The Department of Enterprise, Trade and Employment has published the outline of proposed legislation for a dedicated rescue and restructuring framework for insolvent or potentially insolvent small and micro companies – see here.

The proposed framework, the “Small Company Administrative Rescue Process” or SCARP, follows from a report by the Company Law Review Group published last year (see here). It is modelled on the existing examinership process but is intended to be more accessible and cost-efficient for smaller companies. 

Features of SCARP

Key features of the proposed framework include:

1. It will only be available to small companies (being companies that satisfy at least two of the following three criteria – turnover less than €12m, balance sheet less than €6m and less than 50 employees) or micro companies (being companies that satisfy at least two of the following three criteria – turnover less than €700,000, balance sheet less than €350,000 and less than 10 employees);
2. The process will commence by a resolution of the company’s directors following receipt of a report by an independent accountant that the company has a reasonable prospect of survival.  No court application is necessary;
3. An insolvency practitioner will be appointed as the “process advisor” to formulate a plan to rescue the company and must do so within six weeks of his or her appointment;
4. Whilst the role of the courts will be significantly less than in an examinership; the process advisor can elect whether the High Court or Circuit Court shall have jurisdiction over the process;
5. A stay on creditor enforcement actions will be available upon application to the relevant court;
6. Existing burdensome contracts, such as property leases, can be terminated with the approval of the relevant court;
7. The rescue plan can provide for the write-down of liabilities and must be approved by at least one class of impaired creditors acting by a majority in value;
8. Certain taxes and levies can be excluded from the restructuring;
9. The rescue plan must be designed to secure the survival of the company, must be fair and equitable and cannot impose a worse outcome for a creditor than would be achieved in a winding up of the company;
10. If approved by at least one class of impaired creditors, the rescue plan becomes binding, without court approval, 21 days after the creditor approval unless a creditor files a formal objection to the plan; and
11. Where this occurs, the process advisor must apply to the court to have the rescue plan confirmed and must satisfy the court that the rescue plan is fair and equitable and does not unfairly prejudice the objecting creditor. Otherwise, court approval of the rescue plan is not required.

Observations

The proposed framework significantly reduces the court’s role and leverages the strength of the existing examinership process. If enacted, it will enhance the ability of otherwise viable small businesses to recover and restructure following financial difficulties, including difficulties arising from the COVID 19 global pandemic. 

The proposed framework will undoubtedly be subject to further development as it progresses through the legislative process. An area that requires some consideration is the proposal that certain taxes and levies could be excluded from the restructuring. If those liabilities are significant, which they often are, this could undermine the effectiveness of a rescue plan and the proposed framework.

The outline published by the Department also provides for proposals to making the temporary amendments to the Companies Act 2014 that facilitated virtual shareholder and creditor meetings (see previous note) permanent together with proposed reforms in respect of committees of inspection in a winding up.

For further information or to discuss the proposed framework in more detail, please contact any member of the Insolvency Team.