It felt like the vultures were circling Aidan Mehigan, founder of the Gortinore Distillery, owner of the Natterjack whiskey brand.
The company he founded in 2014 had entered an investigation after Covid-19 had pulled the rug out from under its feet.
Trade had been strong before the pandemic but crucial export sales were suffering – and now Mehigan was running out of time to find a backer who would help Gortinore leave the protection of the court and focus on whiskey again.
It was the most stressful time Mehigan had ever gone through.
“It was really tough – my wife was six months pregnant and we had no income. Our parents were amazing. You need an incredible family around you. We just didn’t know a way out.
“The writing was on the wall. We ran out of money’
“We knew one thing,” he adds. “We had this advantage in the Natterjack brand that people liked and wanted. Unfortunately we just ran out of roads because of Covid.”
At a certain point, the prospect of an exam position seemed unimaginable.
By the end of 2019, Natterjack whiskey’s first year on the market had gone much better than Mehigan had anticipated. It has already been exported to four international markets, including China and six US states.
When Covid hit, there was also a viral outbreak of business uncertainty. The global hospitality industry that Mehigan catered to was in free fall.
“A US venture capitalist approached us. They put $5 million on the table for about half the deal,” he says. “With the hospitality industry in freefall, I said absolutely.”
While working on that deal, Mehigan admitted he lost track of the ball in terms of surviving Covid. The deal dragged on for 18 months and sales slowed to a trickle.
“The writing was on the wall. We would run out of money.”
A 2018 €850,000 promissory note owned by a Jersey-based company called Cowcub, which is linked to a US businessman, was due. The company had gone into receivership.
In April, Mehigan was able to switch to the Examination Board and under the protection of the court, giving Gortinore a chance to survive.
“In this situation everyone loses – but you have the chance to grow in the future”
After some misconceptions, Mehigan reached out to John Green, former CEO of Founders Brewing Company. Green was excited and called other potential US investors, Dale Grogan and Tim Schowalter.
Mehigan and Gortinore landed the funds needed and had the most competitive package. It could leave the examination office.
“It was wonderful. I ran to my wife’s family and just hugged my mother-in-law. There was just a wave of relief.”
Mehigan admits some creditors got cents in euros on their debt.
“It’s painful and stressful. Everyone loses in this situation – but you have the chance to grow in the future.”
“There is growing concern that more entrepreneurs will feel the pain of bankruptcy”
Mehigan’s business survived to fight another day – but many others won’t be so lucky.
As the economy enters another period of significant uncertainty – this time fueled by runaway inflation and pressures from Russia’s war in Ukraine – there are growing concerns that more entrepreneurs will feel the pain of default.
Last week, accounting giant PwC released a report claiming that the direct economic damage from corporate defaults in Ireland is expected to exceed €2 billion by the end of 2022. More than 350 companies have already filed for bankruptcy this year, with associated debts of around 1.6 billion euros.
The third-quarter report found that the rate of corporate bankruptcies has remained at a record low this year, but is showing signs of picking up. Corporate defaults increased 31 percent in Q3 compared to Q2, mainly due to the liquidation of SMEs.
With these well-characterized economic uncertainties and government supports that have helped keep businesses afloat during the winding-down of the pandemic, such as Revenue’s Covid-19 tax warehouse program, could more bankruptcies be on the horizon?
“When people start to feel the pressure, they will consider their options”
Declan de Lacy, restructuring partner at PKF O’Connor, Leddy & Holmes, says it’s difficult to say whether the spike in bankruptcies is due to “statistical noise” or a trend.
He predicts that the first quarter of next year will be the “big bang in the numbers.” He believes restrictions on ending petitions and more active enforcement by the IRS will have an impact.
“That’s going to increase the pressure — and when people start to feel the pressure, they’re going to consider their options.”
De Lacy is wary of making predictions. However, he does not believe that we will reach the level of liquidations of 2014. He believes cases could double, reaching around 600-700 next year, like around 2016.
Sectorally, most cases of bankruptcies have occurred in hospitality, construction and retail.
