The proposed moratorium would last for three months, with the possibility of an extension, if needed
BIS has launched a consultation on whether the UK’s insolvency regime needs updating following a flurry of recent corporate failures and “an increasing European focus on providing businesses with the tools to facilitate company rescue”.
The consultation explores four broad areas for reform. Core to this is introducing a moratorium for distressed businesses to benefit from protection against legal action while considering their options for rescue.
The government department is also seeking to widen the definition of essential supplies, with appropriate safeguards for suppliers; develop a new restructuring plan to increase the options available to rescue businesses and increase the availability of rescue finance.
The proposed moratorium would last for three months, with the possibility of an extension, if needed. During the moratorium creditors would have a general ‘right’ to request information from the insolvency practitioner.
Its also considering extending this to all insolvency procedures to improve transparency and provide an additional safeguard for creditors.
Business secretary, Sajid Javid, said: “The UK’s corporate insolvency regime isalready highly regarded. But with the business world becoming ever-more fast-paced and complex, it is time ask ourselves whether –and how –the system can be improved.
“To remain at the forefront of insolvency best practice we also need to ask what a ‘good’ regime looks like in 2016. An increasing international focus on company rescue has helped to shift the perceptions of what constitutes best practice; the UK needs to reflect this if our businesses, investors and creditors are to remain confident that the best outcomes can be achieved when things go wrong.
It’s also looking to help businesses continue trading through the restructuring process, to make it easier for companies to maintain contracts essential for the continuation of the business.
This should help prevent micro, small and medium enterprises (MSMEs), being held ‘hostage’ by key suppliers seeking to profit from a company’s distress, harming the prospects of a fair and successful rescue solution to benefit all creditors.
The third proposal seeks to develop a flexible restructuring plan, to enable a rescue plan to bind secured and unsecured creditors and introduce a ‘cram-down’ mechanism.
Currently, dissenting creditors may, depending on the procedure, have the ability to block a restructuring proposal.
Under a CVA, says BIS, secured creditors can voluntarily join in a restructuring plan, but in practice many never do. The company then has to negotiate separate deals with secured creditors and this may undermine achieving an optimal rescue solution and delay the process, increasing the costs of a rescue and putting the company at greater risk of failure.
The fourth proposal concerns exploring options for rescue financing.
Andrew Tate, president of R3, the insolvency trade body, backed the moratorium move, saying: “R3 welcomes the government’s proposal to introduce a moratorium for struggling businesses to give them breathing space from creditor pressure. A moratorium could give company directors more time to turn a business around and negotiate with their creditors.”
“It’s very important that any moratorium is practical. It should be short, to make it easier to fund and to limit the burden on creditors, and there should be a licensed insolvency practitioner in place to look after creditors’ interests. The government must also avoid repeating the mistakes of existing moratorium options and ensure the oversight role is proportionate.”
R3’s own recommendation is for a 21-day moratorium, extendable to 42 days with court approval and insolvency practitioner oversight.
The body believes a longer moratorium increases the risk of harm to creditors potentially allowing companies in the moratorium to ‘drift’ rather than resolve their problems.