Faster rescue process for viable small firms on the way

Viable small and micro businesses facing examinership because of Covid will have a much more cost-efficient and less drawn-out experience as a result of new legislation.

The new Companies (Rescue Process for Small and Micro Companies) Bill 2021 has been approved by the Irish Government.

The new Bill provides for a Small Company Administrative Rescue Process (SCARP) that will be cost-efficient and capable of conclusion within a shorter period of time than examinership.

“Small and micro companies’ contribution to our economy cannot be understated. They represent the majority of companies in Ireland and employ in the region of 788,000 workers”

SCARP mirrors key elements of existing examinership framework in an administrative context.

It amends the Companies Act 2014 to provide for a new dedicated rescue process for small and micro companies.

Cutting costs

Minister for Trade Promotion, Digital & Company Regulation Robert Troy, TD, said that while Ireland’s current rescue framework, examinership, is internationally recognised and successful in its own right, the associated costs mean it may be beyond the reach of small and micro enterprises.

He said that the Bill ensures that these companies now have access to an alternative framework; the Small Company Administrative Rescue Process (SCARP).

The administrative rescue process includes key provisions mirroring those in examinership including the repudiation of onerous contracts, application for a stay on proceedings, and cross-class cram down of debts, and encourages ongoing creditor engagement. This will therefore allow for greater efficiencies and lower comparable costs.

“Companies across our country continue to feel the impact the pandemic has had on the normal operation of business,” Minister Troy said.

“We are all aware of the enormous pressure business owners continue to face, not only in terms of their immediate liquidity, but also the sustainability of their business into the future. This is particularly true of small and micro companies, with 78pc operating in sectors which have been particularly challenged by the pandemic such as retail, hospitality and the service industry.

“All viable companies should have reasonable access to corporate rescue and I am pleased we are now in a position to progress with The Companies (Rescue Process for Small and Micro Companies) Bill. This legislation is a key part of Government’s response to the economic impact of Covid-19 and provides for a rescue framework (SCARP) aimed at small and micro companies, many of which have faced significant challenges throughout the pandemic and continue to face challenges as the economy reopens,” Troy explained.

He said that SCARP incorporates key elements of the existing examinership model in an administrative context thus reducing court oversight where creditors are engaged in the process and positively disposed to a rescue plan.

“While court involvement is limited, I am conscious the issue of corporate rescue extends far beyond the distressed company itself, therefore the process incorporates robust safeguards and allows for access to the courts at appropriate junctures. I believe it balances the needs of all stakeholders affected by corporate rescue. For example, the Bill provides that state creditors will operate on an “opt-out basis” on prescribed grounds such as if the company has a poor history of tax compliance. This should provide comfort to business that the State will not remove itself from the process for arbitrary reasons.

“Small and micro companies’ contribution to our economy cannot be understated. They represent the majority of companies in Ireland and employ in the region of 788,000 workers. The sector will be key to our country’s economic recovery. Delivering this Bill is reflective of this Government’s continued commitment to our small company sector and the jobs it supports.

“Given the priority to have this process in place as the economy reopens, Government fast tracked this legislation,” Troy said.

Features of the Bill

The main provisions of the Bill can be broadly summarised as follows:

  • Available to small and micro companies (as defined by the Companies Act 2014).
  • Commenced by resolution of directors rather than by application to Court.
  • An insolvency practitioner (who must be qualified to act as liquidator under the Companies Act) is appointed by the company to begin engagement with creditors and prepare a rescue plan. The rescue plan must satisfy the ‘best interest of creditors’ test and provide each creditor with a better outcome than a liquidation. In addition to this, no creditor may be unfairly prejudiced by the plan. This is in keeping with established principles under examinership.
  • Creditors are invited to vote on the rescue plan by day 49 of the insolvency practitioner’s appointment. The proceedings in relation to the required meetings of creditors are in keeping with existing provisions of the Companies Act.
  • The rescue plan is approved without the requirement for court approval provided that 60% in number and value of an impaired class of creditors vote in favour of the proposal and no creditor raises an objection to the plan within the 21-day cooling off period which follows the vote. The approval mechanism is drawn from examinership and provides for a cross class cram down. This means that where one class of impaired creditor votes in favour of the plan, this decision can then be imposed on all classes of creditors.
  • Where an objection to the rescue plan is raised, there is an automatic obligation on the company to seek the court’s approval. This acts as a safeguard for creditors.
  • Repudiation of onerous contracts, including leases, is provided for subject to court oversight as appropriate.
  • Concluded within a shorter period than examinership (examinerships can currently run for up to 150 days, SCARP seeks to arrive at a conclusion within a shortened timeframe, subject to extension where necessary for court applications),
  • Has safeguards against irresponsible and dishonest director behaviour. The process will be within scope of existing reckless trading provisions. The Director of Corporate Enforcement has a suite of powers to examine books and investigate, as appropriate, in line with that which is provided for in relation to liquidations, receiverships and examinerships.
  • Includes State creditors such as the Department of Social Protection and the Revenue Commissioners. They may opt out of the process on specified statutory grounds.

SCARP also incorporates sufficient safeguards for the protection of creditors:

  • As there is no automatic stay on proceedings, creditors are not impaired by virtue of entry to the process,
  • Creditors are afforded an opportunity to provide input to the process advisor (insolvency practitioner) upon his or her appointment to disclose any facts they consider material to the process,
  • There are various enforcement provisions in relation to failure to comply with filing, notice and information obligations.

The Bill also includes miscellaneous provisions amending company law in line with the recently published Plan for Action on Collective Redundancies following Insolvency.

By John Kennedy (john.kennedy3@boi.com)

Published: 25 June 2021

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