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Update | Small Company Administrative Rescue Process

  • Ireland
  • Litigation and dispute management
  • Restructuring and insolvency

25-06-2021

On 19 May 2021, the Minister for Trade Promotion, Digital and Company Regulation (the “Minister”) announced the publication of further information on the Companies (Small Company Administrative Rescue Process and Miscellaneous Provisions) Bill 2021 (the “Bill”) (including the General Scheme of the Bill).

What is the Small Company Administrative Rescue Process?

The Small Company Administrative Rescue Process (“SCARP”) is a standalone rescue framework for small and micro companies. The process mirrors key elements of examinership, with reduced Court oversight and a limited role for the Court. While examinership is a well-established and internationally recognised process, the associated costs have, at times, placed it beyond the reach of small and micro companies. It is hoped that SCARP will result in efficiencies and lower comparable costs. 

What types of companies will be eligible to avail of the process?

Small and micro companies, as defined by the Companies Act 2014 (the “2014 Act”), will be eligible.

A micro company is defined under section 280D of the 2014 Act, as a company that fulfils two or more of the following requirements in relation to a financial year:

  • Turnover not exceeding €700,000;
  • Balance sheet not exceeding €350,000;
  • Average number of employees not exceeding 10.

A small company is defined under section 280A of the 2014 Act as a company that fulfils two or more of the following requirements in relation to a financial year:

  • Turnover not exceeding €12 million;
  • Balance sheet not exceeding €6 million;
  • Average number of employees not exceeding 50.

What will the key features of the process be?

The key features proposed in the General Scheme of the Bill include:

  • SCARP will be commenced by resolution of directors rather than application to Court;
  • Creditors will be invited to vote on the rescue plan within 42 days of the process advisor’s initial appointment, followed by a 21-day cooling off period after the vote (the “Cooling Off Period”);
  • The rescue plan will be approved without the requirement for Court approval, provided a majority in value of an impaired class of creditors vote in its favour and no creditor raises an objection to the plan during the Cooling Off Period;
  • Where an objection to the rescue plan is raised, the company concerned will be automatically obliged to seek Court approval. It is expected this will act as a safeguard for creditors;
  • State creditors may be excludable on limited and specified grounds;
  • In contrast with examinership, there is no automatic stay on proceedings by creditors; and
  • The process will allow for repudiation, enabling the Court to set aside onerous contracts. As in examinership, repudiation is an avenue of last resort, given Court involvement will delay conclusion of the process and increase costs.  As such, contracting parties will be encouraged to negotiate a mutually acceptable position, where possible.

The process advisor

A process advisor will be appointed by a company availing of SCARP to engage with creditors and prepare a rescue plan satisfying the ‘best interest of creditors’ test.

The General Scheme of the Bill provides that a person is qualified to be appointed or to act as a process advisor to a company where they would be qualified to act as its liquidator. Qualifications for appointment as a liquidator are set out under section 633 of the 2014 Act.

Significantly, the General Scheme of the Bill proposes imposing onerous obligations on process advisors. By way of example, where the process advisor fails to undertake any of the following matters:

  • to file the resolution of the company appointing them as process advisor with the relevant Court office within 48 hours after the passing of such resolution;
  • to deliver notice of their appointment to creditors in the prescribed form within 48 hours after the passing of the resolution by the company;
  • to deliver notice of their appointment to the Registrar of Companies in the prescribed form within 48 hours after the passing of the resolution by the company;
  • to cause notification of their appointment to be advertised in the prescribed form on the company’s website and cause notice of the resolution to be issued to Iris Oifigiúil for publication within 48 hours after the passing of the resolution by the company; and/or
  • to give notice in writing of the creditors’ meeting to consider the rescue plan in the prescribed form not less than seven days before the meeting they shall be guilty of a Category 3 offence.

Commentary

Having considered the General Scheme of the Bill in detail, we would note the following:

  • It is clear that SCARP involves a high degree of responsibility on the part of process advisors;
  • There is an opt-out for the Revenue Commissioners and other State creditors for “excludable debt” which includes where there is any liability arising out of any tax, levy or other charge of a similar nature owed to the State. This mirrors the situation under Personal Insolvency arrangements and will require co-operation from the Revenue Commissioners in particular;
  • The requirement to show the relevant company has a reasonable prospect of survival is a major hurdle in examinerships. The absence of this requirement is a significant advantage of the SCARP;
  • A creditor may object to a rescue plan within 21 days’ of the creditors’ meeting on a number of grounds, including that the rescue plan unfairly prejudices their interests or that the proposals were put forward for an improper purpose.  Notice of an objection must be filed with the relevant Court office and shall be set down for consideration by the Court as soon as may be. Notwithstanding this, it is likely that any objections raised would delay the process;
  • The absence of a stay or moratorium means that companies will be exposed to creditor enforcement prior to the expiry of the Cooling Off Period;
  • The ability to apply to court to repudiate onerous contracts such as leases is a significant advantage of examinership and is likely to be required in many SCARP plans.

What next?

The Minister has stated that the Government is determined to introduce SCARP as soon as possible, and that once drafted, the Bill will be published and introduced in Dáil Éireann.

We will provide a further update in due course.

For more information, please contact

Norman Fitzgerald, Partner in Dispute Resolution and Litigation - NormanFitzgerald@eversheds-sutherland.ie

Neil O’Mahony, Partner in Dispute Resolution and Litigation - NeilOMahony@eversheds-sutherland.ie

Barbara Galvin, Senior Associate in Restructuring and Insolvency - BarbaraGalvin@eversheds-sutherland.ie

Paula Shine, Solicitor in Dispute Resolution and Litigation - PaulaShine@eversheds-sutherland.ie