I move: "That the Bill be now read a Second Time."
I will share time with Deputies Finian McGrath and Catherine Murphy.
I am delighted to have the opportunity to introduce Second Stage of the Bill. I thank Mr. Ross Maguire, SC, and Mr. Barry Lyons, solicitor, for all of their work and expertise in drafting the Bill. I also thank the officials of the Bills Office for their Trojan work in helping me and the team last week in getting the Bill ready. I thank the Minister for Jobs, Enterprise and Innovation, Deputy Richard Bruton, and his officials for their time and expertise in recent weeks. I also thank in advance my fellow Deputies who will contribute to the debate today and tomorrow for the time and effort they are putting in.
The Companies (Amendment) Bill 2014 seeks to radically improve Ireland's examinership process. It would reduce the costs and bureaucracy of examinership and its refinancing requirements. It would address the legacy issue of upward-only rent reviews. In doing all of this, it would for the first time make examinership a real option in Ireland for viable but insolvent small and medium-sized enterprises. If passed, it has the potential to save thousands of companies and tens of thousands of jobs in the coming years. This is not wishful thinking. The solicitor with whom I worked in preparing the Bill has handled more than half of all examinerships in Ireland in the past 12 years. The senior counsel with whom I worked in preparing the Bill has significant experience in insolvency law.
The process described in the Bill and the changes it seeks to make specifically address what is not working in examinership and proposes a better solution. That said, I do not present the Bill as a finished article and have no doubt it can be improved through the legislative process. If the Minister believes there are constitutional issues to be teased out, let us do so through the legislative process. If the Bill is accepted by the Government on Second Stage and passed tomorrow, we will have a structure and momentum to turn the examinership process into something which will provide a second chance for viable businesses throughout the country.
Examinership is a complicated process and I would like to use a real-life example to illustrate the problem and opportunity the Bill addresses. Recently I met the owner of a family-run business in Wicklow. The company manufactures for the domestic and international markets. Its exports have been growing steadily in recent years and it has been particularly successful exporting to the United Kingdom. It employs approximately 20 people and as it grows, it continues to hire more workers. It is profitable but, critically, it is insolvent for the following reason. One creditor in the United Kingdom which bought and received a large quantity of product went into liquidation. As a result, this profitable, growing, export-oriented company finds itself with a large hole in its profit and loss account and cannot continue to cover all of its costs. In short, it is insolvent.
What options are available to the company? The first is that it can enter voluntary liquidation. In this case it would be shut down, the staff made redundant, the assets sold and the creditors paid some percentage of what they were owed. In short, everybody would lose. The staff would lose their jobs, their families would lose the household income, the shareholders would lose the company, the creditors would only be paid a fraction of what they were owed, the other companies with which the company works would lose a valuable customer and the State would lose corporation tax, income tax and VAT and have 20 more people out of work to support.
The second option is court liquidation. In this case the creditors would apply to the courts for a forced liquidation. This would have all of the same downsides as voluntary liquidation with the additional downside of heavy legal costs for all parties involved. Everyone would lose, but in this case they would all lose a little more and a few lawyers would win a little more.
The third option is receivership. In this case the creditors would appoint receivers for the secured assets. For the company the secured assets are mainly machinery, vehicles and premises which would be sold off, almost certainly at a loss to the creditors. Without these assets the company would not be able to trade, bringing us back to the same destructive outcome as voluntary or forced liquidation.
The fourth option is examinership. According to how examinership is meant to work, an independent accountant would be retained and he or she would review the company's finances and give an opinion on its viability. In the case of this business he or she would almost certainly conclude, based on what I have been told as I have not seen the books, that the company was viable, that the debts should be restructured and that the company was a good candidate for examinership. An examiner would be hired and prepare a court petition seeking examinership protection and the papers would be filed with the courts. Previously they would have been filed with the High Court, but following the Act introduced in December they are now filed with the Circuit Court. Once the papers were filed, the examinership would be advertised and the creditors would find out about the examinership process and come to court. The company directors, the creditors and their lawyers would all appear in court and the judge would decide whether to award protection to the company. In the case of this company I am pretty sure the judge would award protection because it would be an obvious candidate for the examinership process. The court would then give the examiner 70 days to meet all of the interested parties, prepare a survival plan, have it agreed with all of the creditors and, critically and with difficulty in the circumstances, find new investors to refinance the company post-examination. This process could take several trips to court as any one of the parties might dispute various aspects of it. After all of this, if the examiner was successful, all of the parties would return to court for another hearing, at which the plan would be agreed to by the judge and receive court approval. The outcome of this process would be that the company would continue to trade, the employees would keep their jobs and more staff would be hired as the business continued to grow, the companies which trade with the company would retain a valuable customer, the creditors would get back at least as much as they would have through a liquidation or receivership process and the State would continue to receive taxes.
