19th May 2021
- Drafting of Companies (Small Company Administrative Rescue Process and Miscellaneous Provisions) Bill 2021 commenced
- Small Company Administrative Rescue Process (SCARP) will be a simplified restructuring process for viable small companies that is timely and cost effective
- SCARP caters for the issue of onerous contracts
- Debts owed to the State are addressed by SCARP
Minister for Trade Promotion, Digital and Company Regulation, Robert Troy TD, today announced the publication of further information on the Companies (Small Company Administrative Rescue Process and Miscellaneous Provisions) Bill 2021. The Bill amends the Companies Act 2014 to provide for a new dedicated rescue process for small and micro companies.
Concerning the publication, Minister Troy stated that:
“Government are determined to introduce SCARP as soon as possible so I want to ensure a high level of transparency so that businesses and stakeholders understand SCARP and the rationale behind it. In designing a new rescue process for small and micro companies, my Department considered the CLRG report and opened a public consultation on several matters including the inclusion of repudiation in an administrative process and the status of State creditors. I believe we have struck the right balance to develop a simplified and effective process that will assist viable companies to restructure and remain in business.”
The information published today demonstrates further clarity on the provisions within SCARP. The new administrative rescue process will include provisions mirroring those in examinership including the repudiation of onerous contracts, automatic stay on proceedings, cross-clam cram down of debts, and encourages ongoing creditor engagement.
The information, which includes the General Scheme of the Bill, also outlines how debts owed to the State via the Revenue Commissioners will be dealt with. The State will only be able to opt out of a process on limited and specified grounds which will be set out in the legislation, for example, if a company could be using the process to avoid tax.
Minister Troy continued, “My Department, with the assistance of the Attorney General, is currently drafting the legislation at pace. I look forward to the Bill, when drafted, being published and introduced in the Dáil as soon as possible. SCARP is a further demonstration of Government’s commitment to do all that it can to help our businesses along the road to recovery as we emerge from COVID-19. It will provide an additional option to micro and small companies who need to restructure and when enacted will deliver a process which is more cost efficient and capable of conclusion within a shorter period of time.”
Notes for Editors
Background
As part of the Government’s medium-term stabilisation response to the economic challenges of the pandemic, and in keeping with commitments contained in the Programme for Government, the Companies (Small Company Administrative Rescue Process and Miscellaneous Provisions) Bill 2021 provides for a stand-alone rescue framework for small and micro companies. It is recognised that Ireland’s existing framework, examinership, while internationally recognised and successful in its own right, may be beyond the reach of small companies due to the associated costs. In this regard, the Tánaiste wrote to the Company Law Review Group (CLRG*) requesting it to examine the issue of rescue for small companies and make recommendations as to how such a process might be designed. The General Scheme of the Bill emanates from the CLRG’s subsequent recommendations.
SCARP seeks to mirror key elements of examinership in an administrative context thereby reducing court oversight resulting in efficiencies and lower comparable costs. It has limited court involvement where creditors are engaged in the process and positively disposed to a rescue plan.
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 42 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 a majority in 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.
- Concluded within a shorter period than examinership (examinerships can currently run for up to 150 days, SCARP seeks to arrive at a conclusion within 70 days, subject to extension where necessary for Court applications).
- Has safeguards against irresponsible and dishonest director behaviour. Company directors will be subject to the existing restriction and disqualification regime provided for under the Companies Act. The Office of the Director of Corporate Enforcement (ODCE) also 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.
- Provides that State creditors, the Department of Social Protection and the Revenue Commissioners may be excludable from the process only on limited and specified grounds, for example if there is cause for concern that a company is abusing the process for the purposes of tax avoidance.
- Includes repudiation. Repudiation is a legal mechanism which allows the Court to set aside onerous contracts in examinership.
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 process advisor will be subject to the same reporting requirements as a liquidator.
- The current requirements in respect of restriction applications will also apply.
Repudiation
The Department considered the views of the CLRG* in this regard and raised this issue as part of the Department’s public consultation process. Several respondents advocated for the inclusion of repudiation provisions. Repudiation is a legal mechanism which allows the Court to set aside onerous contracts.
Court involvement would likely delay conclusion of the process and increase the cost of the process. Repudiation is typically the most contentious issue dealt with in an examinership and involves substantial Court fees. However, a significant number of responses to the public consultation highlighted that repudiation, where relevant and necessary, is key to the success of any rescue plan.
From a practical perspective, notwithstanding that the new process is intended to be a simplified one, small and micro companies may still be subject to onerous commercial contracts such as leases. In order for a successful restructuring plan to be put in place, it is desirable that such contracts be capable of renegotiation. Responses to the consultation highlighted that contracted parties are encouraged to renegotiate onerous contracts under examinership because of the possibility of a Court repudiating such contracts. As such, contracted parties may prefer to come to a mutually acceptable position. Repudiation is a last resort and provides a legal avenue where such mutual renegotiation fails. Following the responses to the public consultation, the Bill therefore mirrors the existing position under the Companies Act in relation to the repudiation of contracts in examinership and SCARP will provide for the option to repudiate onerous contracts or agreements. While the use of repudiation adds costs to the process, such use is optional, and its inclusion is influential on delivering successful restructuring outcomes.
Role of Revenue
The Department considered the views of the CLRG in this regard and queried this issue as part of the Department’s public consultation process. Respondents were asked whether there were any debts they considered should be excludable from the new process. Fundamental to the efficacy of examinership is the ability to impair all classes of creditors in a fair manner.
With examinership, no creditors are excluded, i.e. all debts are included. However, the examinership process provides for significant court oversight in this regard.
Most respondents strongly advocated against the introduction of excludable creditors as part of the new process. Respondents highlighted that in keeping with examinership, all creditors should be included in the process. Submissions also outlined that from a practical perspective there is a clear requirement to ensure all liabilities are dealt with when putting in place a rescue plan. This provides the certainty necessary for the investor, funder, company promoters and importantly other creditors.
The examinership process is well understood and founded on a solid legal framework. The Department considers it appropriate that the new process align with examinership insofar as possible. However, as the new process will not be subject to ongoing Court supervision there is potential for unintended consequences, for example, some companies could abuse the new process for the purpose of tax avoidance. Therefore, it is proposed that the Revenue Commissioners be treated distinctively from other creditors in so far as they will only be able to exclude themselves from the process on limited and specified grounds (e.g. in relation to the potential abuse of the process for tax avoidance). It should be noted that Revenue have been and continue to take a constructive approach in this area - under the Personal Insolvency Act 2012 the Revenue Commissioners have accommodated over 90% of personal insolvency cases where they are in a position to quantify the debt. The Revenue Commissioners has similarly committed to act as a constructive participant in the new Small Company Administrative Rescue Process.
*The CLRG is a statutory advisory body charged with advising the Tánaiste on all matters pertaining to company law in the public interest. Membership of the CLRG is representative of the broad range of company law stakeholders making it uniquely well positioned to provide a nuanced view on the issue of rescue for small companies.
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