Global menu

Our global pages

Close

Ireland’s New Restructuring Process for SME’s - The Small Companies Administrative Rescue Process (“SCARP”)

  • Ireland
  • Corporate
  • Corporate secretarial services
  • Restructuring and insolvency

26-07-2022

The Eversheds Sutherland LLP team, led by Graham Kenny, were delighted to advise the process adviser, Joseph Walsh, on the formulation and ultimate approval of a rescue plan under the new SCARP legislation. It is only the second successful completion of the process in Ireland to date.

The Companies (Rescue Process for Small and Micro Companies) Act 2021 amends the Companies Act 2014 (the “Act”) and provides a rescue process for small and micro companies that are, or are likely to be, unable to pay their debts. SCARP is designed to supplement the Examinership process in Ireland which is typically availed of by larger companies.

Who is eligible for SCARP?

The process will be available to companies with

• A turnover of less than €12 million.

• A balance sheet not exceeding €6m.

• With no more than 50 employees.

What is SCARP?

SCARP allows viable companies experiencing temporary financial problems to restructure with the agreement of creditors and write off some of its debt. SCARP mirrors elements of Examinership but where a process adviser takes on the role of the Examiner and much of the role of the Court. As SCARP is effectively an “out of court process” it eliminates or greatly reduces the requirement for Court intervention making it more cost-effective, accessible and arguably a more efficient process for smaller companies.

SCARP Process

• Appointment of Process Adviser

In order to enter the rescue process, the company will engage an Independent Insolvency Practitioner to act as a process adviser (“Process Adviser”). A Process Adviser must be qualified to act as a liquidator under Section 633 of the Act.

The directors of the company are required to prepare a sworn statement of affairs in a prescribed form. The Process Adviser will then then issue a report on whether the company in their opinion has a reasonable prospect of survival and whether a SCARP should be undertaken (the “Report”).

Protection under SCARP

It is worth noting that there is no automatic protection for the company under SCARP. However, once the Process Adviser has been appointed, they may apply to the Court for some protective measures. Examples of such protective measures would be an order restraining proceedings being initiated against the company, or the enforcement of security over the company's property.

• Resolution to enter Process

In order to formally commence the SCARP, the directors of the company must call a board meeting within seven days of receiving the Report and pass the appropriate resolution to enter the process. Creditors are then informed the process has started and are afforded an opportunity to provide input to the Process Adviser and to disclose any facts they consider material to the process. Specifically, creditors receive a proof of debt form which must be returned within 14 days. Where a creditor holds a guarantee for the debt of a company, if it wishes to rely on its guarantee, it must transfer its voting rights to the guarantor, within 48 hours.

• Excludable Creditors

Excludable creditors (state creditors such as the Revenue Commissioners and the Department of Social Protection) have the ability to ‘opt-out’ of the process. However, such creditors must provide the specific grounds for opting out of the process.

• Formulation of Rescue Plan

The Process Adviser having reviewed the Company’s financial circumstances and consulted with stakeholders including directors, creditors and shareholders, will prepare a draft rescue plan (the “Rescue Plan”). Notably, the company will continue to be managed by its directors.

The Process Adviser must call a meeting of members and each class of creditor within 42 days of his/her appointment. The Process Adviser shall provide seven days’ notice of such meetings, and shall furnish specific information to the creditors and members (as set out in Section 588U(3) of the Act). Such information will include a copy of the Rescue Plan, a statement of the company’s assets and liabilities and the likely financial outcome of a winding-up or receivership.

Such meetings shall take place no later than day 49. As can be seen from the short timelines involved, the process moves very swiftly.

• The Rescue Plan

The Rescue Plan can provide for the write-down of liabilities and cross-class cram down. This means that where one class of impaired creditors vote in favour of the Rescue Plan, it can be imposed on all classes of creditors.

Critically, however, the Rescue Plan must satisfy the “best interest of creditors” test (i.e. provide each creditor with a better outcome than a liquidation). In addition, no creditor may be unfairly prejudiced by the Rescue Plan.

• Company Directors

At any point during the rescue process, where it appears to the Process Adviser, that any past or present officer or member of the company has been guilty of an offence in relation to the company, the Process Adviser is obliged to report the matter to the Director of Public Prosecutions and the Corporate Enforcement Authority.

• Threshold for Approval

Creditors have a right to vote on the Rescue Plan and must be provided with detailed information on its content before this vote takes place. The Rescue Plan must be approved by 60% in number, representing a majority in value of at least one class of impaired creditors at the creditors' meetings. Where the Rescue Plan is approved by the creditors and members, the Process Adviser must notify the employees, the Revenue Commissioners and any impaired creditor or member within 48 hours.

• Creditors Objections

Creditors also have the right to object to a Rescue Plan. Once an objection is lodged, this triggers an automatic requirement for the objection and Rescue Plan to be considered by the relevant Court. A creditor seeking to object to the Rescue Plan, must select one of the grounds of objection (set out at Section 558ZC(3) of the Act) and notify the Process Adviser and Court of the objection. If the objection is upheld by the Court, the Court may order that the rescue plan be modified.

• Binding Effect of Plan

The Rescue Plan is binding on the company, members, creditors and directors where it has been accepted by at least one class of impaired creditor, where 21 days have passed from the filing of the notice of approval and where no objection has been made.

Future of SCARP

Small and micro enterprises account for the majority of companies in Ireland and support somewhere in the region of 788,000 jobs. Following on from the trials of Covid and in the face of rising inflation, it is expected that many more companies will require this process in order for them to have a fresh start and continue to trade successfully.

For further information in relation to SCARP, or alternative corporate restructuring mechanisms, please get in touch with Graham Kenny, Liam Boyle or your usual Eversheds Sutherland LLP contact.