Small Company Administrative Rescue Process (SCARP)

SCARP is suited to companies which are about to be insolvent or are insolvent but have a reasonable prospect of survival. In order to qualify to avail of SCARP, an applicant company must satisfy two of the following three criteria:

• Annual turnover of less than €12m;
• A balance sheet total of less than €6m;
• Average number of employees less than 50.

98% of all corporate bodies in Ireland will qualify under the above criteria, making this a very accessible restructuring tool for companies in difficulty.

Further restrictions are that SCARP is only available to companies where no resolution exists or no court order has been made for the winding up or liquidation of the eligible company. In addition, applicant companies must not have availed of SCARP or examinership within the previous five years. There can be no petition for examinership currently before a court and no examiner appointed to the company concerned.

As set out above, the SCARP legislation was brought in to make restructuring options more accessible and less expensive for small and micro enterprises. In this regard, the appointment of the person tasked with overseeing SCARP (a ‘process adviser’) takes place in the boardroom; there is no requirement to make an application to court like in an examinership.

The appointment of the process adviser takes place via a board resolution i.e., the board of directors of the company resolve to appoint a process adviser. Prior to the appointment taking place, there are certain pieces of information which are required to be provided by the directors of the company to the nominee process adviser. The primary document being the statutory statement of affairs for the company and financial information which is required for the process adviser to prepare their report. Based on all of this, the process adviser prepares their report on the affairs of the company and critically, whether in their view, it has a reasonable prospect of survival.

Within 7 days of the process adviser issuing their report to the company, accompanied by their determination on the prospects of survival for the company, the directors must hold the aforementioned meeting for the appointment of a process adviser.

The appointment of the process adviser takes immediate effect following the passing of the board resolution.

SCARP imposes a number of strict deadlines on the process adviser, which include notifying creditors and employees of the company within 5 days of their appointment. However, the primary duty of the process adviser is to formulate a rescue plan that enables the survival of the company which may include a write-down of the debts of the company. The process adviser is required to formulate this plan and issue notices for meetings of members and creditors within 42 days of their appointment. The meetings of members and creditors are required to take place no later than day 49 of the process adviser’s appointment.

The process adviser will work to secure funding to enable the formulation of a rescue plan. This funding may come from a combination of any number of sources including: (i) fresh equity investment (ii) surplus cash flow (iii) new bank lending and/or (iv) sale of any non-core assets.

Having undertaken more SCARP appointments than any other firm, and having acted as examiner in over 280 examinerships, Azets Ireland has a bank of potential investors and refinancing solutions available to companies in any restructuring process.

Under the legislation, certain State creditors have the ability to opt-out of SCARP. These State creditors include the Revenue Commissioners, in respect of unpaid taxes, and the Department of Social Protection, in relation to sums previously paid to employees and claimed from the social insurance fund.

If these creditors opt-out of SCARP, this can create significant uncertainty for the company and any potential investor. Our initial experience at Azets Ireland is that these creditors have adopted a reasonably supportive approach to companies availing of SCARP to date.

The process adviser is required under the legislation by day 49 of the process to have convened meetings of members and creditors for the purposes of considering the rescue plan formulated. The process adviser is required to provide 7-days’ notice to all members and creditors of the relevant meetings; therefore, the process adviser must issue the notices convening the meetings by day 42 of the process.

The rescue plan is a two-step process:

1. Firstly, the rescue plan must be approved by at least one class of impaired creditor (a class of creditor receiving less than the full value of their debt) where 60% in number of creditors voting, representing a majority (over 50%) of the debt vote in favour of the rescue plan; and
2. Secondly, there is a 21-day objection period after the process adviser has filed their notice of approval with the relevant court where any creditor can object to the rescue plan as formulated.

On expiry of the 21-day objection period, and where no objection has been lodged, the rescue plan is approved and becomes binding on all members and creditors of the relevant company, regardless of whether members or creditors voted to accept the rescue plan.

Similar to examinership, SCARP provides for the repudiation of certain onerous contracts where the process adviser has determined that such contracts are particularly burdensome on the company and their continuation is negatively impacting on the company’s prospects of survival. 

The repudiation can either take place by way of (i) court application or (ii) agreement with the relevant third party as to the claim for damages. In both scenarios, the claim for the damages will be included in any rescue plan as an unsecured debt. However, where the claim can be agreed without the requirement for court involvement, this will obviously be more cost-effective and allow for a greater return to creditors rather than incurring the associated legal and professional fees which would arise in a court application.

The mechanism to repudiate any onerous contract is a vitally important tool in any restructuring and it has been regularly used to great effect in multi-unit retail restructurings where loss-making units were required to be surrendered to landlords and the only mechanism to do so in a going concern trading scenario was by way of a repudiation application in an examinership.      It is possible to disclaim onerous contracts in a liquidation but the distinction there is that to do so is not in a going concern scenario.

Examples of onerous contracts which typically arise in restructurings would include above-market lease terms or a loss-making customer contract.

In the majority of SCARPs, there will be little to no involvement from the Court in the process. For example, there is no requirement to seek formal court approval of any rescue plan provided no creditors object within the 21-day cooling-off period that follows the creditors' meetings.

In limited circumstances there may be a requirement to engage with the Court, for example:

• To seek Court direction on any matter that may arise during the tenure of the process e.g., serving notice of SCARP      on creditors in foreign jurisdictions;
• Seeking a stay on creditor enforcement actions including receivership appointments;
• To repudiate onerous contracts, if agreement cannot be reached with counterparties to the contract.

In the event there is an objection to a rescue plan lodged by a creditor within the 21-day cooling-off period, there will be a requirement for a Court hearing. During this time, the 70-day SCARP timeframe is paused i.e., ’the clock is stopped ‘ until the hearing of the objection has taken place.