Recent figures from accountancy firm Azets shows only 13 Small Company Administrative Rescue Process (SCARP) cases commenced in the first half of 2024, a 28% decrease compared with the same period for 2023. This is in spite of Deloitte reporting that insolvencies are in fact up almost 25% for the first six months of this year compared with the same period in 2023.
So why aren’t more businesses availing of SCARP? Perhaps because they’re unaware of what it is, and when they should avail of it.
In this helpful article, we’ve outlined what SCARP is, and when companies should avail of it.
The Irish Small Companies Administrative Rescue Process (SCARP) is a legal framework established to aid small and micro companies in Ireland experiencing financial difficulties. Enacted through the Companies (Rescue Process for Small and Micro Companies) Act 2021, SCARP offers a more accessible and cost-effective alternative to traditional examinership, which can be prohibitively expensive and complex for smaller businesses.
Understanding SCARP
Eligibility Criteria: To be eligible for SCARP, a company must meet the definition of a small or micro company under the Companies Act 2014. This involves satisfying at least two of the following conditions:
- A turnover not exceeding €12 million.
- A balance sheet total not exceeding €6 million.
- An average number of employees not exceeding 50.
Additionally, the company must be insolvent or likely to become insolvent, and the directors must believe there is a reasonable prospect of the company’s survival.
Initiation: The process begins when the company’s directors resolve to appoint a process advisor, who must be a qualified insolvency practitioner. The advisor assesses the company’s viability and formulates a rescue plan aimed at restructuring debts and returning the company to solvency.
Moratorium Period: Upon the appointment of the process advisor, the company enters a moratorium period lasting up to 70 days, during which creditors cannot take enforcement actions. This period can be extended by up to 50 days with court approval if necessary to finalise the rescue plan.
The Rescue Plan: The process advisor collaborates with the company and its creditors to develop a rescue plan. This plan typically includes debt restructuring measures such as debt write-downs, extended repayment terms, or converting debt to equity. The plan must be approved by at least 60% in number and 50% in value of the creditors in each class affected by the plan.
Court Involvement: SCARP is designed to minimise court involvement, making it less costly and more efficient. Court intervention is limited to resolving disputes or objections from creditors and approving extensions of the moratorium period when necessary.
Conclusion: Once the rescue plan is approved by the creditors, it becomes binding on all parties. The company then implements the plan under the process advisor’s supervision. Successful implementation allows the company to exit the process and continue trading as a solvent entity.
When Should a Company Avail of SCARP?
Determining the right time to avail of SCARP is crucial for maximising its benefits. Here are key indicators that a company should consider entering the SCARP process:
Early Signs of Financial Distress: Companies should consider SCARP at the early signs of financial trouble, such as declining revenues, increasing debts, or cash flow issues. Early intervention can prevent the situation from deteriorating to the point where recovery becomes impossible.
Creditor Pressure: If creditors are starting to apply pressure, threaten legal actions, or refuse to extend credit terms, it may be time to consider SCARP. The moratorium period provided by SCARP offers temporary relief from creditor actions, giving the company time to restructure its debts.
Viability and Survival Prospects: SCARP is suitable for companies that still have a viable business model and a reasonable prospect of survival. If the directors believe that the company can recover with a structured debt restructuring plan, SCARP can provide the necessary framework to facilitate this.
Cost Considerations: For small and micro companies, traditional examinership may be too costly and complex. SCARP offers a more affordable and streamlined alternative, making it a practical choice for companies with limited resources.
Desire to Preserve Business and Jobs: If the goal is to preserve the business and save jobs, SCARP can be an effective tool. It allows the company to continue trading while restructuring its debts, thereby maintaining operations and employment.
Negotiating with Creditors: SCARP encourages a collaborative approach with creditors. If the company believes it can reach a mutually beneficial agreement with its creditors through negotiation, SCARP provides a formal structure to facilitate these discussions.
In conclusion, the Irish Small Companies Administrative Rescue Process (SCARP) is a vital lifeline for small and micro companies facing financial difficulties in Ireland. By offering a cost-effective, efficient, and collaborative framework for debt restructuring, SCARP helps companies avoid liquidation and continue trading. Companies should consider availing of SCARP at the early signs of financial distress, when facing creditor pressure, and when there is a viable path to recovery. With its potential to preserve businesses and jobs, SCARP is an essential tool for supporting the resilience and continuity of small enterprises in Ireland.
