PKF Accountancy Report Partner Profile
A LIFELINE FOR STRUGGLING SMES IT MAY NOT BE PERFECT BUT THE NEW RESTRUCTURING BILL FOR SMALL FIRMS SHOULD PROVIDE STRUGGLING BUSINESSES WITH MUCH-NEEDED SUPPORT, WRITES DECLAN DE LACY Is the current low rate of insolvencies similar to the sea retreating before a tsunami? This is the worst-case scenario envisaged by the European Systemic Risk Board in their recent paper on preventing corporate insolvencies. This scenario seems possible when the Central Bank reports that 16% of SMEs are in financial distress, and the Central Statistics Office reports that more than 16,000 businesses have had their entire staff on layoff since last April. In difficult times large businesses turn to examinership to write down debts and reduce rents. However legal and other costs make examinership inaccessible to SMEs. This inequality was recognised in 2012 in a report by the Company Law Review Group (“CLRG”). Governments since then have promised, but failed, to remedy the situation. Minister Robert Troy has sought to address this by publishing draft legislation to provide a bespoke rescue process for small companies in the form of the Small Companies Administrative Rescue Process (SCARP). The SCARP process is an out of court mechanism for SMEs to make compromises with their creditors and landlords. If at least one category of creditors agrees to the compromise, it can be made binding on them all. Crucially, the process includes provisions
to deal with onerous leases, albeit this will involve a relatively uncomplicated Court application. The legislation does not prescribe the types of compromise that are possible, but I expect most to involve debts being rescheduled or being written down to what would be paid in a liquidation. The real question to be asked now is will the SCARP process work for SMEs? The first challenge will be to persuade businesses to use it. Historically there hasn’t been a culture of corporate restructuring amongst SME’s. This is partly because there hasn’t been a formal structure within which restructuring could take place, and partly because business owners can be slow to recognise problems and prefer to keep them private. The new legislation will address the first problem. The second will only be solved by business owners recognising their difficulties and being willing to ask creditors for help. A similar issue existed when personal debt restructuring procedures were introduced in 2012 and it took several years for them to be widely used. The widespread problems facing SMEs means widespread liquidations will only be avoided if business owners quickly recognise the benefits of SCARP. The second challenge is that state bodies including Revenue can opt out
“CLEARLY SCARP WON’T BE A PANACEA FOR ALL DISTRESSED COMPANIES, HOWEVER FOR THOSE WHO NEED TO TRIM FIXED COSTS AND MANAGE LEGACY DEBTS IT MAY BE JUST THE TOOL TO ALLOW THEM AVOID LIQUIDATION.”
Declan de Lacy, FCA, insolvency practitioner, PKF O’Connor, Leddy & Holmes
of the SCARP process where there is a poor history of tax compliance. This is a major difference between SCARP and examinership but mirrors the new personal insolvency regime. Of course, businesses in distress usually have at least a recent history of poor tax compliance. Minister Troy has given assurances that Revenue will only opt out where the process is being abused. What they do remains to be seen, but SMEs can take comfort from Revenue having engaged with personal insolvency in a reasonable and practical way. The SCARP process is likely to become available to businesses just as the Government’s EWSS and CRSS supports taper off. Clearly SCARP won’t be a panacea for all distressed companies, however for those who need to trim fixed costs and manage legacy debts it may be just the tool to allow them avoid liquidation. Declan de Lacy FCA is an insolvency practitioner and leads the advisory and restructuring practice at PKF O’Connor, Leddy & Holmes
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