InsolvencyCorporate insolvency framework: Maintaining a competitive edge

Corporate insolvency framework: Maintaining a competitive edge

Andrew Tate of insolvency and restructuring trade body R3 examines the government's proposed changes to the UK's insolvency and restructuring framework, and highlights the profession's concerns

Corporate insolvency framework: Maintaining a competitive edge

Andrew Tate, president of insolvency and restructuring trade body R3, and a partner and head of restructuring at Kreston Reeves, examines the government’s proposed changes to the UK’s insolvency and restructuring framework, and highlights the profession’s concerns. 

The UK’s framework for insolvency and restructuring is one of the most effective in the world. Our insolvency processes are ranked in the global top 15 by the World Bank, and return money to creditors more rapidly and more cheaply than counterpart regimes in France, Germany, and the US. UK creditors see more of their money back after an insolvency, too.

The UK insolvency framework is also good for business rescue: just over two in five businesses that worked with an insolvency practitioner in a formal insolvency procedure in 2013-14 continued to operate afterwards in some way. And, importantly, tools within our legislation have helped our jurisdiction become an international centre for the restructuring of global businesses.

All in all, our insolvency and restructuring framework is an integral part of the economy. It helps rescue businesses and jobs, returns money to creditors, and attracts business and investment to the UK.

Despite its success to date, our framework does need to keep adapting to maintain its competitive edge on the world stage and to ensure it keeps up with the demands of an evolving international business and lending environment.

There are new challenges, too: Brexit could make it harder for UK restructuring experts to work on European cross-border cases, while the European Commission’s new directive on “insolvency, restructuring, and second chance” will improve the standards of insolvency regimes across the rest of the EU.

Against this background, the government has been busy consulting on proposals to add a series of new tools and rules to the business rescue framework. Some of these echo the EU Directive and bring ideas from the US, some build on suggestions made by the restructuring and insolvency profession itself, while others are an attempt to give existing, non-statutory restructuring tools legislative backing.

Consulting on the key proposals

The government announced four key proposals in May 2016:

  1. A pre-insolvency procedure moratorium from creditor action for insolvent businesses.
  2. New rules to ensure insolvent businesses still receive supplies essential to their survival.
  3. A new court-based restructuring procedure similar to the pre-existing English Scheme of Arrangement.
  4. The introduction of “super-priority” status in the hierarchy of creditors to encourage rescue finance.

Following a short six-week consultation, the government announced its next steps last September: there would be more consultation, although only three of the four proposals would be carried forward. “Super-priority” status for rescue finance has been deemed unnecessary. As R3 and others argued in our consultation responses, there is already a well-developed market for rescue finance and new legislation is not needed.

This leaves us with a new moratorium, new rules on essential supplies and a new rescue tool. The government has been speaking to stakeholders about its proposals over the autumn and winter, and an announcement on the final plans is due at some point soon. We could even have primary legislation this year. Some of the original proposals were more developed than others, so there is plenty of scope for the final plans to differ from what was first put forward.

The government’s commitment to boosting business rescue and its recognition of the importance of ensuring our corporate rescue framework remains world class are welcome. However, these are new procedures which are being introduced and it is in everyone’s interest that they are effective and workable from the outset. It is vitally important the government takes on board the feedback from both the insolvency and restructuring profession and the business community on the practical implications which future users of the tools can envisage.

There are three key areas for improvement to the proposals which were originally proposed in the consultation: protection for creditors; protection for debtors; and use of the courts.

The moratorium

The government has proposed an extendable three-month “stay” for businesses to protect themselves from creditors while they attempt to sort out their finances. Entry would be restricted to insolvent businesses that could show they had funding for the duration of the moratorium. Oversight would be provided by a supervisor.

Understandably, business groups such as the British Property Federation, Chartered Institute of Credit Management and British Bankers’ Association are not happy with the proposed length of the moratorium. And while R3 published proposals for a similar business rescue moratorium shortly before the government’s own plans, this version of the procedure isn’t something we are keen on either. A last chance for businesses to turn their fortunes around is a good idea, but three months is far too long for the moratorium to last, and increases the chances that something could go wrong – to creditors’ detriment. R3’s own moratorium proposal was for a three-week moratorium. A shorter moratorium would encourage businesses to take action quickly, would be easier to fund, and decreases the chances of creditors’ interests being harmed.

A key requirement of any moratorium – or of most trading insolvency situations – is that the distressed business is still able to access the supplies it needs to continue to function. Suppliers will, of course, have natural concerns about continuing to trade with a company in financial difficulty.

Certain supplies, including some utilities, have long been recognised in legislation as “essential” to distressed businesses and are prohibited from ceasing or changing the terms of supply once a customer has entered an insolvency procedure. R3 recently led a successful campaign to include IT supplies in this category. The government’s new proposals go much further and would allow insolvent businesses themselves to identify any supplier they consider essential and require them to continue to supply.

This is an unpopular move with creditor groups and, despite R3’s support for extending the remit of essential supply legislation, we think it may be a step too far. Little technical detail of the proposal has been provided, but the potential scope of the proposal is too wide and could have a very serious impact on the suppliers who could effectively be expected to extend credit to struggling businesses. The failure of one business already has a detrimental effect on its suppliers, and this proposal increases the risks businesses face when trading with each other. The government must think very carefully about how to limit the scope of this proposal and to ensure that it works in practice for both insolvent businesses and their suppliers.

New restructuring tool

The new restructuring tool looks like an exciting development. A court-based procedure based on the very successful UK Scheme of Arrangement, which is used internationally, the new tool will allow dissenting creditors to be “crammed down”, US-style.

A concern in the insolvency and restructuring profession is that, while potentially useful, the tool may be inappropriate for smaller businesses to use and should be reserved for larger, more complex organisations. It is possible that unscrupulous advisers may spot an opportunity in steering small businesses towards a tool not designed for them and some courts may not necessarily have the experience, time, and expertise to prevent smaller firms from being misled.

Indeed, the government’s original proposals all feature an expanded role for the courts but there are serious doubts regarding whether the already stretched court system has the resources and capacity to deal with any increase in workload.

Where do we go from here?

Hopefully, the May 2016 proposals were simply a starting point for the government. There are plenty of good ideas in them, but the devil will be in the detail. The government has had its chance to listen to the insolvency and restructuring profession (and others) about the changes that are needed and the clock is counting down to discovering if this feedback has been taken on board.

Getting the new ideas right will be a timely boost not just to the UK insolvency and restructuring framework, but a boon for our economy as a whole.

Andrew Tate is president of insolvency and restructuring trade body R3, and a partner and head of restructuring at Kreston Reeves.

 

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