The EU Preventive Restructuring Directive (PRD) became Irish law from July 27 2022.
The purpose of the PRD is to ensure that there are restructuring frameworks in place to assist viable businesses that are in financial difficulty to continue to operate.
The Corporate Enforcement Authority (CEA) in January 2023 issued an information note “to assist company directors in understanding certain aspects of the Regulations, i.e., those aspects having a particular bearing on directors’ duties and responsibilities.”
The CEA highlights the importance in keeping adequate accounting records on a timely basis allied to accurate management information including budgets and cashflow projections.
The note assists directors to understand:
- what is meant by a company being in financial difficulty, being unable to pay its debts and being insolvent
- their duties when a company is in financial difficulty
- the potential consequences of non-compliance with their legal duties
- the restructuring options open to companies where financial difficulties are being experienced including SCARP, examinership and informal arrangements.
The CEA provided a list of non-accounting indicators that might suggest to directors that a situation might be developing in which a company will experience financial difficulties.
| INDICATORS OF FINANCIAL DIFFICULTIES | |
|---|---|
| Revenue/sales | – declining/rapidly declining sales |
| – loss of key contract(s) | |
| – insufficient capital to meet sales growth | |
| – contractual obligations to fulfil loss making contract(s) | |
| – growing number of dissatisfied customers/customer complaints | |
| – market saturation, new/increased competition | |
| Expenses | – substantial/unsustainable increases in business expenses |
| Debtors | – aged debtor profile deteriorating (i.e., customers taking progressively longer to pay) |
| – increasing/unsustainable bad debt levels | |
| – key debtor(s) going out of business | |
| Suppliers | – company exceeding agreed credit terms without supplier approval |
| – suppliers reducing, or withdrawing, credit terms | |
| – suppliers unwilling/unable to supply | |
| – increased reliance on a small number of suppliers | |
| – key supplier(s) going out of business, or themselves being in financial difficulty | |
| Inventory | – company holding high volumes of slow moving/obsolete stock |
| – company unable/failing to meet customer orders due to stock management / supply chain issues | |
| Cashflow/Funding | – depleted/non-existent of cash reserves |
| – late payment of essential services (e.g. rent, electricity) | |
| – receipt of reminders/final demands increasingly a feature | |
| – late filing of Revenue returns to delay discharging debt | |
| – overdraft facilities consistently being maximised/exceeded with associated high interest commitments | |
| – banks and/or other providers of finance unwilling to advance additional funding/offering less favourable terms | |
| – fixed term borrowings approaching maturity without realistic prospect of renewal or repayment | |
| – reliance/over-reliance on credit cards to make payments / credit card balances not being cleared regularly | |
| – directors funding the business with personal funds | |
| – overreliance on group companies to meet day to day funding needs | |
| – reliable cashflow forecasts indicating a deficit that cannot be met | |
| – poor liquidity ratios | |
| Other | – breaches of the terms of loan agreements |
| – legal proceedings threatened or issued, or judgments obtained against company for outstanding debts | |
| – directors/management spending disproportionate amount of time dealing with problems as opposed to growing the business | |
| – failure to meet obligations to the Revenue Commissioners, e.g., non-payment of obligations as they fall due, or failure to maintain instalment payments or direct debits as they fall due | |
| Financial reporting/accounting records/management accounts/management information | – management accounts indicating declining profit margins/ ongoing losses/cash deficits |
| – management unwillingness to acknowledge/confront issues | |
| – management reluctance to produce timely management information, i.e., problem avoidance | |
| – management reluctance to bring issues to the attention of the auditor/efforts to conceal information from the auditor | |
| – unrealistic assumptions/data being used to support going concern basis of preparation of statutory financial statements | |
| – irregularities in accounting records | |
| – significant delays in being able to finalise statutory financial statements | |
| Force Majeure events | – unforeseen events impacting upon a supplier and/or customer and/or on a company supply chain |