Why is the UK behind on insolvency reform?

Why is the UK behind on insolvency reform?

UK stays at 14th place in World Bank rankings for Resolving Insolvency amid calls for corporate insolvency reform

Reform of UK corporate insolvency and restructuring frameworks is desperately needed.

That is the message from accountants and industry insiders as the UK fails to improve its standing in the World Bank insolvency rankings.

While the UK stands still at 14th place, other countries have worked hard to improve their insolvency and restructuring frameworks. For example, the Netherlands has jumped from 11th in 2016 to 7th this year after a raft of reforms. The UK is behind Puerto Rico, Slovenia, and Iceland on the World Bank list.

The government announced a series of proposals for improvement in August, but these have not yet been implemented.

“The UK cannot afford to stand still when it comes to strengthening our insolvency and restructuring framework,” said Stuart Frith. He is president of R3, an insolvency and restructuring trade body.

“Although the UK framework is strong and internationally well-regarded, there are still opportunities to make our framework more responsive, and to make it easier to rescue jobs and businesses.”

High profile corporate failure cases such as Carillion and now Patisserie Valerie have added to the pressure to introduce more legislation to improve corporate governance.

Delayed reforms

No clear timetable was given for implementing the government’s reform package when it was announced in August. The Government said it would introduce the changes through legislation when ‘parliamentary time allows,’ but did not give a date for this.

Stuart Frith said: “We look forward to working with the Government to progress these reforms, making sure that the views of the insolvency and restructuring profession are listened to and acted on.

“The reforms aren’t perfect and there are still tweaks to be made, but overall they could help improve our world-class framework.”

Improved frameworks could attract more international restructuring deals.

Meanwhile the number of people being declared bankrupt is expected to increase throughout the rest of 2018 in England and Wales.

That warning comes from top 20 UK business services firm Wilkins Kennedy.

The latest Insolvency Statistics published for Q3 from July to September 2018 reveal bankruptcies increased by 1.7% this quarter. This was a rise of 12% on the same period last year in England and Wales.

“There has also been a decrease in company voluntary liquidations of 27% and a big increase of 26% in businesses going into administration because I think business owners are letting their companies be wound up or their business be struck off,” said Insolvency expert Louise Brittain, Partner and Head of Contentious Insolvency at Wilkins Kennedy.

Brexit fears

Of course, a lot of parliamentary time has been taken up with Brexit. But that should not be used as an excuse for failing to implement necessary measures, according to Chris Laughton, corporate advisor partner at Mercer & Hole.

He said: “Whatever happens with Brexit, the government should move to implement the plans it has to enhance our insolvency regime and improve our international competitiveness.”

There is still a lot of doubt and uncertainty about exactly how Brexit will affect cross-border restructuring and insolvency cases. R3 believes the Government should act anyway to ensure that the insolvency and restructuring framework “leads the international pack.”

As part of the EU, the UK benefits from regulations which mean UK insolvency and restructuring procedures and judgements are recognised across the EU and vice versa.

This means a UK insolvency practitioner can trace, secure, and realise assets of an individual or multi-national company across the EU without having to apply for recognition in individual countries first.

Before these EU regulations came into force, the process could be time-consuming, expensive and unpredictable. Local courts may not recognise an overseas decision or have time to hear the case.

The Government said it would seek a similar arrangement to the existing with the EU after Brexit. However, there is no guarantee of this in case of a ‘no-deal’ Brexit.

What changes did the Government propose?

The key proposals for the UK’s insolvency regime include a new moratorium, a new restructuring plan and the prohibition of terminating suppliers’ contracts on insolvency grounds.

Also detailed were proposals to strengthen the UK’s corporate governance framework, though these were only at the outline stage. These include corporate governance training for directors, a review of the dividend regime, and create greater transparency around group structures and group corporate governance. At the moment, these are outlines only which the Government has said will be fleshed out in time.

How are the World Bank ratings put together?

The current methodology was introduced in 2015, when the UK scored 13th in the rankings. The World Bank scores insolvency frameworks on criteria including their recovery rate for creditors, the time taken to resolve insolvencies, the cost of insolvencies, whether businesses and companies can be rescued, and the strength of the framework.

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