“SCARP” – The Practitioner’s Toolkit.

In February 2020, Covid-19 reached Ireland and had a devastating effect on many small businesses. In response to the threat of another financial crisis, legislation was introduced that incorporated a new restructuring tool known as the Small Companies Administrative Rescue Process (“SCARP”) in December 2021. 

This new process is based largely on the examinership model, but notably does not require an application to court for its commencement. The idea behind SCARP is to give companies breathing space from their creditors in order to implement a restructuring plan, which ordinarily includes the writing off of a portion of creditors debts. 

The biggest challenge for practitioners is identifying when this legislation can be used and how they can apply it to their clients. This will undoubtedly become a new source of work for practitioners as the likes of retail shop owners, pubs, restaurants and some construction companies struggle with rising costs and reach out to their solicitor for help. 

The following guide aims to enable practitioners to identify likely candidates for SCARP and consider whether a Rescue Plan under the new legislation is possible. 

Who can apply?

The Companies (Rescue Process for Small and Micro Companies) Act 2021 is aimed at protecting “small” and “micro” companies. 

Small companies are defined as having an annual turnover of up to €12 million, a balance sheet of up to €6 million and up to 50 employees. 

Micro companies are defined as having a turnover of up to €700,000, a balance sheet not exceeding €350,000 and up to 10 employees. 

How does a company prepare for SCARP?

The first step a company should take in considering the SCARP process is that the directors should prepare a statement of affairs in accordance with section 558B(4) of the act. 

The statement of affairs is accompanied by a statutory declaration that is then given to a Process Advisor.

What is a Process Advisor?

The Process Advisor is ordinarily an experienced insolvency practitioner who will attempt to restructure the company’s debts. It may be noted that the company’s auditor or accountant cannot act as its Process Advisor. 

The Process Advisor will review the company’s statement of affairs and other financial information (as set out in Section 558C(4)) and then outline their determination as to whether the company has a “reasonable prospect of survival”. 

It is important to note that a Process Advisor does not take executive powers and that the board of the company maintains full control. The Process Advisor’s fees are subject to super-preferential status over all other creditor claims.

How does the rescue process commence?

If the Process Advisor determines that the company does have a reasonable prospect of survival, then they will confirm this in writing to the directors of the company. 

Section 558D(2) sets out that, within seven days of receipt of such confirmation, the directors shall convene a board meeting to consider whether the appointment of a Process Advisor is appropriate. 

Section 558K compels the Process Advisor to notify employees, creditors and the Revenue Commissioners within five days of their appointment. 

Section 558O states that creditors must acknowledge receipt of such notice within seven days and further information regarding their claim within fourteen days.

Can a creditor opt out of the rescue process?

Section 558L provides a list of potential excludable debts. This list includes the Revenue Commissioners. 

Notably, the holders of such excludable debts have fourteen days to notify the Process Advisor of their intention to be excluded from the rescue plan. Such creditors must give reasons for their decision to opt out. 

From anecdotal evidence, it appears that the Revenue Commissioners are largely supportive of the process and generally determined to opt in.

What is a Rescue Plan?

Section 558Q sets out the matters that must be incorporated into any Rescue Plan. These include:

- a statement of affairs.

- the likely outcome for creditors on a winding-up or receivership.

- the effect of the plan on each creditor.

- the reasons why the plan is fair and equitable. 

- details of the Process Advisor’s remuneration. 

How is the Rescue Plan approved?

Section 558T puts on onus on the Process Advisor to call a meeting of members and creditors as soon as is practicable after preparing the Rescue Plan. 

Section 558T(4) requires that such meetings shall be fixed for a date no later than 49 days after the date on which the Process Advisor was appointed. 

It is important to note that creditors must be give seven days notice of such meetings, so in reality the meetings must be convened no later than day 42.

Section 558Y(4) sets out that a Rescue Plan shall be deemed to have been accepted by a meeting of members or creditors when 60 percent in number, representing a majority in value of the claims represented at that meeting, have voted in favour.

Section 558Y(5) sets out that the Rescue Plan shall be binding on members and creditors where at least one class of impaired creditor accepts the plan and, furthermore, that 21 days have passed from the date of filing of the notice of approval in the relevant court office and no objection is filed in accordance with section 558ZC.

Section 558Z requires that creditors are given notice of such approval within forty-eight hours. It is important to note that under section 558ZB the Rescue Plan will not become binding on members and creditors until 21 days have elapsed from the filing of the notice of approval.

What does it mean for a Process Advisor to “certify” certain liabilities? 

Like Examinership, the Process Advisor is given the power under section 558ZAA to certify company liabilities. 

This certification means that such liabilities are treated as expenses of the Rescue Plan and therefore give such creditors a preferential status. 

This provision is often used as an incentive to encourage creditors to continue to trade with the company while a Rescue Plan is formulated. 

Practitioner’s checklist before entering SCARP!

As can be seen from the above timelines, the timelines in SCARP are tight. It is recommended therefore that the following should be discussed with your client before entering into the process:

• Prepare an up-to-date Statement of Affairs of the Company.

• Provide a full listing of all Company’s creditors and their addresses.

• Provide a full list of retention of title claims and existing stock details.

• Consider how a Rescue Plan would be funded. Will directors introduce funds?

• Prepare a statement of the estimated outcome in a liquidation and compare this with a proposed Rescue Plan.

The future of SCARP

Considering the stark numbers of rising small business failures, particularly in the hospitality space, it is incumbent on practitioners to seek the appropriate advice from corporate restructuring specialists when consulted by companies in this quagmire of historical debt. 

The sooner this advice is sought and considered, the more realistic the company’s chances of survival will be. SCARP offers a vital lifeline to many struggling companies, and in the coming months, it needs to become a standard go-to option for practitioners and their clients.