Catherine Murphy (Kildare North, Social Democrats) | Oireachtas source

This Bill is intended to provide a rescue mechanism for small and micro businesses facing difficulties. The situation has been exacerbated by the pandemic, but it is something that was needed in advance of it. We know that SCARP will be available to all small and micro companies, those which have a turnover of less than €12 million, a balance sheet of less than €6 million, and where the number of employees does not exceed 50. This covers 95% of companies in Ireland. It has already been stated that it involves 788,000 workers, so it is very significant in terms of the number of people it impacts.

The need for a similar scheme to examinership was highlighted by the Company Law Review Group in 2012, and every Government since has promised to deal with this issue. The pandemic has exposed significant weaknesses, and this is just one of them. A significant number of small and medium-sized businesses will collectively be under pressure at the same time. I agree with the previous speaker about the time provided for debating the Bill, which will be going through Committee and Remaining Stages next week.

There is a reason for a lengthy legislative process. It gives time to think, evaluate, consult and to put together amendments. This is not in any way ideal. I understand why the Government needs to get this in place quickly but it is important we put on record how unsatisfactory this is. It could end up producing problems which could be overcome in advance of the legislation being passed.

Examinership was introduced in unique and pretty incredible circumstances. When the Iraqi Republican Guard crossed into Kuwait on 2 August 1990, leading ultimately to the Gulf War, it also triggered a crisis here. Within days, the then Taoiseach and leader of the Minister of State's party, the late Charles Haughey, recalled the Dáil from its summer recess to amend the Companies Act in order to keep one of our largest companies in business, the company being Goodman International. Its assets in Iraq were frozen, leaving it on the hook for €215 million owed by Iraqi customers. It was declared too big to fail and the Companies (Amendment) Act 1990 was rushed through the Dáil in less than a week to create what we know today as examinership. Regardless of the origin story, we know from years of experience with examinership that it does work. It saves jobs and is a vital lifeline for struggling businesses and a successful tool for restructuring.

The problem is that examinership is completely out of reach of the vast majority of businesses in Ireland. Over recent years, the number of companies that enter examinership in Ireland has typically ranged between 15 and 30 annually. Of the nearly 600 Irish businesses that commenced an insolvency process last year, only 5% went through for examinership. Examinership is overseen by the courts from beginning to end and as others have said, is therefore prohibitively expensive for the standard small and micro enterprises, costing as it does between €80,000 and €120,000 at a rough estimate. Companies of that size cannot afford it and possibly would not have the credit to enter the process.

Under the proposed new mechanism, small firms facing insolvency will be able to cut debt with support from a majority of creditors without the costs of a High Court examinership and would be able to it in 70 days. The rescue process being proposed in this Bill is a long overdue and welcome process for small businesses that are facing difficulties. With the limited court involvement, it will hopefully massively reduce the costs involved in what has been described as an examinership-lite process. The estimated costs given for this process are between €20,000 and €50,000. That is a big reduction but is still incredibly expensive for any business, let alone a small business which is in dire straits anyway. Its owners may well think again about whether or not to enter the process. I am not dismissing the importance of it but for many it will not be possible. In the public consultation process for this Bill, was an indication given as to what would be a manageable cost for a small business? Was that something that was discussed? The Minister of State might reference that because it does seem like a great deal of money. Indeed, businesses I have talked to in the past year really do not want to take on debt. They are already struggling and unfortunately I have seen many of them close.

The lack of court involvement is of course conditional on the agreement of the creditors and where agreement is not found, the court involvement kicks in. Experience suggests at least one creditor will object to the rescue plan, forcing the company into court and greatly inflating the cost. I am aware there are safeguards provided in this regard. The rescue process will be commenced by the resolution of directors, rather than an application to court and will be concluded within a shorter period than the existing examinership process. A rescue plan will be drawn up by the process adviser within about 49 days and can be passed with a 60% majority vote from the creditors. A previous contributor talked of further trimming that time period and if that can be done it would be welcome.

Time is of the essence when it comes to putting recovery plans in place. For any restructuring option to work, management needs to act quickly and decisively, with early analysis of the status of the business and engagement with the critical shareholders. In this regard, the Bill provides for a cross-class cramdown of debts, in the name of reducing cost. As I understand it, in the examinership process this means that if one class of creditors votes in favour of the scheme, then the scheme can be presented for approval to the court and can be imposed on other classes of creditors. Will the Minister of State outline exactly how this will work in practice in this rescue process? The Irish Congress of Trade Unions, ICTU, has requested employees be explicitly excluded from any such process. Has consideration been given to this request?

Under section 558R concerning leases, the Bill states the rescue plan or order of the court cannot contain proposals for a reduction in rent. Obviously issues with the constitutional right to private property are at play here. This is another reason we must take another look at Article 43 of the Constitution. For the past ten or 12 years, we have had many complaints about upward-only rent reviews that drove rents very high without the prospect of their being reduced. One must ask about the common good here. This is just another instance that merits that article being examined further and possibly going to a referendum.

The Small Firms Association, SFA, has pointed out the largest risk of insolvency comes as the result of onerous contracts, particularly leases with rent exceeding market rents. This will be particularly important in the aftermath of the pandemic when it can be estimated that some categories of property rent may fall as less fortunate businesses close up. This might put existing businesses, which may be struggling with extortionate rents, at a major disadvantage to new entrants to the market, as well as larger companies who have availed of the examinership process. One of the most valuable features of examinership is the facility to repudiate onerous contracts, including leases at above-market rents. When faced with the alternative of repudiation, most landlords will agree to reduce rents to market levels. The new process will offer little respite to these businesses if they cannot exit unaffordable leases that are at above-market rents.

