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18/07/2018

Licences in insolvency and business rescue

In last November’s Budget, the Chancellor of the Exchequer, Philip Hammond, announced the launch of a review into consumer protection in the event of an airline or travel company failure. The review ran from April to May, and the Government is now evaluating feedback.

The review was prompted by the collapse of Monarch Airlines Limited and Monarch Travel Group Limited in October 2017, which highlighted issues around airline insolvency relating to consumer protection and the challenges of business rescue.

More widely, it illustrated the difficulties facing insolvency, restructuring and turnaround professionals who take on cases where a licence of some kind is key to carrying on the operations of a distressed business, but where such licences are automatically rescinded when the company becomes insolvent.

The impact on business rescue

In industries from health care to hospitality, to security, licences issued to providers are fundamental to doing business. Businesses which attempt to operate without the correct licences in place leave themselves open to fines, at the very least, with closure of the company and prison sentences for directors also possibilities. All reputable players within an industry where licences are a prerequisite understand this, and ensure that their permits to operate are valid.

However, complications arise within insolvency situations, as many such licences contain clauses which render them immediately invalid upon the insolvency of the licence-holder. These sector-specific rules on insolvency can make orderly wind downs or business rescue more difficult, leading to avoidable job losses and reduced returns to creditors.

Looking at airlines, the UK’s aviation insolvency rules prevent an airline company operating after it has entered into administration, because the Civil Aviation Authority automatically suspends the an insolvent airline’s operating licence. While the suspension of Monarch’s licence wasn’t the only thing which prevented a rescue (the risk of overseas creditors impounding planes and insurance risks were other major problems), it would have still been a problem even if other issues had been resolved.

With planes grounded, many Monarch customers were stranded overseas, as their pre-booked flights were cancelled (although the Government quickly stepped in to guarantee that all passengers would be repatriated). Any other UK airline in an insolvency procedure would find itself in the same situation.

This can be directly compared to the situation in the recent airline collapses in Germany and Italy involving Air Berlin and Alitalia. In both of these cases the insolvency framework operating in those countries allowed for the continued operation of those airlines after filing for insolvency. The German government stepped in to provide £150m in temporary credit lines backed by a state guarantee which kept Air Berlin flying for approximately three months. Similarly, Alitalia received a six month lifeline from the Italian government. In both these cases the legislation assisted the orderly operation of the insolvent airlines and prevented tourists being stranded around the world.

Reform options

It’s therefore welcome that the Government is reviewing airline insolvencies, but it’s important not to lose sight of the bigger picture: as noted above, some of the factors which make airline rescue difficult are also present in other sectors. Fixing the problem in one sector but not others will only introduce unhelpful complexity to the UK’s insolvency and restructuring framework.

As it happens, while the Government considers the responses to the airline insolvency review and deliberates on its next steps, it is already sitting on reform plans which could help not only airlines but other sectors, too.

In May 2016, the Government unveiled a package of corporate insolvency reforms designed to improve the chances of business rescue. Included in this package were plans to protect the ‘essential supplies’ of companies in rescue procedures. If these reforms were to be introduced, airlines – and other companies – could potentially be able to keep hold of key licences which could keep them running at a crucial time. This would limit the impact of insolvencies on consumers and would help conserve the value of insolvent businesses, allowing more money to get back to creditors.

Unfortunately, the last time the Government made any progress on these reforms was in September 2016 when its early consultation on the proposals closed.

So, while the Government’s attention on airline insolvencies is welcome, it risks distracting from the wider corporate insolvency reform project, which could, in any case, solve some of the problems the Government’s airline review is designed to look at.

Whichever reforms the Government tackles first, the aim should be to promote business rescue or to help trading to cease in an orderly (and safe) fashion. This would help soften the impact of an insolvency on consumers, staff, and creditors.

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.