IT’S A FAIR bet that banks will be watching our current caretaker Government proposing legislation to support Ireland’s struggling small businesses – with below-market-interest-rates from financial institutions – and could decide, on that basis, to hold off on normal lending for now.

That’s displacement. Also, delay.

It’s also safe to assume that most small and medium enterprises (SMEs) are already technically insolvent after the events of the past few months, with all the legal consequences that will bring for company directors. Yet, ministers are already making comments about enabling lending only to ‘viable’ businesses.

This is just one aspect of the proposal to extend bank credit that should be of concern. What constitutes a ‘viable’ business in this unprecedented climate? If the lending is to be at the say-so of the banks, will they assess applications with any enthusiasm or interest? Remember, they already have “skin in the game”.

I believe Examinership as a means of restructure of small businesses isn’t being considered enough in Ireland. Unfortunately, I can’t see banks recommending an examiner-led restructure which would include debt write-off, even where that is clearly the SME’s best post-Covid move.

The problem with modern banking

If you thought predictive grading for the Leaving Cert was going to be difficult, wait until you unravel this business challenge. How you forecast the viability of a business is complex and takes a much longer timeframe. The difficulty in 2020 is that modern banking structures do not allow for much patience or imagination.

Remember that the Empire State Building was started in the Great Depression and did not turn a profit for 20 years. The lesson? Think long-term. The old-style local bank manager worked across their local communities. They knew the value of patience.

The old-style bank manager has since been replaced by an algorithm which is ill-suited to assessing post-Covid conditions. Banks will struggle to get a handle on, for example, the “greening” of consumer demand, on the growth of the staycation with warmer summers, on the new dynamics of socially-distanced high street footfall.

Banks will also play catch-up on the shift to localised business because of the increase in remote working. Factor in too a possible change in our diet, the price of diesel, or the cost of public liability insurance. There will be swift changes in payroll taxes in five years, changes to the interest rate, even. It’s impossible to predict. Nobody has the crystal ball here.

There is some encouraging light, though. Credit Unions, take note: the EU Commission has given until 30 June to register interest in tapping into EU-facilitated funding for SMEs. Check out the COSME programme (Loan Guarantee Facility) and ESCALAR.

There’s no need to wait for the Dáil to legislate, and no reason why Irish SMEs cannot look abroad and past our domestic banks.

Examinership

Examinership is a process through which a struggling company, unable to pay its debts, can seek the High Court’s temporary protection from creditors. It’s meant to help save potentially viable businesses from going to the wall during difficult times and could be a useful lifeline for many small companies in the post-pandemic period.

But Ireland’s examinership structures are well overdue for an update. Instead of additional working capital facilities, an Examinership restructures will usually shrink the business’ fixed overheads by ‘bailing in’ the creditors. Significant, too, in my view, that, unlike the UK’s 1986 Act on which it was modelled, the preconditions for appointment were not spelt out in the Irish act in so many words. 

Helpfully, the EU has been thinking about examinership. Directive (EU) 2019/1023 on “preventive restructuring frameworks, insolvency and discharge of debt” requires the Irish Government to transpose the provisions of the Directive into Irish Law by this time next year. The aim is a company restructure which ringfences the core business and gives the entrepreneur a second chance to achieve viability.

It’s timely.

The courts

Although the case for the appointment of an examiner is always based on a professional opinion, it is still only one person’s opinion. Sometimes in support of a fait accompli. It’s rarely subject to judicial granular inquiry. We could use the opportunity presented to us by the Examinership Directive to be creative both in regard to the bureaucracy of the rescue step and with new working definitions of “viability” and “insolvency”.

“Viability” could be forward-looking, realisable in the medium term, with staged yardsticks for job creation front and centre, and rural decline reversed with community spin-offs.

Qualification for public funding should have a matrix of societal factors with predetermined ranking. This is not rocket science: we do this sort of exercise for all public procurement tendering.

“Solvency” could be a dynamic measure based on re-ordering and perhaps bailing in different creditor classes. A rollover for the revenue and secured creditors. Early and prompt discharge of trade debts. Government grant aid, or equity buy-in, treated as non-preferential “white knight” investment?

In the Dáil recently, Michéal Martin, noting that smaller Irish-owned firms and early-stage firms face “having to take on debt that may undermine their viability”, then went on to say that “the core economic principle in this crisis has been to try to see the debt incurred during the response as separate from normal debt.” He may have just hit the nail on the head!

Related Reads

Covid-19 took our festival trade, so this summer people are using our tents in their back gardens

'Businesses have adapted fast and moved online. April's .IE registrations were up a third'

From gold rum to hand sanitiser: How our brewing business responded to the Covid-19 crisis

The ledgers of private enterprise are also now recording abnormal debt because of the shutdown. It should be treated, in assessing applications for finance, as abnormal.

SMEs will suffer unfairly

A former Secretary Gen of the Department of Finance, John Moran, was quoted in last Sunday’s paper, as chairman of SME Recovery Ireland, suggesting “measures like a better examinership process so if businesses are fighting with their landlord or bank they have the ability to do it.”

It is the sad reality that, in a downturn, the SMEs are liable to be steamrolled one by one, almost thoughtlessly, while the quoted PLCs can find a way through.

The UK Government has now announced “Project Birch” to save “strategically important companies” with state equity injections; “bespoke bailouts of viable companies which have exhausted all options and whose failures would disproportionately harm the economy”, according to the Financial Times 24 May.

We need to grasp the fact that what is “strategically important” for Ireland is that the mom and dad indigenous businesses, especially out of Dublin, should be able to access “bespoke bailouts” to preserve our society.

Restructure through examinership is clearly one way to avoid “disproportionate harm” here.

Edmund Honohan is Master of the High Court.