The Small Company Administrative Rescue Process (SCARP) was commenced on Tuesday 7 December. Now that the process is available we set out some practical considerations for companies and creditors.
The outcome of a successful SCARP is similar to examinership but where a process adviser takes on the role of the examiner and much of the role of the court. It enables small and medium companies to write down debt and restructure. It is intended to operate without any court involvement except where the company cannot get out of the lease of a premises by agreement or there is an objection to the proposed restructuring.
Considerations for Companies Seeking to Avail of SCARP
Choosing the Process Adviser
The process adviser must be qualified to be the liquidator of the company. Broadly, this means an accountant or a solicitor but, practically, we anticipate that almost all process advisers will be accountants. Once appointed the process adviser is key to whether the restructuring will be successful. The process adviser also has significant powers and is required to make decisions of the type normally made by a judge.
A process adviser needs to be someone that the directors believe understands the business and the relevant law and that they can work with. They probably need to have sufficient experience of insolvency in general and, in particular, examinership, to have credibility with the company’s creditors and, if necessary, the court. An experienced insolvency practitioner will also be alive to the potential problems that will arise, specifically with respect to dealing with creditors.
If you are considering availing of SCARP, spend time selecting an appropriate process adviser.
Do you need SCARP?
One of the most useful features of restructuring mechanisms like SCARP is that they provide a backdrop against which to negotiate with creditors. Once you and the creditors understand what is possible to achieve with SCARP, or any other formal restructuring mechanism, it may be possible to resolve your company’s difficulties on a negotiated basis without recourse to SCARP. For instance, a landlord or large supplier may consider swapping debt for shares or providing an extended period for payment of debt. The person you are considering appointing as a process adviser should be willing to advise you on such approaches.
Pick your time
Over the past few months most people thought that COVID-19 restrictions were coming to an end in Ireland. However, current trends and the Omicron variant make that quite uncertain. A company can only avail of SCARP once in a five-year period. Therefore, if a company decides to avail of SCARP, if there is any wriggle room on timing, you should time the process so that you are confident that with the restructuring your company will survive. To make this more concrete, if your business is losing money with the current restrictions but scraping by with government supports, you may wish to consider delaying the SCARP until the easing of restrictions is likely. As against that, you need to weigh the possibility that by continuing to trade without availing of SCARP, you are trading recklessly. Again, your process adviser should be able to help.
Pick your location
It is likely that, if court applications are required, they will be in the Circuit Court, rather than the High Court. This is something that your process adviser actually gets to choose, to a certain extent. If the relevant court is the Circuit Court, it be in the Circuit where your company’s registered office is located. It may be more cost effective to change the address of your company’s registered office so talk to your process adviser about this.
Talk about fees
While the best approach is not necessarily to appoint the process adviser who offers the lowest price, you should discuss fees at the outset. In particular, in most instances, you should plan for how the process will work if an application to court is required and understand the likely costs involved.
Be frank with the Process Adviser
Nothing is more likely to derail a SCARP process, or increase the fees, than the process adviser discovering information late in the process. That said, if you disclose or acknowledge acts or omissions that may constitute criminal offences to a process adviser, they may have obligations to disclose them to various authorities. Accordingly, you may wish to discuss such matters first, with a solicitor, where legal privilege may apply.
Considerations for Creditors
If you are owed significant sums by a number of small or medium companies, it is very likely that one or more of them will avail of SCARP in the coming months.
Accordingly, you need to understand the process and, in particular, the time constraints. Consequences flow from not complying with those time constraints, for instance, if a creditor does not set out its claim the process adviser can estimate it and if a person owed excludable debt does not object in time, that debt will be included in the rescue plan.
In particular, 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.
SCARP potentially offers an attractive, lower cost rescue mechanism for small and medium companies. However, it will likely take some time for all the nuances of the process to be fully understood by all involved.
The content of this article is provided for information purposes only and does not constitute legal or other advice.