I thank the Chair and the committee for the opportunity to discuss the small companies administrative rescue process, otherwise known as SCARP. It is a bespoke rescue process for viable small and micro companies experiencing temporary financial problems. I am accompanied by my colleague, Ms Tara Keane, who was also involved in the development of the process, and Dr. Dermot Coates from the Department's economic and tax policy unit.
SCARP, as a unique process, was developed in response to the Covid-19 pandemic, specifically to alleviate the impact on small and micro companies which demonstrated the largest declines. Some 78% of that cohort operated in sectors that were particularly challenged by the pandemic. With such a rapid response required, there was a risk that any short-term, reactive response would result in a frenzy of sticking plasters that would prop up economically unviable companies and would have far-reaching consequences beyond the distressed company itself. Thus, the challenge was to deliver a sustainable regulatory rescue framework that would provide an effective lifeline to small companies, affording them an opportunity to restructure their debts and continue trading but which would also incorporate robust safeguards and balance the needs of all stakeholders affected by corporate rescue.
A comprehensive review of the State's existing corporate rescue framework and an assessment of available policy options was commenced in June 2020 when the Company Law Review Group, CLRG, a statutory advisory body, was requested to examine the issue. The CLRG's report advising on a legal structure for the rescue of small companies was submitted to the then Tánaiste in October 2020. This report informed the policy and operational approach the Department took in devising a process that would allow viable small and micro enterprises experiencing temporary financial problems to restructure with the agreement of creditors and avoid liquidation, thereby ensuring the long-term viability of those companies and preserving employment.
The Department quickly developed the CLRG's recommendations from both operational and policy perspectives. The defining features of the SCARP project were to, first, reduce court involvement, speed up the restructuring process and lower costs; second, ensure the process was underpinned by a robust legal framework; and, third, amid a global health crisis, establish the process quickly but carefully.
Developing a new rescue process over a compressed period during a public health crisis was challenging. Nonetheless, the Department engaged in an undertaking that was thorough, transparent and accessible, and which included a month-long public consultation on the proposed measures.
Given the significance of SCARP to saving companies and jobs, the Department developed an integrated communications strategy to prepare companies, employees and creditors and professional advisers for its commencement. The comprehensive approach included a media campaign, a dedicated web page and booklet providing practical information on the new process, stakeholder engagement and direct communications with small and micro companies.
SCARP was initially designed to respond to the immediate impact of Covid-19 on small companies. However, it is now positioned to provide for a long-term solution to the economic impacts of the pandemic and the significant challenges that have faced small companies on foot of multiple external and geopolitical crises and the costs associated with them. As such, the process has been broadly welcomed as a valuable addition to the State's insolvency toolkit for our small and micro enterprise sector, which accounts for more than 98% of companies and employs in the region of 900,000 people.
The decision to enter SCARP is a matter for individual companies and their respective advisers. The Department continues to monitor the use of SCARP and, as of 24 April, 62 small companies had availed of it, resulting in a significant number of jobs being saved thus far. It is also important to note that the availability of SCARP as a means to restructure can also encourage creditors to engage informally in a constructive manner with viable companies in distress, diminishing the necessity to enter into a formal process. This important and beneficial aspect of the process obviously cannot be quantified. The context is also important. Insolvency and restructuring activities are, as a whole, rising but remain below pre-pandemic levels.
In tandem with this upward trend, 2023 saw a 50% rise in SCARP notifications over the first year of operation. It is also interesting to note that SCARP, which incorporates key elements of the examinership model, outnumbered examinerships in 2022 and 2023.
Company law is dynamic and the legislative framework provided for by the Companies Act 2014 is regularly reviewed to ensure that the original objectives remain valid and are being achieved, as well as to consider developments arising from stakeholder engagement, developments in case law and the work of the Company Law Review Group, CLRG. Given the necessary pace at which the process itself was developed and the 2021 Act which underpinned it was drafted, a number of technical matters which require refinement and further improvements to the operation of SCARP are proposed in the companies (corporate governance, enforcement and regulatory provisions) Bill 2024. External experts, insolvency practitioners and the public were consulted in the preparation of amendments to ensure all voices were heard in examining its operation thus far. The Bill recently completed prelegislative scrutiny.
The State recognises that fundamentally viable companies can go through difficult times and so its primary focus is on preventive solutions rather than imposing an absolute duty on an otherwise viable company to wind up. Accordingly, Ireland already has well-established processes and procedures to facilitate timely debt restructuring. The design of SCARP was predicated on the need to reduce costs by streamlining and simplifying existing examinership procedures while also balancing the constitutionally protected property rights of creditors, the existing successful and well-tested examinership framework and the need to address the specific requirements of small businesses.
Expanding the State's corporate rescue framework to provide a strong and innovative restructuring procedure in SCARP has met with broad support from industry practitioners, small business representatives and experts in the field of insolvency. The IMF, in its assessment of Ireland’s insolvency regime observed that the process is a welcome addition to Ireland's insolvency toolkit. All this positive feedback suggests that SCARP is well positioned to assist small and micro companies in the period ahead.
We welcome the opportunity to contribute to the committee's discussion of the process and to assist in any way we can. I thank the Chair.
