The Companies (Rescue Process for Small and Micro Companies) Act 2021

What is SCARP?

On 7 December 2021, the Companies (Rescue Process for Small and Micro Companies) Act 2021 (SCARP) came into operation.

SCARP amends the Companies Act 2014 (the 2014 Act) to establish a new rescue process for small and micro companies that are, or are likely to be, unable to pay their debts. The new rescue process is modelled on the existing examinership process but has been designed to be utilised by small and micro companies. Due to the reduced role of the court in the process, SCARP will be a more cost-efficient process and more accessible than examinership for small and micro companies. 

Who can avail of SCARP?

A company can avail of SCARP as a small company if any two of the following conditions are satisfied:

1. The turnover of the company does not exceed €12 million
2. The balance sheet of the company does not exceed €6 million
3. The average number of employees does not exceed 50 people

A company can avail of SCARP as a micro company if the following conditions are satisfied:

1. The company must qualify for the small companies regime (as defined by section 280C of the 2014 Act and whereby different rules apply to the company)
2. Two or more of the following requirements must be satisfied in a financial year
   1. The turnover of the company does not exceed €700,000
   2. The balance sheet of the company does not exceed €350,000
   3. The average number of employees does not exceed 10 people

The requirements for an eligible company to meet if it wishes to avail of a rescue plan are as follows:

1. The company is, or is likely to be, unable to pay its debts
2. No resolution subsists for the winding up of the company
3. No order has been made for the winding up of the company
4. The directors of the company have no passed a resolution for the appointment of a process adviser in the previous 5 years
5. No examiner has been appointed to the company during the previous 5 years

How will SCARP operate?

• The directors must prepare a statement of affairs setting out the financial situation of the company and confirm by statutory declaration that they have made a full inquiry into the affairs of the company
• This statement and statutory declaration are provided to the intended process adviser who then determines and reports to the directors on whether there is a reasonable prospect of survival of the company as a going concern
• To avail of SCARP the company must pass a resolution to commence the rescue period within 7 days of receipt of the intended process adviser's report and the process of appointing an independent process adviser is initiated by a resolution of the company's directors, without any need for a court application (unlike Examinership)
• The rescue period will end if either the appointment of the process adviser is terminated or where the process adviser resigns and is not replaced
• If, at any point during the rescue process, the process adviser deems that there is no longer a reasonable prospect of survival of the company, the process adviser must notify the directors and must resign
• The process adviser must begin preparing a rescue plan for the company as soon as practicable after the resolution is passed
• Once the process adviser has prepared a rescue plan, he or she must call meetings of the members and creditors as soon as possible to consider the rescue plan. These meetings must be held not later than 49 days after the date of the passing of the directors' resolution
• At the meetings of the creditors and members, the rescue plan will be deemed to be accepted once 60% in number representing the majority in value of the claims represented at that meeting have voted in favour of the resolution for the rescue plan
• Where the rescue plan is approved by the creditors and members, the process adviser must notify the employees, the Revenue Commissioners and any impaired creditor or member within 48 hours
• The rescue plan is binding on the company, members, creditors and directors where it has been accepted by at least one class of impaired creditors, where 21 days have passed from the filing of the notice of approval with the office of the relevant court and where no objection has been filed

Key Features 

• The directors of the company remain in control of and responsible for the running of the business
• Subject to court approval (or an alternative out-of-court procedure), the process adviser may repudiate contracts that are burdensome if it is necessary for the survival of the company
• The process adviser may seek court permission to sell or dispose of charged property but the priority of the charge holder is protected
• Tax liabilities may be excluded from the rescue plan
• There is no automatic protection from creditors during the SCARP process as there is in an examinership, however upon application to the relevant court, a stay on creditor enforcement actions will be available. This may be important where there is a threat of creditor action that could jeopardise the ongoing trade of the business
• SCARP will allow small and micro companies to be restructured in similar terms to those available in Examinership including the repudiation of onerous contracts, an application for a stay on proceedings in being, a cross-class cram down of debts and ongoing creditor engagement
• SCARP will provide a new rescue framework that seeks to balance the interests of all stakeholders affected

Conclusion

Although many features of SCARP are similar to the examinership regime, this is a new and entirely untested process. For that reason, if you are considering SCARP as a suitable process for your business or receive notice from a supplier or customer or otherwise become aware that they are considering SCARP we recommend that you contact us for further information.

This information provides a summary of the subject matter only. It should not be acted on without first seeking professional advice.