Financial Services Advisory

Small Administrative Rescue Process (SCARP): The Creditor’s Perspective

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Small Company Administrative Rescue Process (SCARP) is a new restructuring process available to small- and medium-size enterprises (SMEs), and it is likely to negatively impact creditors in relation to funds outstanding as at the date the process commences. The creditor retains their legal right to support or reject the proposal; however, the SME only needs 60% in number, representing the majority in value, of an impaired class of creditor to support the process for the proposal to proceed. It is critically important that creditors partake in the process as outlined below.

How Does SCARP Impact Your Debt?

  • Unsecured Creditor: Likely write down of debt
  • Excludable Creditor: Likely write down of debt, subject to excludable creditor agreeing to the process
  • Secured Creditor( mortgage security and floating security): secured assets may, in certain instances, be disposed of, but the secured creditor’s position is not prejudiced 
  • Landlords: may have their leases repudiated, following which their debt would rank as an unsecured claim

All creditors may lose their ability to enforce on their security and realise their assets while a Process Adviserr (PA) is in place.

Key Considerations for Creditors

  • As there is no automatic stay on proceedings, creditors are not impaired by virtue of entry into the process.
  • A stay on creditor enforcement actions will be available upon application to the relevant Court and if the Court deems it necessary for the survival of the company.
  • Creditors are afforded an opportunity to provide input to the PA upon their appointment and to disclose any facts they consider material to the process.
  • The PA prepares a Rescue Plan as the framework for the survival of the company, which usually involves a write down of debt.
  • A creditor needs to consider the value in supporting a Rescue Plan and enabling the SME to return to normal trading, thereby recommencing their business relationship. Although this will likely mean a write down of their debt, the alternative option is liquidation.

The Approval Process

  1. Different classes of creditor may be treated differently in the Rescue Plan.
  2. The Rescue Plan is approved without the requirement of Court approval provided that at least 60% in value representing a majority in number (greater than 50%) of an impaired class of creditor vote in favour of the proposal and that no creditor raises an objection to the plan within the 21-day cooling-off period that follows the vote.
  3. Where an objection occurs, the PA 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.

Excludable Creditors:  State Creditors, the Department of Social Protection and the Revenue Commissioners

Excludable Creditors may be excludable from the Rescue Plan and any write down of their debts on limited and specified grounds, primarily where there is cause for concern that a company is abusing the Rescue Process for the purposes of tax avoidance.

Excludable creditors can object to their debt being excluded where:

  • Tax returns are outstanding;
  • An ongoing tax audit or intervention exists;
  • Taxes are under appeal; or
  • A history of non-compliance with tax obligations exists;

The PA must give notice to creditors with excludable debts, advising of their intention to compromise their debt. If no response is received within 14 days, the creditor is deemed to have consented.

Contract and Lease Holders

  • SCARP includes a mechanism that allows for the repudiation of onerous leases; however, contract or lease holder consent is required. Otherwise, an application to Court is required.
  • The Court shall only grant approval for repudiation of a contract where such approval is considered necessary for the survival of the company.
  • Any creditor who suffers loss or damage arising from such repudiation will rank as an unsecured creditor of the company for the amount of that loss or damage.

Secured Creditors and Enforcement

  • A PA may, where necessary for the survival of the company, make an application to the Court as to the status of any receiver appointed by a secured creditor, and the Court may order that the receiver cease to act from a specified date.
  • While there is no automatic stay on proceedings against the company under SCARP, a PA can apply to the Court for same. A creditor is therefore unlikely to be able to initiate proceedings or take enforcement action against a company availing of SCARP.