This situation can be stressful for directors who are responsible for the company, and who in many cases are facing this situation for the first time.

The need to be cognisant of the implications for the company and for themselves personally by continuing to trade, when not being in a position at this time.

At the outset, directors of a company facing challenges need to be able to assess the situation. In this regard, they should conduct a thorough assessment of the company’s financial position, including liabilities, assets, and cash flow.

Cash flow is critical as the key test of insolvency is the ability of a company to pay its debts as they fall due.

Assessing this will help the directors determine the extent of the problem and identify any areas where the situation can be remedied through a turnaround process or a financial restructuring or if indeed there is no alternative liquidate the company.

This is often the appropriate time to engage with an Insolvency Practitioner who has been through this process many times before. An experienced insolvency practitioner will be able to give directors an experienced, unbiased view on the company situation and assist them in considering the alternatives that are available to them.

At this stage it is important to note that whilst the principal duties of a director are owed in the first instance to the company itself, that once insolvency becomes a real possibility for the company, the primary duty of the directors pivots in favour of the company’s creditors.

In this regard, steps should be taken to preserve assets and to minimise loss to creditors. Those steps may include the following:

• Review its costs and take whatever steps may be appropriate to reduce them.
• Keep detailed records of the commercial basis of decision that are taken in order to be able to show that they were responsible decisions made with creditors best interests.
• Any commercial decision that the company should continue to trade although it faces the prospect of insolvency, or is insolvent, should always be informed by the appropriate professional advice and that advice should be recorded.
• Ensure that accounts are being properly prepared and are up to date.
• Payments to connected parties should be avoided.
• Annual returns and tax filings should be kept up to date and any tax liabilities should be paid to Revenue as they fall due.

Some of the common mistakes directors make at this time include:

• Transferring assets to related entities for less than fair value.
• Lend money to their company if it can’t be repaid.
• Pay certain creditors in priority to others. (e.g. creditors with personal guarantees).
• Continue trading whilst insolvent.
• Obtain advice from unregulated and unqualified advisors.
• Use personal bank accounts / intermingling company and personal finances.

Making an educated informed decision at this time is important. It necessary to say that directors should not assume that the safest course of action is to cease trading. Directors may be criticised in certain circumstances for a premature cessation of trade as for continuing to trade while insolvent.

However, equally important is that very much at the same time, a decision to continue to trade while insolvent risks personal liability for the directors and should only be taken based on clear legal and financial advice which directors should carefully document review and update frequently.

Some of the implications for directors who did not act “honestly and responsibly” include:

• Be subject to a negative report to CEA leading to Restriction or Disqualification as a director.
• Be accused of Reckless Trading or Fraudulent Trading and be possibly held personally liable for debts.
• Have transactions overturned as a result of:
  • Fraudulent Disposition of Property
  • Unfair Preference
• Be held personally liable for debts arising out of a failure to maintain proper books of account.

So having met with an Insolvency Practitioner and having established the situation the company is facing the next thing to consider all the available options.

The key question is whether the company can be made viable. There is a dividing line between when a company is suitable for a turnaround or whether it should be placed into a formal insolvency procedure.

If a company can be made viable then a Turnaround or Restructuring through SCARP or Examinership may be possible. If the company cannot be made viable then the directors should place it into Creditors Voluntary Liquidation.

Business turnaround strategies focus on assisting struggling firms plan for their short- or long-term financial recovery. If turnaround is not an option because a company’s problems are so severe, restructuring can still enable the company and/or its business to survive. The term ‘restructuring’ refers to a range of formal insolvency processes aimed at helping businesses in significant distress – including SCARP or Examinership.

Every company which is considering liquidation should consider SCARP or Examinership in the first instance. Given that Examinership has been around in one shape or another since 1990, and that it is not a viable option for many micro, small or medium sized entities by virtue of costs involved, we will focus on SCARP for this article.

SCARP (or to give it its full title – Small Company Administrative Rescue Process) is a simplified corporate rescue mechanism specifically geared towards small and micro companies. It is an alternative to Examinership which can often be overly costly for smaller businesses.

The primary objective of the Small Company Administrative Rescue Process is to save a company and any jobs provided by it.

In order to avail of it a company must meet certain eligibility criteria, namely:

1. Be a Small or Micro Company
2. Be unable or unlikely to be able to pay debts
3. Be not in liquidation and
4. Not have used the process in previous 5 years

The SCARP process is as follows:

The company will engage an Independent Insolvency Practitioner (IP) to act as a “Process Advisor”. This is often the IP they meet to consider the options. The company’s Auditor/Accountant cannot act as Process Advisor.

Having identified the need to enter the process and having engaged a suitable Process Advisor, the directors of the company will prepare a Statement of Affairs in a prescribed form.

The Process Advisor will then issue a report on whether the company in their opinion has a reasonable prospect of survival and whether a SCARP should be undertaken.

In order to formally commence the SCARP, the directors of the Company will call a board meeting within 7 days of receiving the Process Advisors report at which they will pass a resolution to commence the process.

Creditors are then informed of the process and are sent the Statement of Affairs and the Process Advisor’s Report. Creditors will also receive a Proof of Debt form which needs to be sent back within 14 days. During this period, creditors are afforded an opportunity to provide input to the process advisor and to disclose any facts they consider material to the process.

The Process Advisor having reviewed the Company’s financial circumstances and consulted with stakeholders including directors, creditors and shareholders, will prepare a draft rescue plan.

In terms of this plan, which is in simple terms, an agreement between a company and its creditors to settle company debts. There are:

• No prescribed components or exclusions.
• No creditor may be unfairly prejudiced.

Critically the plan must satisfy the ‘best interest of creditors’ test (i.e. provide each creditor with a better outcome than a liquidation).

In terms of the approach the Process Advisor’s rescue plan can take, there is no express limitations. In this regard,

• Debts can be written down.
• Different classes of creditors receive different treatment.

For example, whilst in Examinerships, creditors are normally settled with a “lump sum”, Companies could pay creditors over a period in a SCARP, of say, three years.

Having formulated a rescue plan, the Process Advisor summons meetings of members and each class of creditor within 42 days of their appointment. Facilitating a timely process, notices may be sent via email.

Creditors are invited to vote (having been provided with 7 days-notice) on the plan by day 49.

For the Rescue Plan to be approved by Creditors there must be a 60% majority in number and a SIMPLE majority of value in respect of at least one class of creditor.

Such approval of one class of creditor voting in favour of the rescue plan will result in it been binding on all creditors.

If there is no objection to the plan and it is approved by creditors there is no requirement to obtain Court approval and the plan becomes binding 7 days after Statutory notices are filed unless objected to within 21 days.

An experienced and creative Process Advisor can formulate different types of schemes of arrangement. There is no one size fits all solution, so it can be tailored to each company’s specific situation i.e., it can involve for example:

• no write down of debts but extend repayment dates or
• it can involve a write down of debts for creditors across the board or
• different levels of write down for different classes of creditors.

Critically though – the outcome must be better for each class of creditor than the alternative outcome in liquidation.  No creditor can be prejudiced in this regard.

In conclusion, any company which can be saved, should be saved as liquidation has a detrimental effect on jobs and on asset values.

Essentially, every eligible company facing difficulties should contemplate SCARP before Liquidation as SCARP gives many companies the opportunity to turnaround their fortunes protecting jobs and the assets of the company.

It is also important to recognise that corporate insolvency can be a difficult and stressful time for directors. It’s important to seek support from friends, family, and colleagues during this period. With the right approach and support, it’s possible to minimize the consequences to all parties involved and help the company navigate the challenging situation.