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29/09/2016

Corporate Insolvency Consultation Response Summary

The government’s summary of responses (published 28th September 2016) of its Corporate Insolvency framework review provides a bit of an insight into what we might expect to be introduced through legislation in the near future. While not a full government response nor an outline of their next steps, the summary clearly sets out the views of the stakeholder community on the proposals. In all, there were 71 responses; many from the insolvency and restructuring profession but also a number from the creditor community.

The consultation itself, published in May, set out four proposals which aim to ensure ‘that the insolvency framework supports business rescue where possible, maximising returns to creditors where possible’. As a quick reminder, the four proposals are: a new business rescue moratorium; allowing companies to designate certain supplies as ‘essential’, which would guarantee the continuation of these supplies in case of insolvency; a new 12 month restructuring tool; and new options for rescue finance. The proposals would see the most significant changes to the corporate insolvency and restructuring landscape since the 2002 Enterprise Act.
 
R3 welcomed the government’s objectives but had a number of concerns around the detail of each proposal. We spent a lot of time during the consultation engaging with members of the profession and the business community to hear and share views on the proposals and were pleased to see in the summary that our views and concerns were shared by many others. 
 
What should we expect next?
 
Although it’s still early days with the government’s thinking (they have said they will maintain dialogue with stakeholders over the coming months on the proposals), there was ‘broad support’ for the principles behind the proposals. We should therefore expect the government to continue with its direction of travel over the coming months – albeit hopefully with some revision to the current proposals. We may then see legislation as early as next year.
 
There are clearly a number of concerns from the profession and business community that the government must address. There are fears that the proposals could undermine the UK’s world class insolvency regime and reduce trust and transparency unless safeguards are put in place to better protect creditors. Business bodies in particular have serious concerns about the measures, with one describing them as ‘stifling’ the current insolvency and restructuring system, and another saying that that they will not enhance the existing framework.
 
R3 hopes the government will take on board this strength of feeling and consider better safeguards than currently proposed.
 
The moratorium
 
There was broad support for the business rescue moratorium (which would give financially distressed businesses ‘breathing space’ from creditor action to try and pull together a rescue plan). However, like R3, the majority of respondents believe that the detail of the proposal needs refining and more safeguards for creditors should be introduced.  
 
R3 has previously called for a 21 day moratorium to be supervised by an insolvency practitioner; the government’s own plans are for a three month (extendable) moratorium to be supervised by an insolvency practitioner, accountant or lawyer. 75% of respondents disagreed with the government’s proposed length, with the most common alternative suggestion being R3’s proposed 21 days; 60% of respondents agreed with R3 that the supervisor should only be an insolvency practitioner.
 
Given the strength of feeling here, we hope the government’s final proposals for a moratorium will follow those suggested by R3 and supported by a number of firms and business bodies.
 
Essential supplies
 
R3 welcomed the October 2015 extension of continuity of supply rules to IT and utility contracts – in fact, it was an R3 campaign that led to these changes being introduced in the first place. Under continuity of supply rules, certain ‘essential’ contracts (now including IT and utility supplies) cannot be unilaterally changed or cancelled simply because the customer has become insolvent. Without access to key supplies, insolvency practitioners will struggle to rescue a business.
 
The government’s 2016 proposal is to extend these rules by allowing directors of insolvent companies to designate their own essential supplies. Over half of the respondents who commented on whether the proposal would bring about more business rescues thought it would do so. However, around 40% disagreed with the proposed criteria under consideration for an essential contract as drafted and almost 70% do not believe the proposed safeguards for creditors are sufficient.
 
The responses are mixed. It’s clear that safeguards need to be tightened but there is still a lot up for debate around the criteria and scope of an ‘essential supplier’. R3 has suggested a number of possible solutions to improve the proposal, including payment for goods and services on a pro forma basis.
 
Restructuring tool
 
The government’s plan for a 12 month restructuring tool would introduce a ‘cram-down’ mechanism and the ability to bind secured creditors in a restructuring plan; it was supported in principle by consultation respondents. Just under half agreed with the government that the tool should be a stand-alone procedure rather than an extension of an existing procedure, like a CVA.  
 
The government’s summary says that the majority of the respondents believe that there is sufficient protection for creditors (through the courts); R3 disagrees with this point of view. R3 is concerned that the main proposed safeguard, the court, is not set up to deal with such a tool and with the courts already under significant budgetary pressures, we proposed that the tool should only be introduced alongside a new specialist insolvency court. R3 will also continue to raise concerns about the potential for the proposed tool to be abused, particularly in the SME market. This issue hasn’t been picked up in the summary but we will continue to call on the government to make the tool only available to larger businesses, if introduced at all.
 
Options for rescue finance
 
With more than 70% of respondents disagreeing with the government’s proposals, it is unclear what may happen next with this proposal. The government had proposed to introduce new rules to encourage rescue funding (including priority for rescue finance) but many of those who opposed the proposal said the same thing:  that there is no shortage of rescue funding; that any changes to the ‘order of priority’ will impact the UK’s lending environment; and that secured creditors already make funding available for viable businesses.
 
It may well be that the government put this particular proposal on the back burner, but the issue of rescue finance certainly won’t disappear anytime soon given the ever changing lending landscape.
 
The coming months
 
The summary of responses gives a good idea of where the government should head with its proposals, but there is clearly a way to go. R3 welcomes the government’s commitment to engage with stakeholders over the coming months and looks forward to being part of that dialogue.
 
The UK’s insolvency and restructuring regime is one of the best in the world and so any new proposals must only serve to maintain or improve that status, not undermine it. We hope the government will take on board the views of all stakeholders and only introduce proposals that benefit insolvent businesses, creditors and, importantly, that are workable for the insolvency profession.   

Notes to editors:

  • R3 is the trade body for Insolvency Professionals and represents the UK’s Insolvency Practitioners.

  • R3 comments on a wide variety of personal and corporate insolvency issues. Contact the press office, or see www.r3.org.uk for further information.

  • R3 promotes best practice for professionals working with financially troubled individuals and businesses; all R3 members are regulated by recognised professional bodies
     
  • R3 stands for 'Rescue, Recovery, and Renewal' and is also known as the Association of Business Recovery Professionals.