SCARP Comes To The Rescue For Ireland's SMEs
The Irish Government has drafted legislation for an expedited restructuring process for viable small businesses needing to be rescued financially, known as the Small Companies Administrative Rescue Process (SCARP). This scheme and the reasons for its introduction are summarized here.
Currently, firms in financial difficulties can go to court to seek an examinership. Under this process, the court will appoint an Examiner who will oversee the restructuring of a company and possibly secure additional sources of funding. Importantly, during the period of the examinership, creditors are unable to take legal action in respect of the company's debt.
However, as a court-driven process, an examinership can be costly and lengthy, and for this reason, it is often out of reach for small and micro-firms.
SCARP – Main Features
The SCARP scheme is designed specifically with small companies in mind, and as such it is a more light-touch, timely, and cost-effective solution for potentially viable firms in need of restructuring.
The scheme is being introduced through an amendment to the Companies Act 2014, known as the Companies (Small Company Administrative Rescue Process and Miscellaneous Provisions) Bill 2021 and includes the following main features:
- SCARP may be initiated by a resolution of the company's directors instead of by application to court, provided that an independent accountant has verified that the company is viable and that no creditor objects to the procedure;
- A "process adviser", who must be a qualified liquidator, will be appointed by the company to draw up a rescue plan and liaise with creditors. The rescue plan must satisfy the "best interest of creditors" test and provide each creditor with a better outcome than liquidation;
- Creditors will be invited to vote on the rescue plan by day 42 of the insolvency practitioner's appointment. By contrast, the examinership process can take up to 150 days.
- A rescue plan does not need court approval unless a creditor objects within a 21-day cooling-off period following the vote, following which there is an automatic obligation on the company to seek the Court's approval.
Worth noting separately is that SCARP includes repudiation provisions. These will provide for the option to repudiate onerous contracts or agreements, such as leases. Respondents to a consultation on the scheme said this is often vital to a successful restructuring. However, this could potentially add additional costs to the process from court fees.
It is also notable that, as with an examinership, no creditors are excludable under SCARP. As such, tax debts remain on the table, unless the Revenue excludes itself on a set of limited grounds.
Who May Benefit From SCARP?
The SCARP scheme is open to companies with no more than 50 employees, with turnover not exceeding EUR12m, and a balance sheet not exceeding EUR6m.
Why SCARP Is Needed
Small businesses make up 98 percent of all companies in Ireland. Therefore, there was an obvious need for a scheme supplementing the examinership process which, by virtue of its financial and time costs, potentially excludes a huge swathe of the country's viable businesses from being rescued in the event of financial trouble. And the need for a scheme like SCARP has become all the more pressing given the impact on small businesses in particular of legal restrictions on commerce and people's movement during the pandemic.