The recently launched Small Company Administrative Rescue Process (SCARP), a low-cost mechanism for small businesses to avoid going into liquidation by reaching a compromise with their creditors and landlords, will also increase, according to de Lacy.
SCARP involves the appointment of an insolvency practitioner to devise a plan to turn a troubled business into viability. Creditors are divided into classes with similar rights, and the scheme becomes binding on all if at least one class of them votes to approve it.
Earnings have the right to opt out of a SCARP program under a variety of circumstances, including when there is a history of poor tax compliance.
De Lacy says that storing tax debt isn’t “bad tax compliance” — but failing to agree on a phased payment agreement (PPA) before the due date is.
He believes that troubled companies should initiate SCARP before the storage period ends in December, as larger creditors such as banks and the Inland Revenue may be reluctant to cause systems to fail.
“This reluctance is unlikely to last very long.”
“In July, 84,000 companies were still using debt storage with €3bn parked”
Uptake of SCARP has been low to date, with only 11 cases. However, De Lacy believes the number will rise to about 50 in the next year.
De Lacy is concerned about how much cash small businesses hold. According to a 2020 Central Bank report, half of SMEs are estimated to have annual sales of 5 percent or less in cash.
In July, 84,000 companies were still using the revenue’s debt storage program, with around €3 billion parked.
“We’re now at the end of a period of bad trading where they stored the debt,” says de Lacy. “If they don’t have the money to pay off the debt, which they probably don’t, they’ll have to do a PPA. And they won’t be able to if they can’t pay 25 percent of the debt up front.
“It’s hard to imagine how a company that has done poorly for two years and started without a good cash cushion can now pay that 25 percent.”
Revenue said companies should make arrangements to pay off stored debt ahead of their applicable deadlines, either in December or April. This allows the parties to create a repayment plan.
“If payment difficulties become apparent, the tax office will proactively work with the affected company to find an agreed solution to these difficulties. In most cases, a mutually satisfactory solution can be found without resorting to collection/enforcement sanctions.”
Revenue adds that it “appreciates the challenge for companies to service their outstanding debt in a difficult economic and financial climate.” It says it has encouraged struggling companies to work proactively with them.
“When your business collapses, it’s difficult to focus on anything other than business.”
Nicholas O’Dwyer, Financial Services Advisory Partner at Grant Thornton Ireland, says he believes the Irish economy has held up “fairly well”.
“Nobody really knows where we’re going to end up,” he says of bankruptcies, adding that moves are likely to be made in the second quarter. He believes many will try to “get through the winter” rather than join SCARP now. “If you have a bad winter trade, you are challenged.”
O’Dwyer also believes banks will try to avoid appointing insolvency practitioners.
“They could try to clarify their position on companies not committing or not paying their debts when they are due. This will mean that companies will have to seek advice from practitioners on their actions.
“I think next year will be really interesting,” he says.
Neil McDonnell, chief executive of lobby group Isme, says his members are concerned.
“As winter begins, many companies are facing their most serious trading period since 2008-2010. It’s potentially that bad.”
With these comparisons to previous recessions, McDonnell points to the terrible toll that bankruptcy can take on entrepreneurs’ mental health.
“It’s not a problem that one small business is going to go through this winter that another small business hasn’t gone through. So pick up the phone and talk to someone. There is a lot of goodwill out there.”
Gortinore founder Mehigan remembers how tough the test was.
“When your business collapses, it’s difficult to focus on anything other than business,” he says. “You have to find the space to ask yourself, ‘Is this business working?’
“The exam is tough. A lot is said and implied about you and how you ran the business.”
Mehigan is focused on the future. Despite grueling experiences over the past two years and ongoing discussions with Waterford City and Co Council about a proposed distillery, he remains optimistic.
“We will do what we set out to do at the end of 2019,” says the whiskey entrepreneur.
https://www.independent.ie/business/irish/insolvency-is-the-big-bang-coming-for-irish-businesses-42048092.html Bankruptcy: Is the ‘Big Bang’ coming for Irish companies?