Is SCARP fit for purpose?

Given the economic headwinds facing businesses, the relatively low take-up thus far of the Small Companies Administrative Rescue Process (SCARP) has been surprising.

This is perhaps because the impact of COVID-19 on individual businesses has been masked, to a large extent, by government supports, including Revenue’s debt warehousing scheme and other creditor forbearance. Similarly, Brexit is not fully implemented, and we have yet to feel the full impact of rising energy costs and interest rates on consumer spending and the broader economy.

So far, there have been just 10 SCARPs with six having commenced in August. Insolvencies right now are at an artificially low level yet so-called “Zombie companies” continue to trade. It is likely that the level of insolvencies and restructuring cases (including SCARPs) will increase as the true impact of rising costs become apparent in the winter months, and Revenue’s plans to implement debt warehousing repayment plans take shape.

What is SCARP?

Introduced under the Companies (Rescue Process for Small and Micro Companies) Bill 2021, SCARP is a restructuring tool for SME’s who are facing temporary insolvency affording them the opportunity to restructure through a combination of a write-down of debt and new investment. SCARP is based on the key components of examinership and is subject to strict timelines and rules for meeting quorums and approvals. Careful planning and engagement with key creditors is essential, prior to commencing the process in order to achieve a successful outcome with the required creditor approval levels.

Mazars acted as Process Advisor for the country’s first SCARP case in January. We have found that SCARP is ideally suited to small retail and hospitality operations. It is aimed at small and micro-companies and designed to act as a cost-effective restructuring option with limited court involvement. It is likely that many of these businesses will be heavily impacted by oncoming inflationary pressures and will require restructuring support if they are to survive.

Process observations

SCARP does have some notable limitations, such as no automatic stay on creditor action, and the fact that legal contracts (leases etc.) cannot be varied without court involvement. These issues can only be addressed in SCARP with legal representation and court supervision, adding substantial costs, which could price many small companies out of the process.

Revenue can opt out of the process where there is a history of non-compliance with Revenue legislation. In our experience, however, Revenue has engaged constructively with the process to date, which can only positively impact the uptake of SCARP. 

Nevertheless, SCARP can be a useful restructuring tool for small companies, allowing them to compromise legacy debt that would otherwise leave them with no option but to enter into liquidation. We would, therefore, strongly advise that all small companies concerned about their short-term solvency consider SCARP and its potential relevance to their circumstances.

This article first appeared in Accountancy Ireland