Over the past several years, various economic headwinds have prevented some startups from growing as planned, leading to financial difficulties that threaten their survival.
Some startups completed numerous funding rounds, resulting in fragmented ownership structures, which can be unattractive to potential new investors, especially financially distressed companies.
When current or new potential investors lack the appetite to provide further capital or debt to a startup facing insolvency, Examinership/SCARP (Small Companies’ Administrative Rescue Process) can offer a solution. An investor through Examinership/SCARP can acquire all or most of the share capital of the company.
The investor(s) provide the capital needed to restructure the company’s debts and operations, thereby creating a more sustainable business. By investing through either of these processes, investors can benefit from the company's preserved value while protecting jobs. In essence, investors have a chance to acquire a potentially strong business at a discount.
What is Examinership&SCARP
Examinership and SCARP are formal corporate rescue processes where an Examiner / Process Advisor is appointed to formulate a rescue plan to ensure the continued survival of insolvent companies.
The rescue plan (scheme of arrangement in an Examinership) is a compromise arrangement with creditors that allows for the write-down of a company’s liabilities. SCARP is a rescue process for small and micro companies only, with a shorter process of 70 days compared to Examinership, which can last up to 100 days.
While the Examiner /Process Advisor is preparing the scheme/rescue plan, the company can be protected from enforcement/legal action from creditors (protection is automatic in an Examinership process and can be obtained, if necessary, in a SCARP).
Positive Step
Both Examinership and SCARP are seen as positive actions taken by a company to ensure its survival and avoid liquidation. Investors have frequently used them in the past to acquire financially distressed companies where the underlying business is viable but has not fulfilled its potential.
Both processes are attractive to investors as, post-Examinership/SCARP, the company will have a clean, restructured balance sheet with debt and other legacy issues addressed through the rescue plan/scheme. The company will be in a much healthier financial position, and therefore, the rewards can be substantial for an investor who has acquired a potentially valuable business at a discounted value.
The burden of loss-making onerous contracts, such as leases, can also be removed, allowing the business to potentially thrive with the right strategy or business model in place.
Investing in a company through these processes can be challenging due to the limited due diligence that can be conducted within a tight timeframe. This makes advanced planning before commencing either process more important, meaning a successful outcome is more likely.
Crucial to act early
Early action and specialist advice are important for exploring suitable options to ensure the company's future survival and avoid liquidation (closure). As time goes on, the chances of exploring restructuring options diminish, leaving less time for planning and starting an Examinership /SCARP.