PracticeConsultingInsolvency reforms spark sale fears

Insolvency reforms spark sale fears

Business recovery professionals have warned that proposed changes to company insolvency legislation could have negative consequences in the long run.

The changes, revealed yesterday by Melanie Johnson, parliamentary under-secretary for competition, consumers and markets, were given a cautious welcome by the business recovery profession, but some expressed reservations.

They said company insolvency reforms, which include restricting the use of administrative receivership and encouraging the use of administration, could unintentionally endanger the sale of companies as a whole instead of in parts, known as going concern, by lengthening the time it takes to rescue them.

Roger Oldfield, president of R3, the Association of Business Recovery Professionals, said: ‘Our main concern is that this proposal could complicate or lengthen rescues.’

Oldfield also said the reform could encourage anti-competitive behaviour. ‘Competitors could set out to frustrate rescues by buying out a creditor’s position and becoming a member of the creditors’committee.’

‘There are bound to be some who see an insolvency as an opportunity to eliminate or acquire cheaply a member of the opposition,’ he added.

Alastaire Beveridge, partner at Kroll Buchler Philips, said the changes to administration laws could be problematic because it gives administrators only 28 days to prepare their cases.

He said: ‘What the administrator should be concentrating on should be rescuing the business, if he has to waste time with the procedure and not the company. In the United States, Chapter 11 bankruptcies are given longer than three months.’

But Frances Coulson, head of insolvency at Moon Bever, supported the government’s decision. He said: ‘When you look at it closely, there are many advantages to administrations, and as long as the bank’s rights as a senior creditor to have some say in how the assets get realised are respected, it is hard to object.’

‘In the long run the banks will benefit. They will no longer be seen as the people who put the company down, because the decision will have been made by the courts instead.’

But he warned: ‘The system of putting in place court-appointed administrators must be equally swift.’

Although the majority of the profession welcomed the removal of crown preferential status, R3’s president said the results could be that Inland Revenue and Customs & Excise would become less forgiving creditors.

‘Abolishing preferential status is great news for business rescue. It may not be good news for those businesses that fail to improve cashflow management skills,’ he said.

Links

Johnson unveils insolvency shake-up

Department of Trade and Industry website

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