The Small Company Administrative Rescue Process (SCARP) was introduced in December 2021, and it is fair to say that engagement with the process has been slow in the initial months.
The first SCARP was commenced in January 2022 and up to the start of August 2022, there were only three more SCARPs utilised by insolvent companies. It appears however that the process is now starting to gain some traction, with six SCARPs commencing since the start of August.
Although it is only a small sample size, a quick analysis of the four SCARPs that have commenced and concluded to date shows that three have been successfully concluded, and we understand that while the fourth case did not result in a successful SCARP, the company was able to reach an agreement with its creditors outside of the process and continues to trade. This is a positive note for the SCARP process as, although the numbers have been limited, it shows that the process is working to its goal of providing a rescue process for the SME sector.
Another interesting aspect of the cases to date is that half have involved the restaurant sector, including some high-profile cases involving Dylan McGrath’s restaurants and a restaurant from the owners of Fallon & Byrne. This is in contrast to the overall insolvency figures for the first half of 2022 (which don’t include SCARPs), where there were only seven restaurant-related insolvencies, representing just 3% of the overall total.
While the SCARP process has been slow to take off, as would be expected with any new process which requires time to be established, the overall low number of insolvencies has also had an impact on the SCARP figures. The total number of insolvencies for the first half of 2022 was 253. This represents a 50% increase on the same period for 2021, but the figures for 2021 were at the low point for insolvencies due to the government related supports for businesses put in place to deal with the COVID-19 pandemic. The figure of 253 for H1 2022 represents an 18% decrease when compared to the same period for 2019, before the impact of the government supports.
It is clear from the H1 2022 figures that the impact of the COVID-19 pandemic on corporate solvency has yet to been seen. The Covid supports put in place during the pandemic have provided much-needed assistance to many businesses, and the ability to warehouse tax debts during the pandemic has also provided significant breathing space. These supports however have now ceased and come 1 January 2023, Revenue will be seeking repayment of any taxes in the warehouse scheme. In addition, further energy price rises and the ongoing impacts of a high inflationary environment are likely to exacerbate both direct and indirect pressures on businesses due to rising supply costs and further tightening of consumer spending.
Given these factors and the impact of COVID-19-era liabilities falling due for repayment, it is expected that the second half of 2022 and into 2023 will see a spike in the number of corporate insolvencies. What remains to be seen however is whether the recent increase in SCARPs over the last few weeks will continue and if the process will be widely used by companies to restructure their businesses.
We believe that this will depend to an extent on the Revenue Commissioners’ attitude to the process. The legislation underpinning the process allows for Revenue to “opt in” or “opt out” of the process. We understand that they have been constructive in their engagement in the majority of the cases to date and, with an estimated €2.9bn of tax still warehoused under the scheme (due from 88,000 businesses), their continued engagement with the process will be vital for SCARP to be deemed a viable rescue option for SMEs.
Read our article: Key stages of the SCARP process
If you find your business is facing financial issues as a result of any of the matters highlighted above, it is advisable to seek early advice from a finance professional. There are many options available to businesses at the early stages of difficulty (including SCARP), but these options diminish if you leave it too late to seek advice.
If you or your business is in need of financial, operational or strategic support, please do not hesitate to contact our restructuring and insolvency team for a confidential consultation.