The Irish Government has published the details of a new 'out-of-court' rescue process for small companies, the Small Company Administrative Rescue Process or 'SCARP'. The process seeks to borrow some features from the well-established examinership rescue process, but with one fundamental difference, being the limited role of the Irish courts proposed for SCARP. The relative high cost of examinership for smaller companies has historically been found to be a barrier for entry. Furthermore, while a facility for smaller companies to file for examinership in the lower courts was introduced a number of years ago, it did not gain much traction as the cost of the process was not sufficiently altered. With SCARP, the Irish Government is seeking to provide a more affordable restructuring tool with an 'out-of-court' process.
For those who may be interested in the expected next wave of Irish NPL sales, which will undoubtedly emerge in some form or another once the economy reopens, SCARP may need to be factored into any due diligence or modelling exercise given the possibility of those non-performing loans being reduced through a streamlined administrative process which incorporates cross-class cram-down.
The high level features of the legislation have been published and include the following:
- SCARP will be available to small and micro companies as already defined under Irish company law (turnover does not exceed €12m; balance sheet total does not exceed €6m; number of employees does not exceed 50 employees);
- it will be commenced by way of a resolution rather than by an application to court;
- an insolvency practitioner will be appointed by the company to act as Process Advisor to engage with its creditors and to formulate a rescue plan for the company – the company will continue to be managed by its directors;
- SCARP will have a 70 day period (the creditors of the company to vote on rescue plan within 42 days, followed by a cooling-off period for 21 days post-vote);
- recourse to court for creditor objections to rescue plan within 21 days of the vote;
- the rescue plan will be approved where one impaired class of creditors vote in favour of it – this allows for a cross-class cram-down;
- State creditors (Revenue Commissioners and Department of Social Protection) may be excludable from the process; and
- there is no automatic stay on proceedings by creditors.
We await the draft legislation and will publish a further note to consider in detail SCARP and its impact in due course.
We are all aware of the enormous pressure business owners currently face in terms of not only their immediate liquidity, but also the sustainability of their business into the future. This is particularly true of small and micro companies, with 78% operating in sectors which have been particularly challenged by the pandemic such as retail, hospitality and the service industry. Our response to the crisis has proven successful in mitigating the immediate impact of the pandemic on the sector. However, as the economy re-opens, we must have an appropriate regulatory response which supports fundamentally viable companies to continue to trade and get themselves back on their feet.