There is another ethical issue that arises here. I commend the owner of the George's Street Arcade, who showed great leadership in how the tenants of the units there were treated during the pandemic. It is the kind of thing that would make me want to shop in that type of location. Public sentiment will appreciate that sort of ethical approach. While one could not make that appeal to many landlords, there will be some who feel that kind of sentiment would be valuable. We should not dismiss that as something that may be possible in terms of people being very public about how they have treated their tenants. The public will appreciate it and it may be a badge of honour some businesses can wear. Many businesses will be in rent arrears or will have made agreements to defer payments and many landlords want to be paid rent and service charges in full from the date of reopening.

There is a need for tenants to be able to agree meaningful arrangements related to high rents in order to sustain businesses since cash flow has plummeted. The current High Court list is full of disputes between retailers and landlords. A number of business lobby groups, including Retail Excellence Ireland, have called on the Government to put in place a formal arbitration process for rent disputes. I would happily support that as it would make sense.

The Company Law Review Group report states that some members of the sub-committee felt repudiation was too complex an issue to be dealt with in a simplified process aimed at smaller companies, while others felt that repudiation should be available where it is necessary to ensure the survival of a company. It seems glib to suggest that repudiation is too complex for the 98% of companies for which the new process is designed. The alternative is to preserve a situation where repudiation is reserved for larger businesses that can use it to gain a competitive advantage over smaller competitors. The variety in our town and city centres is something that we want to try to re-establish. There is a cumulative advantage in doing that. It is important that small businesses that give a distinctive flavour of our towns and cities survive as much as they can. They are likely to be the companies most under pressure and they will have fewer options available to remain viable.

Without significant change, the proposed procedures are unlikely to be a viable alternative to liquidation for companies that face problems with rents. The proposed legislation will allow a rescue scheme for creditors to vote on. In many cases where landlords are the largest creditor, that could give them a power of veto. Perhaps I am wrong about that and the Minister of State might refer to that point when he is summing up.

The Governor of the Central Bank has stated that many businesses will fail as business supports are withdrawn. Banks and non-bank lenders have been warned to support viable businesses and engage with borrowers proactively. There is a serious lack of competition for SME lending now that Ulster Bank has exited the sector. Larger SMEs in particular may wish to and have used multiple banks in the past. That is a new dynamic. Banks need to engage with borrowers that they think need the greatest level of support. While we cannot expect banks to be anything less that pragmatic, there is a need to be flexible and sympathetic and to think about the long-term future of those businesses. If we are looking for a job-rich recovery and if we consider the number of people employed in this sector, any supports that keep viable businesses going will be essential to the broader recovery.

A paper published in April by the Central Bank and the ESRI showed that more than 30% of Irish SMEs recorded a loss in 2020, while a further 30% just broke even. Some 5% of the businesses that made a loss last year were already struggling before the pandemic hit, while almost 20% of those that made a loss in 2020 were merely breaking even before Covid-19 hit, making them more vulnerable to liquidation. There will be a variety of situations. Many would be newer businesses which are just starting to establish and maybe like is not being compared with like, since others may own the premises and rents would not be an issue. They may have a difficulty with the banks in making sure that mortgage payments can be restructured.

In contrast, the report showed that 42% of the SMEs that struggled last year were profitable in 2019, before the pandemic, showing a promising sign of their ability to trade back to viability. In the first quarter of this year, the number of companies entering liquidation fell by two thirds compared with last year. It is probably due to directors being reluctant to begin insolvency procedures while Government intervention keeps them afloat. In the normal life of a business, every single one will experience ups and downs but the pandemic has put unprecedented obstacles in the way of small businesses and the true impact of the economic fallout of Covid-19 is not yet known.

When dealing with struggling businesses, our first instinct has to be to identify how and whether the company can be saved. The restructuring of businesses saves jobs and saves businesses and should always be the first option considered. Liquidation is the last route for any business and I doubt many want to go down that route. As the Minister of State knows, it costs so much to create new jobs, whether it is done by IDA Ireland, Enterprise Ireland or even local enterprise offices. Retaining those that are viable makes economic sense.

Under this proposed system, Revenue and the Department of Social Protection have the option to opt out on specific grounds, particularly if they feel the process is being abused for tax avoidance reasons. I imagine that ensuring that VAT debts cannot be run up as cash flow would be a concern in this area. I believe there is a similar system in place for personal insolvency arrangements and Revenue has engaged in over 90% of debt restructuring, as the Minister of State said in his opening statement. It is important to recognise that it is needed but we can already see that Revenue has engaged honourably and I hope that this will continue. It is logical to assume that it will take a similar approach here. The main debts of struggling businesses would be owed to Revenue, especially with the tax warehousing scheme offered by Revenue last year. Rents are also an issue. It is essential that the rescue scheme is one that Revenue is willing to engage with in the vast majority of cases and I think it will be.

This Bill also includes a provision to include an employee representative to the five-person committee of inspection for the winding up or liquidation of a business. This is a welcome addition, especially in light of the controversies of Debenhams and Clerys in recent years. It is important to ensure that workers' voices are meaningfully heard and included in these proceedings, and are not outvoted at every turn.

I reiterate that I do not like the idea of this measure being rushed. That is something that should be avoided. There are a number of other areas and one of them, namely, the aviation task force has been referred to in respect of looking at ways to retain jobs on a sectoral basis. I am told that Ryanair is employing cadets who pay a substantial amount of money for training themselves. Pilots who are only paid on the basis of the hours that they fly are now not getting hours. I am told that they are being replaced by newer recruits who have paid for their training. If that is the case, it needs to be considered seriously and quickly because we want to avoid that kind of thing, with the pandemic being used for all the wrong reasons.

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