GETTING TO GRIPS WITH SCARP
For small and micro companies experiencing temporary financial difficulties, restructuring through the SCARP process could be the answer, writes Brian McEnery and Stephen O’Flaherty
The imperfect trifecta of increasing inflation, energy costs and interest rates are having an increasing negative impact on Irish businesses and are giving rise to turbulent trading conditions. The construction sector is one of the worst hit sectors from a cost inflation perspective when taking into account some global headwinds, resulting in a severe lack of raw materials due to Brexit and the Russian invasion of Ukraine. BNP Paribas Real Estate Ireland’s construction index which measures growth within the sector noted a steady decline in activity from February – May 2022. Increased pressure on availability of resources, including labour, is impacting profitability and makes managing cashflow more difficult. As a global threat of recession looms, business owners should focus on sensible pricing, cost control measures and cash management. At BDO, we believe the knock-on implications of the trifecta of critical business challenges listed above will soon have companies under pressure again, just as they emerge from the cloud of uncertainty brought upon by Covid-19. Throughout the last economic downturn, terms such as receiverships, examinerships and liquidations were almost heard daily through all forms of media reporting on companies in distress. As of 7th December 2021, a new term – SCARP or Small Companies Administrative Rescue Process – has been signed into legislation by Minister Robert Troy. The new act is a dedicated rescue process for small and micro companies experiencing temporary financial difficulties to restructure their debts, once majority agreement from their creditors has been received. SCARP is fundamentally based upon the principals applied to examinership, but is administratively based and ran out of court (unless objections from creditors are received). As a process, it significantly reduces the proposed cost for an SME. The SCARP process can be concluded between 50-70 days depending on the scheme. The rescue option enables SME’s (subject to creditor approval) to restructure their balance sheet, re-size their liabilities and thrive into the future.
A rescue plan is deemed to be accepted when 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. SCARP is available to SMEs that satisfy two or more of the following three criteria in relation to both micro and small companies, with the previous two financial years as reference points.
Small and micro companies account for 98% of all companies in Ireland. Given the costs associated with examinership, only larger firms are likely to have the financial resources to implement. SCARP was created to give smaller businesses an opportunity to restructure their debts and provide a better outcome to creditors versus a liquidation scenario. A SCARP process can be initiated once company directors pass a resolution appointing an insolvency practitioner or referred to a Process Advisor (PA) by the legislation. Prior to taking any engagement, the PA needs to ensure that the company has a reasonable prospect of survival. The PA begins engagement with all creditors and prepares a rescue plan which must satisfy the ‘best interest of creditors test’ and provide each creditor with a greater outcome than in a liquidation scenario. Relevant State creditors have the option to opt in or out of the scheme. Based off engagement with various State creditors, initial information is that they shall support viable businesses once they don’t have a chequered history. SCARP is designed to avoid oversight of the court system and it is possible to conclude the process without the courts involvement. In some circumstances, PA may need the direction of the court; some examples are repudiate a lease/contract; seeking a stay on a receivership or liquidation appointment; stay on any proceedings that were live at date of commencement; dealing with creditor objections to the rescue plan. Dealing with creditors objections is expected to be the issue that brings matters before the court most frequently. Creditors must set out the grounds in which they are being unfairly prejudiced, but the onus remains on the PA to demonstrate that the rescue plan is fair and equitable.
Since SCARP was launched, there has only been a handful of cases, which is in line with the historically low level of insolvency at present. Into the second half of 2022 and onwards into 2023, we foresee an increasing number of businesses availing of this new framework. Indeed as rescue practitioners, we are dealing with some live cases currently. Challenges can arise from one or two bad contracts or the burdens of legacy debts and liabilities. SCARP has many key benefits, but most importantly it offers SME’s an opportunity to be attractive for recapitalisation through the restructure of debt, improvement of their working capital and the addressing of other issues which the PA identifies. The Irish Government and indeed other governments across Europe have been encouraged by the European Commission and the European Central Bank to prepare for corporate restructuring so that employment could be preserved. The basis of SCARP is to make it fit for purpose in terms of speed, costs and effectiveness. This is the reason why it needed to be more accessible and cost efficient to examinership. Nonetheless, examinership remains a powerful and relevant process for larger enterprises that face the same challenges.
As the clouds of economic uncertainty loom, cashflow management needs to be to the forefront of all business decisions. Whether some debtors aren’t paying or being contracted into onerous contracts, there’s always some form of solution if there is an underlying good business. Early engagement with professional advisors is critical. For any businesses feeling the pinch in current times, SCARP or other rescue frameworks should be considered.
Brian McEnery (firstname.lastname@example.org) is Corporate Finance Partner & Head of Advisory at BDO Ireland and Stephen O’Flaherty (email@example.com) is a Partner in Debt Advisory at BDO Ireland
Denise Maguire Editor of Irish Construction Industry Magazine & Plan Magazine