Small Company Administrative Rescue Process (SCARP) was passed into legislation by the Oireachtas on 13th July 2021. The process provides a rescue tool for SME’s which aims to provide a low-cost alternative to examinership as it is designed to eliminate or significantly reduce the requirement for court intervention which can be costly through examinership.
One of the main drawbacks of SCARP is Revenue’s ability to withdraw from the process, however, to do so they must be able to demonstrate that there is a history of non-compliance. Another key consideration is repudiation of onerous contracts such as leases which are likely to be a common theme facing companies in distress given the move from ‘bricks and mortar’ to ‘click and order’ and indeed the hybrid working model that looks to be here to stay. Whilst repudiation of leases is provided for in SCARP, it requires court approval and in some cases will introduce additional costs to the process where the landlord does not consent. On balance, SCARP is a welcomed tool and it is likely that the process will be considered widely by SMEs in distress with viable underlying businesses as a means to cram down unsecured debt.
Who qualifies for SCARP?
SCARP provides for small companies who are unable or likely to be unable to pay their debts as they fall due. They must meet the following criteria:
- The proposed legislation restricts the process to small companies which comprises up to 98% of companies in Ireland and are defined by companies who meet two of the following three criteria:
- Turnover does not exceed €12 million
- The balance sheet total does not exceed €6 million
- The average number of employees does not exceed 50
- The Process Advisor is required to carry out an assessment of the business before the process commences and must conclude that the company has a reasonable prospect of survival after the rescue plan is implemented.
- The process is enacted by way of Company resolution rather than a Court application and is overseen by a Process Advisor who is an Insolvency Practitioner. There is a more detailed commencement process required and specific filing obligations.
- The Directors must provide a statement of affairs and confirm by statutory declaration that they have carried out a detailed review of the affairs of the company.
- There is no automatic stay from creditor action during the period, however, if required the company can make an application to Court to stage during the process. Making the Court action discretionary is designed to reduce costs furthers as such a stay may not be necessary in all cases.
- The Process Advisor may apply to Court to stand down a Receiver / Provisional Liquidator if it can be demonstrated that the Company has a reasonable prospect of survival.
- The process timeline extends to 70 days with the Rescue Plan to be submitted to court for approval by day 49 allowing for a 21 day objection period for creditors.
- The scheme will be approved by 60% in number, representing a majority in value of at least one class of impaired creditors at the creditors' meetings. Creditors have the ability to object to the vote and seek court direction, however, they will have to set out their position in court and absorb the associated costs.
- Cross cram down of debt is permitted. This gives the Company the ability to impose a scheme even on dissenting classes of creditors where it can be demonstrated that they would be worse off under the relative alternative restructuring tool. The specific mechanism for approving the scheme has yet to be determined. It may be the case that approval of the court is required for all schemes with cross cram down of creditors.
- The process allows for repudiation of onerous contracts, however, they must be approved in court. A separate court application may not be required where the landlord consents to the repudiation and it is simply approved as part of the submission of the Rescue Plan.
- Excludable creditors (state creditors such as the Revenue Commissioners and the Department of Social Protection) have the ability to opt-out of the process. They must provide the specific grounds for opting out of the process such as failure to comply with tax requirements, being party to an ongoing audit or an appeal relating to a tax requirement.
- If the Process Advisors conclude that a Rescue Plan is not possible, they must set out alternative recommendations. The recommendations are not binding but if the Directors fail to take them and within six months the company is wound down, the court may consider reckless trading and a restriction application.
SCARP is designed to avoid interactions with Court and it is possible to conclude the process without court applications. The following applications are likely to be most common:
- A stay on receivership and provisional liquidation appointments. In order to do so, they must be able to demonstrate to the court that the Company has a reasonable prospect of survival.
- A stay on proceedings that were live at the date of commencement.
- Application to repudiate a lease. This is only likely to arise if the landlord contests the repudiation, otherwise, repudiation will be approved when the Rescue Plan is filed with the court.
- The Process Advisor must notify the landlord of intention to repudiate within 10 days.
- Consideration must be given to any proposals/modifications put forward by the landlord.
- Notify the landlord of intention to include a provision repudiating the lease in the Rescue Plan and inform them of their right to participate at the meeting or file an objection.
- Creditor objection to the Rescue Plan.
- The creditor must set out the grounds of the application in court which must have been specified in advance in a notice of objection. The grounds must include unfair prejudice, inequitable or put forward for an improper purpose.
- Where a creditor files a notice of objection the burden of proof is on the Process Advisor which ensures that the scheme cannot fail by simply lodging an objection.
- If the objection is upheld, the scheme must be modified otherwise it will fail.
- If the scheme is objected to but the Process Advisor can prove that the creditors would fair worse under a liquidation scenario it is unlikely that the Court would uphold the objection.
- If the objection is dismissed the Rescue Plan comes into effect immediately
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