This is a real case in Wicklow and the company has four potential futures, in three of which everybody would lose. In the fourth, examinership, everybody would either win or be no less worse off than they would be in any of the other three. Given all of this, one would expect this profitable family-owned export-oriented company to come through the examinership process and continue to trade, but as the examinership process works under law today, the chances are that it will not. There is every chance it will end up being forced to close.
This is not an isolated case. In the past three years there have been approximately 4,700 insolvencies and only 64 examinerships. There has been one examinership for every 73 insolvencies. The reason there have been so few examinerships relative to the high number of insolvencies is - I am sure the Minister will agree with me - the examinership process does not work. It is completely unfit for purpose.
I will outline five main reasons the current process does not work. The first is that it is too expensive. The people I prepared the Bill with estimate that an examinership currently costs approximately €70,000 and can be as high as €350,000. Most of that, as we know, is for legal fees due to multiple court appearances. I commend the Minister on his Bill from December, which brought the examinership process from the High Court to the Circuit Court. Based on the contributions made by the Minister at the time, my understanding is that the main reason for this is to drive down costs. I voted for the Bill. I support the Bill, and I welcome the move by the Minister.
The second reason examinership does not work is that it is open to abuse by creditors. I am told that in some examinerships, creditors find ways of forcing proceedings back into the court again and again. I am told they do this to make the examinership process so expensive for the company that the directors are forced to abandon the process.
The third reason the examinership process does not work is that the re-financing costs can be too high. As we know, many banks have so-called on-demand clauses in their loans to small and medium enterprises, SMEs. Therefore, during the examinership they can insist on full repayment against their secured asset. In today's credit-constrained world, the companies cannot find the level of finance needed and again, the process can fail.
The fourth reason the examinership process, as constituted today, fails is that landlords are refusing to budge on upward-only rents, although not in all cases. The people who are doing this on the ground are telling me that some landlords are refusing to budge from the artificially high rent, the bubble era rents, even though they know it means that the company in question will be liquidated.
The fifth reason the examinership process does not work in Ireland is that in some cases essential creditors refused to trade without guarantees. If we take the example of a restaurant, food suppliers may not provide the restaurant with any produce during the examinership process because they are not secured creditors. They will sell the restaurant the fruit, the vegetables and the meat but they know it is in examinership and that if there is any money to be divvied out, they are at the bottom of the pile, and therefore they will not do it. In this case again the examinership process fails because the company cannot continue to trade.
It is the combination of those five problems, and undoubtedly many more, that mean examinership in Ireland is not working for SMEs and because of that, viable companies are being shut down throughout the country and jobs are being lost that should not be lost.
As I said, in the past three years there were approximately 4,700 insolvencies in the country. It is difficult to estimate how many of them could go through a functioning examinership process but if we are conservative and say that one in five of the companies deemed insolvent go through examinership, then over the past three years nearly 1,000 companies that no longer exist would have been saved.
It is entirely possible that the potential prize is much bigger. There are approximately 15,000 SMEs in Ireland. Sadly, that figure is down by about 2,000 since the start of the crisis, but those 15,000 SMEs still account for 70% of the workforce in this country, according to the Department of Finance and, astoundingly, constitute 99% of all companies operating in the Republic. It is an understatement - we hear it all the time; I hear the Minister say it and I say it - that SMEs are the backbone of this economy, but if 70% of the workforce work in them, and they constitute 99% of the companies in this country, then it is worth repeating that saving these companies and helping the sector is helping the backbone of the economy. However, they urgently need a functioning examinership process.
