SCARP: effective but underutilised

The Small Company Administrative Rescue Process (SCARP) was introduced in December 2021 to provide a quicker and more affordable formal restructuring process to small and micro businesses in Ireland. SCARP allows businesses to restructure their debts by agreeing a rescue plan with their creditors, where a proportion of the company’s debts are written off, allowing the company to continue to trade.

Since SCARP’s inception, there have been 50 separate appointments of process advisers, with a successful exit in 34 processes (68%). (In one case, where there was no exit, we understand a separate arrangement was agreed with creditors to allow that entity to continue trading.) Six of the processes are ongoing, which, if successful, could lead to an 80% success rate if all rescue plans are approved. This high success rate shows that SCARP is a realistic and attractive option for small and micro businesses to restructure their debts and secure their future.

The graphic below offers an insight into which sectors are taking advantage of the process.

Some of the main sectors utilising SCARP – such as hospitality, construction and engineering, and retail – are among those hardest hit by the Covid-19 pandemic and the subsequent economic headwinds that are being dealt with by businesses.

Revenue’s position

Revenue has a key influence on the success of SCARP as it can opt out of the process in accordance with section 558(L)4 of the Companies (Rescue Process for Small and Micro Companies) Act 2021.

Recent media reports have suggested that Revenue may not be supportive of rescue plans or schemes of arrangement (in relation to examinerships) if high levels of warehoused tax remain outstanding. However, the graphic below provides a very different picture, demonstrating that Revenue has been broadly supportive.

This shows that of the 48 SCARPs there were 45 with tax liabilities. Of those 45 with tax liabilities, Revenue participated in 38 (84%). It has approved 74% of the 38 rescue plans it has participated in, and voted against two. The remainder are either ongoing or a rescue plan could not be formed, with the companies subsequently entering liquidation.

While Revenue will assess each case on its merits, it has stated that it will support a rescue plan if the company is actively and realistically engaging with its tax affairs, does not have a history of non-compliance and does not have a history that would question its trustworthiness.

Strategy for success

The requirements for a successful SCARP are as follows:

• The company has a viable business and a realistic prospect of survival.
• There is a structured and well-thought-out rescue plan, which ensures creditor claims are properly classified, and that creditors are fairly treated and not unfairly prejudiced (ie SCARP provides a better outcome than a winding up for all classes of creditors).
• There is advanced planning, including required investment, to ensure the viability of the business and to fund the rescue plan.
• A realistic business plan can be implemented after a successful exit from SCARP.
• The company’s tax affairs are in order.

Proactive push

So far, SCARP is proving to be a very effective restructuring process for viable small and micro companies to restructure their debts and continue to trade as a going concern. However, with only 50 SCARPs commencing so far, it is clearly an underutilised process.

The tax liabilities outstanding under the debt warehousing scheme, brought in to assist companies during the pandemic, will fall due on 1 May 2024, and companies must engage with Revenue to deal with their warehoused tax liabilities. That, along with persistent economic headwinds, mean that viable small and micro companies must be proactive and take steps to address their financial difficulties.

From the evidence available to date, Revenue will be supportive of a company’s SCARP once it has fulfilled the requirements and have actively engaged with its tax affairs.