A short moratorium will give struggling companies a chance to be open with their creditors and negotiate a way out of their problems transparently, says Sykes
STRUGGLING businesses should be granted up to six weeks free from creditor pressure in order to plan a suitable recovery or rescue.
That’s the clarion call from insolvency trade body R3 which believes the introduction of a ‘business rescue moratorium’ would help save more companies suffering severe financial strain, saving jobs and improving creditor returns.
Phillip Sykes, R3 president, said: “The UK insolvency regime is flexible and effective but it needs a simple moratorium procedure to give companies time to plan when there is a chance of rescuing a business and preventing insolvency. It is too easy for anxious creditors to undermine potential rescues with a winding up petition.”
“As a result, rescue deals are arranged quickly and confidentially, which can leave unsecured creditors in particular feeling left out. Additionally, faced with losing control of their company when entering an insolvency procedure, directors often wait until it is too late before trying to take decisive action needed to turn their company around.”
A short moratorium also gives struggling companies a chance to be open with their creditors and negotiate a way out of their problems in a transparent fashion, added Sykes. A further benefit is that directors would remain in control of their company, with the supervision of a qualified insolvency practitioner.
Under R3’s proposals, creditors would not be able to pursue debts owed by companies in a moratorium for 21 days. This period could be extended for a further 21 days with court approval.
During the moratorium, companies would be overseen by a ‘moratorium supervisor’ who would ensure the directors are using the moratorium as intended.
Any company could enter the proposed moratorium, including insolvent companies who might otherwise enter a formal insolvency procedure immediately.
R3 stressed that the moratorium can be used to put in place plans to restructure a company, negotiate alternative payment terms with creditors, negotiate a CVA, or prepare for an administration or liquidation.
A 2014 European Commission recommendation on business failure and insolvency called on member states to introduce a ‘stay’ (moratorium) of at least four months for struggling businesses.
Sykes said four months “is too long to ask creditors to wait” and there is a danger that in a longer moratorium a company would ‘drift’ rather than focus on dealing with its problems.