The Irish economy has continued to perform remarkably, well with GDP growing at modest levels and the labour market at full employment. The Irish economy has two distinct elements to it. The first is a standard domestic retail/services economy which is growing albeit at a slower pace than in recent years. The second is a high-performing multinational sector focused on the tech, pharma and financial services sectors. The rate of growth in the economy has been modified by the changing global economic environment. Rising inflation, interest rates and energy prices are creating some difficulties in the economy for businesses.
The number of restructuring and insolvency cases in Ireland has increased in 2023 compared to 2021 and 2022. The sectors most impacted are construction, retail, food and hospitality. The restructuring and insolvency processes most commonly used are liquidation, receivership and examinership/SCARP. Ireland has had in place since 1990 the process of examinership, which is a flexible restructuring tool. The recent adoption of Directive (EU) 2019/1023 on preventative restructuring frameworks resulted in some changes to the examinership laws in Ireland but the market has many years’ experience of dealing with restructuring using examinership for domestic and cross-border cases. During 2023, the trend of Irish examinership being used in parallel with US Chapter 11 proceedings has continued.
Appointments under the small company administrative rescue process (SCARP), which has been in place for almost two years, remain quite low with the process relatively underutilised. Total SCARP appointments are at just 40, with SCARP representing less than 4% of all insolvencies during the past two years. It is anticipated that these figures will begin to increase, and SCARP will become more utilised with the estimated 6,000 companies that hold warehoused tax, which is dealt with in more detail below.
In 2023 to date, the retail and hospitality sectors have accounted for more than 40% of business failures in Ireland, with 116 and 78 failures respectively. The aviation sector has not had many restructurings in 2023. This was a sector that had a number of high-value restructurings during the COVID-19 crisis.
As of August 2023, the Irish inflation rate sits at 6.3%. Inflation is expected to plateau and start to fall in 2024. Soaring global inflation rates have undoubtedly exerted immense pressure on businesses, as consumer spending power diminishes and wage demands increase.
The European Central Bank (ECB) continued its monetary tightening efforts in August 2023, raising its refinancing operation interest rate to 4.25%. This marked a substantial increase of 3.75% from just 0.5% in July 2022.
In the first half of 2023, the US Federal Reserve continued to raise its benchmark interest rate from the 0.25% seen in March 2022 to a range of 5.0% to 5.25%. In July, it further tightened policy by lifting the rate to 5.25% to 5.5%, marking a 16-year high.
In August 2023, the Bank of England implemented its fourteenth consecutive interest rate increase, pushing rates to 5.25%, the highest level since the 2007-2008 financial crisis.
It is anticipated that rising interest rates will have a negative impact on some corporate borrowers operating in a low-margin environment and that the re-financing of loans reaching the expiry of their current terms may be problematic.
The war in Ukraine has created uncertainty for both domestic and international businesses, disrupting supply chains, driving up energy costs, amplifying global market volatility, and causing commodity prices to soar. Sanctions imposed on Russian entities and individuals have further restricted business operations, increasing the risk of insolvency. In some cases, insolvency proceedings have been considered to unlock assets for distribution to creditors.
Debt warehousing/delayed onset of COVID-19-related insolvencies
It was anticipated that COVID-19-related restructuring and insolvencies would increase as government support measures, introduced during the pandemic, were phased out. Towards the end of 2022, and continuing into 2023, many of these supports, crucial for businesses struggling financially, came to an end. This left businesses previously reliant on this support facing financial difficulties, with many compelled to explore restructuring and insolvency options. Consequently, the end of support measures likely shifted some insolvency cases from 2022 to 2023, impacting the year’s insolvency statistics.
A notable example of a phased-out COVID-19 support measure is the tax warehousing mechanism. This allowed SMEs affected by the pandemic to warehouse, and therefore essentially delay, the payment of tax owed to the Revenue Commissioners. The deadline for paying this warehoused debt is May 2024. From 1 January 2023, interest started accruing on much of this debt warehoused by the Revenue Commissioners, which is estimated at around EUR2.8 billion.
The obligation to pay both the accrued interest and the warehoused debt is expected to pose significant challenges for many businesses. It is anticipated that this will result in an increased use of restructuring and insolvency tools, particularly the SCARP process.
