Scarp scheme offers companies facing difficulties the chance to restructure

When the Small Company Administrative Rescue Process (Scarp) came into law just more than a year ago it was anticipated that there would be a strong uptake of the new tool during the latter part of 2022, mainly by companies struggling under the weight of debt built up during the Covid pandemic. This has proven not to be the case to date, according to Mazars insolvency partner Hilary Larkin.

“The level of insolvencies remains below pre-Covid levels, and while there was a sense that there would be a wave of insolvency appointments in the wake of the pandemic, the reality is that many companies have been able to trade through Covid due to assistance from various Government supports,” she says.

Revenue has extended the warehousing date until the end of the year, and from January 1st, 2023, they are offering a rate of 3 per cent interest to companies, she notes. “This is welcome news to the many businesses that have accrued substantial Revenue liabilities during the Covid period. It gives them a more cost-effective source of finance than alternative lenders in the market who are charging interest rates of up to 12 per cent. The amount of debt warehoused peaked at €3.1 billion. We are now at under €2.6 billion of warehoused debt which remains a significant exposure for Irish businesses. Companies are also due to start receiving payments under the government’s Temporary Business Energy Support Scheme, which will assist in overcoming the impact of the energy crisis.”

Other factors are also at play, she points out. “Whilst economic headwinds such as the current inflationary environment including rising interest rates, staff and energy costs are widely reported, there are no indications that consumer spending has been impacted yet. It will be interesting to see if spending declines during the Christmas period and the effect that may have on the retail and hospitality sectors going into 2023. We have seen an increase in insolvencies in the construction sector in recent weeks, which is largely due to the impact of rising costs of materials for businesses that are tied to fixed-price contracts. However, given the scale and size of these businesses, Scarp is unlikely to be the solution in this sector.”

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For those companies which do find themselves facing temporary trading difficulties, Scarp gives them the option to restructure through a combination of debt write-down and new investment that is significantly cheaper than examinership. It is open to companies with less than 50 employees, total assets of less than €6 million and a turnover not exceeding €12 million. Allowing companies to restructure their debts will assist them in avoiding liquidation, guarantee creditors a better outcome than they would get under liquidation and, in many cases, preserves employment.

It differs from examinership in many important respects, Larkin explains. In the first instance, there is no requirement for court oversight of the process, that work is done by a Process Advisor who must have the same qualifications as a liquidator under the Companies Act 2014. That significantly reduces the costs of the process, as does the shorter timescale – 70 days as opposed to up to 150 for an examinership.

“While Scarp is a welcome process for small businesses, it has certain limitations that people need to be aware of,” she adds. “For example, lease terms cannot be varied without court involvement which can add significant cost to the process, particularly where the landlord does not consent. Revenue is not compelled to engage in the process, nor are other State creditors if there has been a history of noncompliance within the business. However, the expectation and experience are that Revenue will engage where the circumstances allow. There is also no automatic protection from creditor action during the process. The issues should not deter businesses from using Scarp.”

The key to a successful outcome lies in preparation, she points out. “Careful planning with advisers is essential. The company must ensure it can continue to trade and be able to determine the level of working capital required to trade through the process bearing in mind that creditors will be operating on a cash-on-delivery basis for the next 12 months. Early communication with creditors is essential to a successful outcome.

“According to some media reports, 14 companies have been through the Scarp process since its inception, and less than a third of those have been successful,” Larkin says.

“Mazars acted as Process Advisor for the country’s first Scarp case in January. A rescue plan was successfully implemented, and the business has re-emerged and continued to trade. Overall, the process is an effective restructuring tool that will help and preserve businesses of a certain size, but it is not suitable for everyone.”