The aim of the Small Company Administrative Rescue Process (SCARP) is to provide a rescue tool for SMEs that are facing temporary difficulties, giving them an option to restructure through a combination of debt write-down and new investment that is significantly cheaper and less bureaucratic than examinership.
“SCARP was introduced to provide a quicker and more affordable restructuring option to small and micro businesses in Ireland facing insolvency. SCARP is based on the key components of the examinership process but is more streamlined and quicker without court involvement,” explains Ian Barrett, a restructuring director in KPMG.
It is too early to tell if SCARP has made a difference to SMEs facing short-term difficulties but the early signs are encouraging. Since SCARP legislation was enacted in December 2021, there have been 10 SCARP appointments.
While this may seem like a small number, it reflects the low but slightly increasing number of insolvency appointments during the same period.
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“Of the 10 SCARP appointments to date, six were made during August 2022, which shows interest in the process is picking up. However, three SCARP appointments resulted in successful outcomes for the respective companies. The other processes are still ongoing, so we will not see the real impact of SCARP for another while,” Barrett predicts.
So far, half of all SCARP appointments are from the hospitality sector, which is unsurprising given the industry’s broad range of challenges. Other appointments have come from the construction and retail sectors.
“It is widely accepted that a high volume of corporate insolvencies has been avoided due to various government supports, tax warehousing and creditor forbearance. Since the onset of the Covid-19 pandemic, the level of insolvencies has been artificially low. As supports are removed, it is expected the volume of insolvencies will increase, and we anticipate more companies will explore SCARP as an option to restructure their debts,” Barrett adds.
Along with removing government supports, businesses face a swathe of challenges including geopolitical uncertainty, growing inflation, increasing interest rates, an energy crisis, labour shortages, and supply chain issues after Covid-19 and Brexit.
“These issues adversely impact companies’ financial position and drive costs upwards for businesses and consumers, which has started and will continue to dampen business and consumer sentiment,” he points out.
Early action by companies is critical
Directors who are concerned about a company’s financial position should take professional advice. “This advice can set out options for a board and recommended steps to take, given a company’s financial position. If left too late, SCARP or other restructuring options may not be feasible at that point, when, unfortunately, closure/liquidation may be the only possible outcome,” says Barrett.
As SCARP is a short process, typically lasting less than 70 days, a company should undertake careful planning well in advance of entering SCARP to ensure the process adviser can hit the ground running and quickly propose a fair and equitable rescue plan for all creditors.
“If investment in the business is required, investment options would need to be explored in advance of SCARP commencing, which would form part of a company’s planning for SCARP, and ultimately form part of the rescue plan proposal to the creditors,” he explains.
As debts owed to creditors such as the Revenue Commissioners and Department of Social Protection can be excluded from a rescue plan, the potential position adopted by the most likely impacted creditor, the Revenue Commissioners, will have an impact on future SCARP appointments.
“Given the highly influential role Revenue will play in certain SCARPs, it is important to consider how the Revenue may assess the merits of a rescue plan,” he cautions.
“In addition, the position of other key creditors, such as landlords, critical suppliers and service providers, will also need to be carefully considered, as these creditors will need to support rescue plans proposed by process advisers.”
How it works
The SCARP scheme was introduced by the Companies (Rescue Process for Small and Micro Companies) Act 2021 to give help to certain companies that are viable, yet insolvent.
It is open to companies with fewer than 50 employees, with a turnover not exceeding €12 million. In allowing companies to restructure their debts it can help companies avoid liquidation – ensuring creditors get a better outcome than they would under a liquidation.
To avail of it, a specialist process adviser – who must have the same qualifications as a liquidator under the Companies Act 2014 – must make a request for Revenue to participate in a rescue plan.
As with other insolvency procedures, the company’s existing auditor or accountant cannot act as a PA. The PA gives Revenue a Letter of Authority to act on behalf of the company in the SCARP process.
Revenue has the option to opt out of any debt reduction agreement under SCARP and may do so if the company has failed at any time to comply with a requirement relating to tax imposed; has an open Revenue audit or intervention; or is party to an appeal in relation to a requirement relating to tax.
Companies should be aware when entering the SCARP scheme that any Revenue debt within SCARP will be removed from the Debt Warehouse, the company must file and pay all taxes when they are due and debt reduction under SCARP may result in additional tax liabilities which will need to be considered in the rescue plan. If a company fails to comply with the terms of the SCARP agreement, Revenue may apply to court to challenge the continuation of the process or place the company into liquidation or receivership.
Challenging times
Research from PwC, conducted earlier this year, indicates that government supports – primarily the Employee Wage Subsidy Scheme – during the pandemic saved 4,500 businesses from business failure.
