Small Company Administrative Rescue Process (SCARP)

Introduction

As part of the Government’s medium-term stabilisation response to the economic challenges of the Covid 19 pandemic, the Companies (Small Company Administrative Rescue Process and Miscellaneous Provisions) Bill 2021 provides for a stand-alone rescue framework for small and micro companies.

I have summarized some of the key requirements of SCARP below but having reviewed the Bill I would suggest that the process involved in reaching arrangements and settlements with corporate creditors in this format would be similar to the Personal Insolvency legislation. In my role as a PIP we have been actively managing personal insolvency cases since 2012 following the last financial and economic crash.

The Small Company Administrative Rescue Process (SCARP) seeks to mirror key elements of examinership in an administrative context thereby reducing court oversight resulting in efficiencies and lower comparable costs. It has limited court involvement where creditors are engaged in the process and they are willing to support a rescue plan.

Main Provisions

The main provisions of the Bill can be broadly summarised as follows:

• Designed for “small” and micro companies (as defined by the Companies Act 2014) which represents the majority of companies in Ireland.
• To qualify a company must satisfy two or more of the following three requirements:
• Annual turnover of up to €12m;
• A balance sheet total of up to €6m;
• Up to 50 employees.
• Commenced by resolution of directors rather than by application to Court.
• Concluded within a shorter period than examinership.
• An insolvency practitioner (who must be qualified to act as liquidator under the Companies Act) is appointed by the company to begin engagement with creditors and prepare a rescue plan
• A majority of value (50% + 1) of the total creditor pool is required to support the rescue plan,
• Provides for format of cross class cram down of debts designed to reduce costs.
• Does not require application to Court for approval of rescue plan (provided no creditor objections).
• Gives safeguards against irresponsible and dishonest director behavior.
• The rescue plan must satisfy the ‘best interest of creditors’ test and provide each creditor with a better outcome than a liquidation.
• In addition to this, no creditor may be unfairly prejudiced by the plan.
• Creditors are invited to vote on the rescue plan by day 42 of the insolvency practitioner’s appointment. The proceedings in relation to the required meetings of creditors are in keeping with existing provisions of the Companies Act.
• The rescue plan is approved without the requirement for Court approval provided that a majority in value of an impaired class of creditors vote in favour of the proposal and no creditor raises an objection to the plan within the 21-day cooling off period which follows the vote.
• Where an objection to the rescue plan is raised, there is an automatic obligation on the company to seek the Court’s approval. This acts as a safeguard for creditors.
• Concluded within a shorter period than examinership (examinerships can currently run for up to 150 days, SCARP seeks to arrive at a conclusion within 70 days, subject to extension where necessary for Court applications).
• Provides that State creditors, the Department of Social Protection and the Revenue Commissioners may be excludable from the process. This means they may determine to “opt out” of the process on the basis of statutory grounds, for example if the company has a poor history of tax compliance. 

Protection for Creditors

SCARP also incorporates sufficient safeguards for the protection of creditors:

• As there is no automatic stay on proceedings, creditors are not impaired by virtue of entry to the process.
• Creditors are afforded an opportunity to provide input to the process advisor (insolvency practitioner) upon his or her appointment to disclose any facts they consider material to the process.
• There are various enforcement provisions in relation to failure to comply with filing, notice and information obligations.
• The process advisor (insolvency practitioner) will be subject to the same reporting requirements as a liquidator.
• The current requirements in respect of restriction applications will also apply. 
• It will allow Landlord’s leases to be repudiated, but an application to court will be necessary if the landlord does not voluntarily agree

Why should a company consider SCARP

The process will be an agreement between your company and its creditors to gradually pay off your debts over an agreed (short-term or a long-term) period, typically from one to five years, or, alternatively, to accept a lump sum payment.

Availing of the Small Company Administrative Rescue Process can prevent creditors from closing down your business using a winding up petition. This allows you to continue trading while paying back your creditors over time and keeping your company in business.

Not all companies will be eligible to enter into a SCARP. If your company has a business model that just isn’t viable and hasn’t ever produced a profit, it’s unlikely that your creditors will be willing to accept a SCARP proposal. It maybe difficult for some sectors to prove that they will be viable over the coming years as the economy recovers as this may depend on how badly their business has been impacted by the pandemic.

Unlike liquidation, which could leave creditors with little or no money once your company is wound up, a SCARP guarantees creditors a certain amount of their debt over the repayment period.

If you believe that your company may need to seek the assistance of SCARP then I would suggest that you take preparatory steps to review your business with an experienced insolvency practitioner and seek the appropriate advice now.

Regards

Mark Ryan, CPA,

Personal Insolvency Practitioner (PIP),

Partner, Quintas

Email: mark.ryan@quintas.ie

Mark Ryan is authorised by the Insolvency Service of Ireland to carry on practice as a personal insolvency practitioner.