SCARP – New Rescue Process Announced for Small and Micro Businesses

While examinership is a successful and internationally recognised rescue process for Irish companies, there has been a concern for some time that is out of reach of smaller businesses due to the associated costs. As part of the government’s response to the economic challenges of the pandemic, the Department of Enterprise has published a rescue process for small and micro businesses.

The proposed Small Company Administrative Rescue Process (SCARP) provides for a stand-alone rescue framework for small and micro companies. The primary focus of the proposal is to reduce complexity and costs and the means of achieving this goal is by making it an out of court process.
 
SCARP will be available to companies that have a turnover not exceeding €12 million, a balance sheet total not exceeding €6 million, and where the average number of employees does not exceed 50. This means it will effectively be available to about 98% of companies in Ireland.
 
Key Features
 
Although the Bill has not yet been published, the recent Press Release outlines the primary features of the proposal. The process will be commenced by resolution of the directors and will be overseen by an insolvency practitioner. This will provide safeguards to stakeholders against irresponsible and dishonest director behaviour. The insolvency practitioner will prepare a rescue plan which may be passed by a simple majority in value of creditors and will allow for cross-class cramdown of debts. The rescue plan will not require court approval, provided there are no creditor objections. The process is to be concluded within a period of 70 days, which is considerably shorter than the time allowed in an examinership (currently up to 150 days).
 
It is noteworthy that the general scheme does not make reference to whether the repudiation of contracts may occur through the process. Repudiation of contracts has been the key to success in many examinerships.
 
Effect on Creditors
 
Unlike examinership, there will be no court protection or automatic stay on proceedings against the company. This could be controversial, as it seems that creditors may still be a threat during the process. Although creditors will not be impaired by virtue of entry to the process, they may be impaired by the cross-class cramdown of debts. In recognition of the property rights of creditors and the need to balance the respective rights, where an objection to the rescue plan is raised, there will be an automatic obligation on the company to seek the court’s approval for the plan. This will act as a safeguard for creditors. The rescue plan must be proven to satisfy the ‘best interest of creditors’ test, providing each creditor with a better outcome than in a liquidation and ensuring no creditor may be unfairly prejudiced by the plan.
 
In order for the rescue plan to be successful, creditors must be engaged with the process and be positively disposed to it. However, State creditors will operate on an “opt-out basis” on prescribed grounds, such as if the company has a poor history of tax compliance. Although it is suggested that the State would not remove itself from the process for arbitrary reasons, where Revenue is often the largest creditors for struggling businesses, a poor tax compliance history will likely preclude that business from availing of SCARP. This could also prove controversial.
 
Conclusion
 
SCARP seeks to mirror key elements of examinership but with increased efficiencies and lower costs making it more accessible to smaller businesses. This is welcome news for companies which have come under additional strain during the pandemic, but which have a viable business that should survive with the appropriate assistance.
 
Written by Mark Woodcock and Ciara Gilroy.