In a recent article we set out the key features of SCARP, the government’s proposed rescue process for small and micro companies. The proposed legislation envisages that:
- SCARP will be available to small companies, unable or likely to be unable to pay their debts as they fall due, that satisfy two or more of the following three requirements:
- annual turnover of up to €12m;
- a balance sheet total of up to €6m;
- up to 50 employees.
- SCARP can be initiated by a resolution of the company’s directors (not a court application).
- Before the directors pass the resolution, they must obtain a report from an independent accountant stating that the company has a reasonable prospect of survival.
- An insolvency practitioner is appointed as the “Process Advisor” to formulate a plan to rescue the company within 42 days of appointment.
- The rescue plan can provide for the write-down of liabilities and cross-class cram down.
- The rescue plan must be approved by at least one class of impaired creditors acting by a majority in value.
The SCARP framework is modelled on examinership but is intended to be more accessible and cost-efficient for small companies because of the reduced involvement of the court.
Repudiation in SCARP
It is likely that a key feature of most restructurings, particularly in the retail sector, will involve the exit from non-profitable or burdensome contracts such as property leases that are no longer required or are overrented.
The proposed SCARP framework allows the Process Advisor, subject to court approval, to “affirm or repudiate” a burdensome contract under which some obligation other than payment remains outstanding, such as a lease. Any person suffering loss because of the repudiation becomes an unsecured creditor. The court can determine the amount of damages due to that person. Repudiation or affirmation will only be granted by the court where it is necessary for the survival of the company.
The proposed provision effectively mirrors the process for repudiations in an examinership, except that the SCARP application is brought by the Process Advisor rather than the company.
What will repudiation mean for landlords?
We anticipate that the practices and principles established in examinership case law are likely to be applied by the court in any SCARP applications.
These principles include the following:
- repudiation is only applicable to contracts where some performance element, other than payment, remains to be performed;
- the counterparty shall stand as an unsecured creditor for the amount of any loss or damage flowing from the repudiation;
- repudiation of a lease will only be granted where it is proven that repudiation is absolutely necessary for the survival of the company as a going concern.
Lessons learned from New Look and Norwegian Air Examinerships
In October 2020, William Fry acted on behalf of two of the three landlords (Landlords) who objected to an application by New Look Retailers (Ireland) Limited (New Look) for the appointment of an examiner. Click here to learn more about this significant case.
The Landlords argued that New Look had not explored alternatives to examinership and was using the process to force the landlords to change fundamental terms in the leases rather than engage in meaningful negotiation with them.
The High Court ultimately refused New Look’s application for the appointment of an examiner. Mr Justice McDonald decided that New Look had satisfied the test in legislation for examinership. However, McDonald J exercised his discretion not to appoint an examiner on the basis that it had not engaged with its landlords. He suggested that companies explore less drastic options such as negotiating with landlords before pursuing an application for examinership. This case highlights the need for companies to meaningfully engage with their landlords before seeking the court’s protection.
In the recent examinership of Norwegian Air, Mr Justice Quinn noted that it is necessary for the court to balance the interests of the individual counterparty such as landlord against the interests of the company and the company’s members and creditors before granting a repudiation. Mr Justice Quinn stated that although the repudiations sought affected the rights of the counterparties, they were necessary because the survival of the Norwegian group was dependant on them being carried out. He emphasised that simply demonstrating that repudiation will facilitate the examiner’s proposals for the rescue plan for the company is not enough. It must be demonstrated that the survival of the company will be prejudiced if the repudiation is not granted.
Potential impact on SCARP
Unlike examinership, SCARP will commence by a directors’ resolution of an eligible company, without a court application. Therefore, a landlord is unlikely to be able to prevent an eligible company from entering SCARP. However, the repudiation of a contract by a company in SCARP, such as a lease, would require a court application. This would give a landlord a right to be heard by the court.
A SCARP rescue plan is likely to propose the payment of a dividend being a percentage of the debt due to creditors. However, similar to examinership, the proposed legislation provides that the rescue plan must not unfairly prejudice any creditors. Where a landlord believes that it is unfairly prejudiced by a proposed rescue plan, it can raise an objection and refer the plan to court. The court can uphold an objection, reject the rescue plan or confirm the rescue plan with or without changes.
SCARP proposes to facilitate a mechanism through which small companies can seek to terminate or repudiate onerous leases. However, recent cases confirm that repudiation will only be granted where strictly necessary for the survival of the company. A court might be reluctant to grant repudiation where there has been no attempt at meaningful engagement with landlords or the exploration of alternatives. Lastly, it will be open to creditors such as landlords to object to a rescue plan on the basis that they are unfairly prejudiced. They can refer the SCARP to court where their concerns will be considered.