Arguably, the most important case in the Irish insolvency and restructuring sphere in 2023 was the determination made by Mr Justice Quinn in Mac Interiors Ltd v Companies Act 2014  IEHC 549. In this case, the Revenue Commissioners challenged the proposed scheme of arrangement prepared by the examiner of Mac Interiors Limited (the “Company”).
In its challenge, the Revenue Commissioners argued that there had been an error in “class composition” in respect of creditors that could vote on the proposed scheme of arrangement.
The Revenue Commissioners was the biggest unsecured creditor of the Company. A significant part of its debt was warehoused as part of the COVID-19 Debt Warehousing Scheme. When the Debt Warehousing Scheme was extended, a substantial part of the Company’s debt lost its preferential status. As a result, the Revenue Commissioners became an unsecured creditor of the Company for over EUR13 million.
A separate group of creditors, referred to as the Retained Project Creditors, was placed in a separate class from the rest of the unsecured creditors for the purposes of voting on the scheme of arrangement. The Revenue Commissioners submitted that the creation of the class of Retained Project Creditors breached the established principles on class composition.
It was noted that class composition is fundamental in the formulation and confirmation of schemes of arrangement, with the Companies Act 2014 requiring that at least one class of creditors whose interests or claims are impaired by the scheme of arrangement must have voted in its favour before a court can approve it. In this case, the class of Retained Project Creditors was the only impaired class that voted in favour of the scheme of arrangement. The class of Unsecured Creditors, which was dominated by the Revenue Commissioners, voted against it.
In the High Court, Quinn J considered whether:
He concluded that the same principles apply to class composition analysis in examinerships. The law requires the classification of creditors to focus on legal rights and interests derived from those rights. Simply put, this means that creditors should predominantly be categorised according to their legal rights. Where their legal rights are the same, diverging interests can be considered. However, only in exceptional circumstances should “non-legal rights-based interests” be relied upon to subdivide a class whose rights are identical.
Those exceptional circumstances must, at least, engage differences which are:
Quinn J noted that the distinction relied upon to form the Retained Project Creditors class was based on the fact that those creditors were likely to have a future relationship with the Company, while the rest of the unsecured creditors were not. He concluded that this distinction did not meet the exceptional circumstances criteria.
Quinn J could not accept “that where the divergence described in this case is no more than different degrees of aspiration among trade creditors – not grounded in or associated in any way with legal rights – it can be relied on as a starting point and, as in this case, as the finishing point to fracture a class whose rights both past and present are otherwise identical”.
In coming to a determination, Mr Justice Quinn found that the classes of creditors were erroneously formed, and the statutory meetings that voted in favour of the proposals had not been validly convened and held. On that basis, the court had no jurisdiction to confirm the scheme of arrangement. Quinn J subsequently made an order to wind up the Company.
In terms of significance, this decision highlights the importance of the correct formation of classes of creditors by examiners, particularly where the Revenue Commissioners is likely to be a significant player in the class of unsecured creditors.
Another high-profile Irish restructuring is taking place, concerning Mallinckrodt PLC, which entered into examinership in September 2023, having entered the same court protection procedure in early 2022. The company successfully exited examinership in 2022 through a large-scale restructuring, reducing its debts by USD1.3 billion. The financial difficulty first arose out of a swathe of legal actions brought against the company in the US arising out of the fallout from the opioid crisis. This second examinership is again running alongside a US Chapter 11 bankruptcy process.
The first restructuring in 2022 was intended to bring the company’s financial difficulties to an end as a result of this significant debt reduction and a new board of management and directors. However, lawyers for the company told the Irish High Court in September 2023 that the company had been unable to achieve its aims and that this was due to difficulties that it could not foresee in 2022, including developments in the slow sale of new products since it emerged from the previous Chapter 11 proceedings and the previous examinership, as well as adverse economic conditions contributing to a rise in interest rates on the company’s variable debt rate. Despite this, the company and its subsidiaries expressed confidence that the business had a reasonable prospect of survival if a new scheme of arrangement could be put before its creditors.
The company, which is registered in Ireland, does not directly employ anyone in the country, but its subsidiaries employ over 110 people at a facility in Dublin, as well as another 2,500 globally.
The developments in the Mallinckrodt case raised the issue of whether a company could enter a second examinership and seek the protection of the court for the second time in such a relatively short period of time. It was put to the court that there is nothing in the Companies Act 2014 or Irish Law in general that prevents a company from doing so, and this was accepted by the court. The examinership and Chapter 11 proceedings are ongoing.