Are you having financial difficulties? New bailout process for small businesses
The Small Business Administrative Rescue Process (ESCARPMENT) started on Tuesday, December 7. Now that the process is available, we present some practical considerations for businesses and creditors.
The outcome of a successful SCARP is similar to that of an examiner, but where a process advisor takes on the role of the examiner and much of the role of the tribunal. It allows small and medium-sized businesses to reduce their debt and restructure. It is intended to operate without any intervention by the courts, except when the company cannot withdraw from the lease of a premises by agreement or if there is an objection to the proposed restructuring.
Considerations for businesses looking to take advantage of SCARP
Choose the process advisor
The process advisor must be qualified to be the liquidator of the company. Basically that means an accountant or a lawyer, but in practice we expect almost all process advisers to be accountants. Once appointed, the process advisor is the key to a successful restructuring. The procedural adviser also has important powers and is called upon to take decisions of the type normally taken by a judge.
A process advisor should be someone who the directors believe understands the company and the relevant law and with whom they can work. They probably need to have sufficient experience with insolvency in general and, in particular, legal expertise, to have credibility with the company’s creditors and, where applicable, the court. An experienced insolvency practitioner will also be aware of any potential issues that might arise, especially in relation to dealing with creditors.
If you are considering using SCARP, spend some time selecting an appropriate process advisor.
Do you need SCARP?
One of the most useful features of restructuring mechanisms like SCARP is that they provide a backdrop against which to negotiate with creditors. Once you and the creditors understand what is possible with SCARP, or any other formal restructuring mechanism, it may be possible to resolve your business difficulties on a negotiated basis without resorting to SCARP. For example, a homeowner or large vendor may consider swapping debt for stocks or giving an extended period for debt payment. The person you are considering appointing as a process advisor should be willing to advise you on such approaches.
Choose your hour
Over the past few months, most people thought COVID-19 restrictions were coming to an end in Ireland. However, current trends and the Omicron variant make this quite uncertain. A company can only use SCARP once every five years. Therefore, if a business decides to take advantage of SCARP, if there is leeway on the schedule, you need to plan the process in such a way that you can be sure that with the restructuring your business will survive. To make this more concrete, if your business is losing money with the current restrictions but is coping with government support, you may want to consider delaying SCARP until the easing of restrictions is likely. On the other hand, you should assess the possibility that by continuing to trade without using SCARP, you are trading recklessly. Again, your process advisor should be able to help.
Choose your location
It is likely that, if legal motions are necessary, they will be in the Circuit Court rather than the High Court. It’s something that your process advisor can choose, to a certain extent. If the competent court is the Circuit Court, it will be in the Circuit where your company’s registered office is located. It may be more cost effective to change your company’s head office address, so talk to your process advisor.
Talk about fees
While the best approach might not be to appoint the process advisor who offers the lowest price, you should discuss the fees up front. In particular, in most cases, you need to plan how the process will work if a court application is required and understand the likely costs involved.
Be candid with the process advisor
Nothing is more likely to derail a SCARP process, or increase costs, than the process advisor uncovering information late in the process. That said, if you disclose or acknowledge acts or omissions that may constitute criminal offenses to a process advisor, the process advisor may be required to disclose them to various authorities. Therefore, you may wish to discuss these matters with a lawyer first, when solicitor-client privilege may apply.
Considerations for Creditors
If several small or medium-sized businesses owe you large sums of money, it is very likely that one or more of them will benefit from SCARP in the coming months.
Therefore, you need to understand the process and, in particular, the time constraints. The consequences arise from not respecting these time constraints, for example, if a creditor does not present his claim, the process advisor can estimate it and if a person with an excludable debt does not object in time, this debt will be included in the rescue plan. .
In particular, when a creditor holds a guarantee on the debt of a company, if he wishes to avail himself of his guarantee, he must transfer his voting rights to the guarantor, within 48 hours.
SCARP potentially offers an attractive and low-cost rescue mechanism for small and medium-sized enterprises. However, it will likely take some time for all the nuances of the process to be fully understood by everyone involved.
The content in this article is provided for informational purposes only and does not constitute legal or other advice.