Timely new rescue process announced for small and micro businesses in Ireland

The Department of Enterprise, Trade and Employment has published the heads of the Companies (Small Company Administrative Rescue Process and Miscellaneous Provisions) Bill 2021 (SCARP) in a bid to support smaller businesses, which represent 98% of companies in the country and employ around 788,000 people. 

SCARP aims to contribute to efforts by the government to counteract the hardship felt across the economy over the past year, with the Bill being described as “an appropriate regulatory response which supports fundamentally viable companies to continue to trade and get themselves back on their feet”.

SCARP is designed to supplement the pre-existing examinership process in Ireland which is typically availed of by larger companies.

Examinership is a process where a company in financial difficulty can potentially be restructured via the appointment by the court of an independent examiner. Examinership provides a period of court protection during which creditors can't pursue legal action which enables the examiner to make restructuring proposals and seek investment to ensure the survival of the company.

While the examinership process is frequently and successfully used to rescue companies in financial difficulty, it has faced criticism for being unsuited to smaller businesses due to its associated costs. SCARP will be greatly welcomed by small businesses in financial distress as it is intended to be more accessible and cost-friendly, improving their chances of survival.

SCARP's overarching mantra is to mirror elements of examinership but with limited court involvement, thereby reducing costs. The process will be available to companies with a turnover not over €12 million and a balance sheet not exceeding €6m, with no more than 50 employees.

The process will commence by resolution of the directors, rather than by application to court, where an independent accountant has prepared a report stating that the company has a reasonable prospect of survival.

It is shorter than examinership with a planned 70 day period, rather than up to 100-150 days in the examinership process. Rather than an “examiner” there will be a “process advisor” who will engage with creditors and prepare a rescue plan which must satisfy the "best interest of creditors" test, be fair and equitable and provide a better outcome for creditors than a liquidation.

There will be no automatic stay on proceedings by creditors seeking enforcement but a stay is available on application to court. If a receiver or provisional liquidator has already been appointed, the company can seek direction from the court as to the status of their appointment

The Revenue Commissioners and Department of Social Protection may opt out of the process in respect of certain taxes, levies and debts on one of five specified grounds.

Contracts may be repudiated through SCARP. Similar to the test on examinership, there is no requirement that these contracts are onerous, simply that the contract must have some element of performance remaining by both parties other than payment.

A simple majority in value in one class of creditors is required to pass the rescue plan, and approval of a rescue plan is not contingent on a court application. Instead, it becomes binding after 21 days of the creditors' approval of the rescue plan, unless a creditor files an objection which then triggers the requirement for court approval of the rescue plan.

What will this mean for small and micro businesses?

The announcement of this legislation is timely considering the struggles felt by businesses as a by-product of the Covid-19 pandemic. Draft legislation will be awaited with enthusiasm by many for this ‘out-of-court’ cost-effective rescue process.

There will be significant engagement with stakeholders through the public consultation process, which may result in some changes to the key features. For example, consideration may need to be given on the impact of SCARP on pre-appointed receivers or provisional liquidators and whether a cut off period for the use of SCARP should be introduced in these circumstances, as is the case in examinership.

Additionally, the proposal that certain taxes can be excluded from SCARP may challenge the overall effectiveness of SCARP as often these will be significant liabilities that companies have on their books.

Notwithstanding these questions, SCARP will be a welcome rescue alternative for small and micro businesses who are in financial distress who will hopefully not have to wait long. The messaging from the government is clear – SCARP needs to be introduced as soon as possible.