisation is not feasible unless there is effective coordination and cooperation between practitioners north and south of the border.
“We anticipate that the temporary measures, once they have expired, will be carefully reintegrated into permanent legislation in the coming years.”
FW: What procedures do you think are going to dominate NI and ROI in the next few years?
Keating: The popular business rescue procedure known as the company voluntarily arrangement (CVA) has been significantly impacted by the return of the ‘Crown preference’, where certain HMRC liabilities now rank in preference to not only unsecured creditors but also floating charge creditors. This has affected the feasibility of many business rescue procedures. It means that HMRC will most likely have to be paid in full for the CVA process to be successful. It remains to be seen how HMRC will use its increased creditor status in voting on future proposals. HMRC has recently said it will consider proposals but has not specified any change in relation to this key issue which impacts the feasibility of business rescue in Northern Ireland. Where HMRC debt is not the key problem, it is likely that CVAs will continue to be utilised to resolve historical liabilities such as landlords and trade creditors. When combined with the impact of ongoing macro challenges affecting the business environment, we believe Northern Ireland will experience a significant rise in CVAs and compulsory liquidations as well as administrations. Cost is likely to be a barrier to the use of the new business restructuring plan.
Digney: In Ireland, as in Northern Ireland, we anticipate increased insolvency activity as the full impact of the pandemic and other macro challenges materialises. This is likely to trigger a rise in the number of director-led creditor voluntary liquidations and receiverships throughout the rest of the year and beyond. Given the current business environment, both locally and globally, we expect the rescue landscape to continue to evolve in the short to medium term. While at the date of writing only a couple of SCARPs have been successfully implemented, we expect this number to increase substantially, as we believe this can be a very useful restructuring option for businesses struggling with debt that can demonstrate a reasonable prospect of survival and thus avoid liquidation.
Gary Digney is a licensed insolvency practitioner, personal insolvency practitioner and a fellow of Chartered Accountants Ireland with over 15 years’ experience working with lenders, as well as individuals and companies in financial distress. He has expertise in resolving all forms of debt including residual debts due on mortgages and to vulture funds. His pioneering approach in delivering debt solutions is evident by his significant number of landmark deals and success rate in debt write-offs. He can be contacted on +353 (0) 1691 3500 or by email: g.digney@fpmaab.com.
A leading figure in the insolvency industry, Seamas Keating is a licensed insolvency practitioner in both the UK and Ireland and has acted on a significant number of high-profile corporate insolvency appointments and specialist IVAs across various sectors. He has been successful in developing a niche offering to facilitate the restructure of large property investors and developers, which has proved to be an excellent tool. He can be contacted on +44 (0)28 3026 1010 or by email: s.keating@fpmaab.com.
Gary Daly is a qualified solicitor, authorised to practice in Ireland, England and Wales, and is a vastly experienced insolvency and corporate restructuring specialist. He has acted in many high-profile examinerships, receiverships, liquidations and bankruptcies. He has acted for companies, shareholders and directors and for insolvency practitioners and for both secured and unsecured creditors, as well as private clients. He can be contacted on +353 (0) 8171 668 or by email: gary@dalykhurshid.ie.
Seamus Hempenstall is a future trainee solicitor with Daly Khurshid Solicitors LLP and has extensive knowledge and experience of cross-border and domestic insolvencies. His particular area of expertise spans corporate and commercial law, with a particular focus on corporate and commercial insolvency. He provides tailored advice to insolvency practitioners and to companies and directors attempting to navigate insolvency situations. He can be contacted on +353 (0) 8171 668 or by email: seamus@dalykhurshid.ie.
© Financier Worldwide
THE PANELLISTS
FPM Accountants
Daly Khurshid Solicitors LLP