On May 24, the Collector General issued proceedings in the High Court against Mac Interiors, one of the biggest fit-out companies in the country.

Mac Interiors is part of Mac Group Holdings, a northern Irish company ultimately controlled by Armagh businessman Paul McKenna. At its peak, the group employed 200 people across four offices in Ireland and the UK.

The latest accounts for Mac Interiors are for the 18-month period to the end of June 2021. At first glance, they show a company in rude financial health – it reported revenues of £116 million over the previous 18 months and had capital and reserves of £15.5 million, with £4 million in cash.

So, why was the tax authority pursuing the company? There were hints in those accounts: at the time, the company owed £5.5 million in  tax and social security costs. Like many companies, it had opted to warehouse its tax liabilities during the pandemic, one of tens of thousands of companies to avail of the scheme. 

What was not public knowledge at the time was that its tax bill has swelled in the period since then to more than €13 million. A forensic report by accountants EY would later reveal that, on a consolidated basis the Group has been unprofitable since the 2019 financial year with accumulated losses in the region of £27 million. 

With Revenue in pursuit, the company dispatched its lawyers to the High Court to secure bankruptcy protection and the appointment of an examiner. That examiner, Interpath accountant Kieran Wallace, pieced together a rescue plan that would save the business but result in significant pain for creditors. All classes of creditors backed the proposal. All bar one – the Revenue Commissioners. 

And this is where it gets interesting. Revenue normally takes a neutral stance in examinerships because, as a preferential creditor, it tends to get repaid in full. In this case, however, because the debt has been warehoused for more than 12 months, it was treated as a normal creditor and was being asked to write off the vast bulk of its debt.

When the scheme of arrangement went before the High Court, Revenue opposed it on technical grounds – namely, that certain creditors had not been classified correctly. Last week, it won, with the judge saying he would not ratify the application.

Revenue’s appeal may have been technical, but its motivation was more philosophical. For a start, the tax authority does not like to be crammed down. It will restructure payment dates and work with companies on flexible schedules, but it is not in the business of writing down debts. 

Plus, there is €1.9 billion still sitting in the tax warehouse, and a successful application by Mac Interiors could have prompted a host of other companies to seek examinerships to help make their tax debts evaporate. That was why the case was followed so closely by accountants, lawyers, and businesses.

A number of lobby groups have called for debt forgiveness on the warehoused debt, but this has been understandably rejected by government. After all, what sort of message does it send to the companies who went above and beyond to pay their tax bills during the pandemic period?

As such, the use of an examinership to achieve the write-down has caused significant concern in official circles. 

The tax authority has already been forced to write off €85 million in warehoused debt due to liquidations and businesses ceasing to trade. Revenue is determined to keep that figure low.

However, the issue of warehoused debt will not go away. The numbers are simply too big. At the end of August, there was €1.9 billion in the warehouse – of which €947 million was in Vat (essentially a tax that the consumer has already paid).

Some 59,500 companies are currently availing of the scheme. However, this number is slightly misleading as 66 per cent of that number owe less than €5,000 (in fact, 49 per cent of all those in the warehouse have an outstanding balance of less than €1,000).

The bulk of the debt – €1.62 billion – is warehoused by just 5,900 companies. And it is this cohort of businesses that are most at risk.

And there are certain sectors more at risk than others. Some 16 per cent of outstanding debt is owed by companies in the accommodation and food service industry, while a whopping 21 per cent are companies in the wholesale and retail trade.

Construction makes up 12 per cent of the debt as do companies operating in  “professional, scientific and technical activities”.

For struggling companies with significant outstanding debts, the proposed Mac Interiors solution might have offered a path forward. And this was a point made by the examiner, who argued that the scheme was designed to save jobs and keep a company alive.

Plus, creditors, including Revenue, would get more of a dividend from the scheme than a liquidation, the court was told. 

However, for Revenue, writing down so much debt – with the potential of much more to come for other businesses – was a step too far. 

Is there a middle ground to be found? Speaking to Francesca last week, Joanne Cooney of the Corporate Restructuring and Insolvency team at Byrne Wallace, had a nuanced take.

“The court has determined that this Revenue debt in the region of €13 million wasn’t properly classified. What might be a workaround in this particular case would be to find that if your normal trade creditors are getting one cent in the euro as a dividend as part of one class, Revenue’s warehoused debt, which has because of the passage of time become unsecured, is in a special class of its own. And so would potentially be entitled to a greater return in the examinership.”

“I think it’s a fair argument to make,” she added. “That you can’t have the unprecedented assistance of the state in the warehousing of taxes being entirely written down in this way through the process of examinership when that was unlikely to have been the intention of the government at the time. This was a break given to people and businesses in a time of unprecedented economic hardship.”

The written judgment in the case has not been published yet, and it may yet provide some clarity. However, with €1.9 billion still in the warehouse, it is an issue that will not go away anytime soon. 

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