Just a few weeks ago, in December, the Central Bank reported that up to half of the total amount loaned out to SMEs could be in trouble. Currently, about €50 billion is lent out to SMEs. We could be talking, therefore, about €25 billion in loans to the SME sector that are currently in trouble. At the same time, we know that Irish businesses are finding it hard to raise credit. Some of the banks disagree, and perhaps in some cases they are right, but a recent European Central Bank, ECB, survey shows that Irish SMEs are facing significantly tougher credit conditions than the eurozone average. The ECB is saying it is harder for the SMEs to get credit here than it is for SMEs, on average, to get credit in the eurozone.
What is the likely result of that? The Central Bank says half of the loans could be in trouble. The ECB says it is harder for the Minister's SMEs to re-finance, therefore, the likely result is that many more SMEs that do not need to close down will close down this year, next year and the following year. They are viable SMEs that have had a shock to their profit and loss. That may be partly their own fault or entirely somebody else's fault. That will happen because the examinership process does not work. It is not fit for purpose. That is why I have introduced this Bill. I am fairly sure this is the first Private Members' slot I have had on my own since this Dáil term started nearly three years ago. I have chosen to introduce the examinership Bill in that slot because I believe that if we get this process right, thousands of companies that otherwise would close will continue to trade, and tens of thousands of jobs will continue to exist that otherwise would not.
The Bill radically reduces the cost of examinership. Our best estimate is that it will reduce the average from €70,000 to €20,000. It does this by removing the necessity for all parties to appear in court on multiple occasions, hence lowering the legal fees. There is still full court oversight. Any party can still bring proceedings to court at any stage if they wish, and there is still final court authority. The final examinership agreement must still receive court approval.
The Bill makes it more difficult for vexatious or frivolous court involvement. If a judge deems a creditor to be involving the court for vexatious reasons, legal costs can be awarded against that creditor. That makes it much more difficult for a powerful creditor to bully viable businesses out of the examinership process.
The Bill allows the court to impose lending conditions on secured lenders over five years. That is important. It means that a bank cannot simply activate the on-demand clause and shut down a viable business. However, the bank still does well. It retains its security. It is paid 7% per year interest on that security and after the five years, it can call on the security.
The Bill allows the court to change upward-only rent contracts. In this case the rent is adjusted to market rates plus 7% for five years. We are told that the Government sought opinion on upward-only rent agreements in 2011 and that there might be constitutional issues, therefore, it did not try to legislate for them. The case of examinership, however, is different. Should the company be shut down, the landlord would in future receive market level rent from the next tenant, and will incur the cost of trying to find a tenant and get rid of the existing tenant. Under examinership, they would receive 7% higher than the market rate, and they would not incur any of the costs of securing a new tenant. As such, the landlord has not only not been unfairly prejudiced, the landlord's property rights have not been affected but improved based on what would have happened through a receivership or a liquidation process.
The Bill allows the examiner to give priority to certain essential creditors. To go back to the example of a restaurant, the Bill would allow the examiner, with the approval and authority of the court, to give the same level of protection to the company supplying the food as it gives to the bank. This means that essential but unsecured creditors would continue to trade with the company, meaning the company could continue to trade.
I have discussed this Bill with the Small Firms Association and its members support it. They mentioned that they have been trying for years to get the examinership process changed and that the changes in this Bill would work very well.
I have discussed the Bill with the Dublin Chamber of Commerce, and it stated:
The ultimate aim of examinership is to allow the business to survive and recover. It is important that politicians ensure that legal hurdles to enter the examinership process are in proportion to the size of a business. Making sure the process moves as fast as possible will reduce costs for SMEs, leading to more businesses escaping a situation in which all parties would otherwise lose out.
This Bill achieves all of those goals.
The SME sector in Ireland deserves and needs the Oireachtas to support it, and this Bill does that.
It could save thousands of businesses and tens of thousands of jobs without investing 1 cent of public money. If the Government accepts the Bill on Second Stage, we will begin to see the benefits of the legislation very quickly.
I will conclude with a political point. Government Members regularly criticise the Opposition, not unreasonably, for not proposing solutions to the crisis. This Bill offers a good solution which will save businesses and jobs. The question for the Government is whether it is prepared to accept solutions when they are proposed by Opposition Members. I commend the Bill to the House.