Government’s corporate insolvency reforms welcome but in need of further work – R3
The government’s major package of reforms for the corporate insolvency framework may boost business rescue in the UK, but the proposals won’t achieve their goals without improvements and the government should focus more on improving existing insolvency procedures, says insolvency trade body R3.
R3 is concerned that the proposals lack safeguards to prevent abuse, may not work for smaller businesses, make too many demands on an over-burdened court system, and could be seen as unfair for creditors.
A consultation on the proposals closed yesterday.
In order to boost company rescue and return more money to creditors, the government has proposed introducing a moratorium from creditor action for struggling companies, further protections for insolvent companies to ensure they can access essential supplies, a new restructuring procedure, and changes to encourage rescue financing.
Andrew Tate, R3’s president, says: “R3 welcomes the focus on restructuring tools and business rescue in the government’s consultation. This mirrors the focus of the UK’s insolvency profession.”
“Not all of the proposed tools will benefit business rescue in the UK. With some changes, the moratorium could become a valuable business rescue tool, for example, but the proposed changes to encourage rescue financing are not necessarily needed.”
“The UK already has one of the best insolvency regimes in the world and there are some simple steps the government can take to improve business rescue without major reform. CVAs have the potential to become a much more effective business rescue tool than they are now. And the government, as a creditor, can do much more to support business rescue efforts and encourage struggling businesses to seek advice earlier.”
R3 published its own proposal for a ‘business rescue moratorium’ in April 2016. R3’s proposed moratorium would last 21 days compared to the government’s proposed three month moratorium.
Andrew Tate says: “A moratorium on creditors pursuing debts can be necessary to give a company time to put a rescue plan into place, but this would impinge creditor rights. Any moratorium needs safeguards to protect creditors and prevent abuse, but the protections proposed by the government are not strong enough.”
“A shorter moratorium than proposed by the government and a supervisory role carried out by a properly regulated and experienced individual would help provide the safeguards the moratorium needs. The restructuring tool also needs better safeguards to prevent abuse.”
R3 is concerned that the proposals involve an expanded role in insolvency for a court system that may not be ready for the work.
Andrew Tate says: “The essential supplies proposals, and others, could lead to significant extra workload for the UK court system, which is not set up to deal with a large amount of insolvency work. The UK’s insolvency regime has developed to operate on an out-of-court basis and the government should work within this framework.”