With pre-pandemic normality unlikely to return, insolvency practitioners are going to need to reposition businesses for a very different future. Tom Murray FCCA explains
This article was first published in the June 2020 Ireland edition of Accounting and Business magazine.
A lot of the early commentary on how companies should deal with the current pandemic crisis has centred on the need to stabilise a business and then embark on a recovery programme.
Corporate recovery practitioners are prone to preface the word ‘recovery’ with words such as ‘respond’ and ‘rescue’ and then follow it up with words such as ‘thrive’ and ‘renewal’. However, recovery is usually understood as a return to a normal state of health or strength; by extension, in normal times corporate recovery refers to nursing a company in financial and other difficulty back to health or solvency.
However, it has already become clear that Covid-19 will have a business impact that is more profound than perhaps any other post-war event. Over the relatively short period of six to eight weeks in March and April this year, the way many companies do business has irrevocably changed.
We have vaulted five years into the future with the adoption of new technologies and work practices. People are shopping, exercising and educating themselves online. Doctors are consulting remotely through video technologies, and people are managing their pensions and investments remotely.
Shopping centres have turned into ghost towns during lockdown, and many retail industry observers are finding it difficult to foresee a return to old shopping habits. The current expectation is that significant business has been lost to online channels. For those who do continue to visit physical shops, their ‘dwell’ time will be reduced out of health concerns.
Similarly, the viability of corporate entertainment, international travel for meetings and conferences, and the globalisation of supply chains has been put in doubt, with business models coming under heavy scrutiny.
Against this background, it has become clear that the usual pattern of a return to recovery following an unexpected shock to the business is simply not going to happen for many. And the reason it won’t happen is that what was a normal state of health for a company is not going to be possible for many businesses in many sectors. In this context, the most appropriate ‘R’ words to focus on for corporate recovery practitioners and the businesses they advise are not the usual options of ‘rescue’ and ‘recovery’, but the twin concepts of ‘reset’ and ‘reposition’.
The reason for this is that in order to combat the unprecedented Covid-19 impact, minimise the effect of a recession and offset a potential depression, the government is taking steps to support businesses. But a lot of the support that has been announced at time of writing (early May) is in the form of debt or quasi-debt (including the postponement of collecting certain tax debts, which simply kicks the can down the road). A key challenge here is that Irish SMEs are already heavily reliant on debt as a source of finance (particularly compared with their European peers) and in many cases do not have significant reserves to withstand the pandemic. Further debt without debt compromise will not enable companies to recover, let alone reposition their business models.
While government support such as the Covid-19 wage subsidy has preserved and prolonged the use of the reserves that companies do have, ultimately companies in financial distress as a direct consequence of the pandemic may need to undertake a fundamental corporate reconstruction if they want to remain in business. Furthermore, in these unusual times, companies need to find new ways to make a profit in ways that were unrecognisable only a few short months ago. To do that viably may require a new beginning or a fresh start unburdened by unsustainable historical and legacy debt.
In this context, rather than recover and return to a state or a model that does not exist any more, companies may need to hit the reset button and fundamentally restructure their balance sheets so they can reposition their business models.
Options such as examinership and schemes of arrangements can be valuable tools in any restructuring. By utilising them, the business may be given sufficient breathing space to restructure both its balance sheet and its business model. This fundamental reset could enable a company to develop a sustainable competitive advantage and provide opportunities to be viable going forward.
However, in the current environment, company liquidation should not be dismissed or seen as an admission of failure. Entering a creditors’ voluntary liquidation and ‘recycling’ business assets through a pre-pack liquidation or a sale by a liquidator may be an essential course of action for a company. This is particularly the case if there are debts such as tax bills that can only be compromised or written down in a formal procedure, or there are onerous contracts such as long-term leases that can be settled in an examinership or via disclaimer in a liquidation.
In all the cases outlined, the opportunity remains for existing or new promoters to bring the business to the next stage. In this regard, an insolvency procedure does not bear the usual negative connotations of failure, but can instead be used positively to create value through capturing, retaining and protecting assets of value and to allow the repositioning of companies into viable businesses going forward. That possibility places corporate recovery practitioners at the very centre of the business fight for survival against the ravages of the pandemic.
Tom Murray FCCA is an insolvency practitioner with Friel Stafford.