When dealing with company debt in Ireland, many small business owners or directors of companies struggle to know where to start, and what path they should choose.
There are three main options available in circumstances like these to effectively manage or resolve your company’s financial issues: examinership, SCARP, and liquidation (which is also known as winding up).
At Anthony Joyce & Company Solicitors, we understand how important it is to choose the right strategy tailored to your company’s specific needs. In this blog post, we’ll cover each of these options in detail, so that you can make informed decisions with confidence and a clear understanding of the potential outcomes.
Understanding Your Debt Management Options
Examinership
What is Examinership? Examinership is a process designed for companies that are going through a short-term financial struggle but have the potential to succeed with the right changes. It allows your business to continue operating while you work on stabilising finances, providing a protective bubble against creditor claims during the restructuring phase.
How Does Examinership Work? The process begins when the Court appoints an independent examiner. This examiner thoroughly reviews your business and works to create a survival plan involving the restructure of company debt. This consists of renegotiating debts and potentially looking for new investments. Their aim is to help stabilise your company financially in a way that creditors will accept, ensuring it can continue to trade successfully. Examinership is a process available to companies who wish to avoid liquidation.
Court Involvement Examinership is a process overseen by the Court, where the examiner presents their financial roadmap to the Court. This allows everyone involved, particularly creditors like the Revenue Commissioners, to share their views and approve the proposed restructure before it is implemented.
Suitability for Dealing with Various Creditors The inclusive nature of examinership makes it especially effective for businesses dealing with multiple creditors. Since the restructuring plan can bind all creditors once approved by the Court, it offers a way to comprehensively address debt without shutting down operations.
SCARP (Small Company Administrative Rescue Process)
What is SCARP? The Small Company Administrative Rescue Process (SCARP) is intended for small to medium-sized businesses (SMEs) that are struggling financially. It works similarly to examinership but is more straightforward, allowing for a simpler way to reorganise debt without going through the lengthy Court procedures that are typically needed in examinership.
How Does SCARP Work? In SCARP, a process adviser helps your company create a rescue plan that meets the needs of both the business and its creditors. This plan usually involves restructuring the company debts. The rescue plan is put forward to creditors who can vote yes or no. If all creditors vote yes then the rescue plan is legally binding on all creditors. However, if a creditor votes no it is not the end of the road, the process advisor can seek approval from the Court.
Court Involvement SCARP does not generally require Court involvement unless the plan is rejected by creditors. This minimal Court interaction assists in simplifying the process and can acquire quicker results reducing the level of legal costs involved.
Suitability for Various Creditors The SCARP process can assist with various creditors in the restructuring process. However, it’s important to keep in mind that certain debts are excluded from SCARP such as taxes owed to the Revenue Commissioners. This means that these debts would not be dealt with in the SCARP process.
Liquidation (Winding Up)
What is Liquidation? Liquidation means shutting down a company by selling its assets to pay off company debts. Liquidation is deemed necessary when the company’s liabilities exceed its assets and there is no reasonable prospect that the Company can survive. The Company must cease trading upon liquidation.
How Does Liquidation Work? A liquidator is appointed to take control of the company, sell assets, and distribute proceeds to creditors. This process ensures that all legal and financial obligations are met before the company is dissolved.
While directors of a limited company aren’t usually personally liable for company debts, there are some exceptions. For instance, if the directors continue to run the company when it is unable to pay its debts, or if they have signed personal guarantees they could be held accountable. Additionally, if the company has unpaid taxes, directors might face examination for their involvement in these debts, especially if it involves unpaid employee taxes, which could result in personal consequences.
Court Involvement Liquidation may be initiated voluntarily by the company or involuntarily by the creditors through a Court process. Court involvement in liquidation makes sure that the company’s closure is done legally, with official supervision over how its assets are shared out.
Suitability for Various Creditors Liquidation allows for all creditors to be paid, but the order in which they receive payment is set by law. Priority creditors, such as secured creditors and employees, are paid first, and then unsecured creditors, like suppliers and partners, receive their payments. This process is less adaptable than SCARP or examinership and usually doesn’t allow for any continuation of business operations.
What to Consider Before Choosing an Option
Choosing the right debt management strategy means understanding the legal process and finding the best solution for your company’s specific situation. Here are some important factors to consider:
- Nature of the Debt: The type of debt and level of debt your company has will hold weight when choosing an option. For example if the debt is mainly operational for example money owed to suppliers or whether they are primarily debts owed to banks will all be considerations.
- Company’s Financial Health: It’s essential to assess the overall financial stability of your business. If you’re facing a short-term cash flow problem, options like examinership or SCARP may give you the time you need to reorganise and recover. On the other hand, if your business is in serious financial trouble, you might have to consider liquidation as an option.
- Impact on Company Reputation: The strategy you choose can also influence how the public sees your company and how you relate to stakeholders. For instance, going through examinership may show your commitment to improving the business, while liquidation could indicate that your business is closing down.
It’s also important to think about how and why your company’s debt occurred. Many businesses, for example, faced unexpected challenges due to the COVID-19 pandemic that led to new debts. Showing that you’ve made efforts to repay these debts can help during negotiations with creditors and might even influence which debt resolution strategy is best for your situation.
Final Thoughts
We know that dealing with company debt isn’t straightforward and the right solution varies greatly depending on each unique situation. If you’re facing difficult decisions about how to handle your company’s debts, or if you’re unsure which path is best for your company, contact us. We’re here to offer you clear, professional advice and can also connect you with experienced Insolvency Practitioners for comprehensive support.
