In the face of rising business costs, practitioners must ensure that more SMEs avail of the Small Company Administrative Rescue Process in the months ahead, writes Graham Kenny
In 1990, the Iraqi dictator Saddam Hussein led a ground force invasion into Kuwait. This war was to serve as an unlikely catalyst for a radical overhaul of corporate restructuring in Ireland.
It set in train a clear evolutionary lineage to the Small Company Administrative Rescue Process (SCARP) recently enacted under the Companies (Rescue Process for Small and Micro Companies) Act 2021.
To understand this evolution, it is important to consider what actually happened in 1990. The economic effects of the invasion of Kuwait had immediate and dire consequences for Ireland.
Up to 70 percent of Larry Goodman’s Anglo Irish Beef Group exports were sent to Iraq and its customers went into immediate default.
Faced with the collapse of one of the largest employers in the State, the then Taoiseach Charles J. Haughey hastily recalled the Dáil from its summer recess and passed the Companies (Amendment) Act in August 1990.
This piece of legislation introduced examinership into the Irish statute books and, for the first time, permitted protection from creditors and the subsequent write-off of company debts.
Over the past two decades, I have been involved in many of the seminal cases of examinership across a range of sectors, including the first Supreme Court hearing of an examinership (In Re Gallium Limited [2009] IESC 2009).
My experience is that examinership has served as an essential corporate restructuring tool, saving thousands of jobs through schemes of arrangement.
Often, however, the costs associated with such restructuring have been cited as a disincentive for smaller companies to use the process. As a result, examinership has notionally remained the preserve of larger companies.
The genesis of SCARP
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, SCARP came into force in December 2021.
This new Act is based largely on the examinership model, but notably does not require an application to court for its commencement.
Like examinership, the idea behind SCARP was to give companies breathing space from their creditors in order to implement a restructuring plan, which ordinarily included the write-off of a portion of creditors’ debts.
Before discussing the necessary role SCARP will have to play in the coming months, it is important to first undertake a brief overview of the salient features of this new corporate restructuring tool.
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 14 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 14 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 is 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; and
- details of the Process Advisor’s remuneration.
How is the Rescue Plan approved?
Section 558T puts the 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 48 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.
The future of SCARP
Corporate restructuring requires a fine balance between competing corporate interests, employee rights and duties to creditors.
An unfortunate consequence of this complexity is that the rules governing such restructuring, whether under examinership or SCARP, can be convoluted and sometimes confusing.
But this fact alone should not deter practitioners from seeking appropriate advice and permitting struggling companies from reaping the benefits of this multifaceted legislation.
The low number of companies availing of SCARP thus far is bewildering. I would suggest that one of the main reasons for this sluggish start is simply the unfamiliarity of practitioners with the process.
The well-worn path of liquidation is regrettably often proffered by advisors before a full consideration of SCARP (or indeed examinership) is properly undertaken.
I think the main reason SCARP has not taken hold, however, is down to the extensive supports and debt warehousing that has been offered by the State.
In my experience, entrepreneurial directors live in the moment and dream of a brighter future. Directors can be reluctant to focus on the dark clouds on the horizon and are often instead consumed with an arguably unrealistic optimism.
A report published by the Revenue Commissioners in March 2023 highlighted that 13,000 businesses have been expelled from the tax warehousing scheme for non-compliance and are now facing a 10 percent penalty charge.
Perhaps more worryingly, the same report shows that about 63,000 businesses still had a combined €2.2 billion tax debt in the warehousing scheme. This report also revealed that such debts owed by businesses in the scheme ranged from 19,000 businesses owing less than €100 to 6,400 owing more than €50,000.
Jobs and livelihoods at stake
Behind all of these abstract statistics, it is important to remember that these businesses employ 400,000 people who, in turn, have families to support.
In the face of both cost-of-living and housing crises, it appears inevitable that any rise in corporate insolvency rates would have a devastating impact on countless families within the next two years.
In light of these stark numbers, it is incumbent on practitioners across Ireland 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.
Graham Kenny is a Partner in the Dispute Resolution and Litigation Practice Group at Eversheds-Sutherland LLP
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