R3's response to the Government's Corporate Insolvency Framework Consultation

The government’s objectives are to ‘ensure that the insolvency framework supports business rescue where possible, maximising returns to creditors where possible’. The government is concerned that if it does ‘nothing’, the UK’s corporate insolvency regime will lose pace relative to other regimes ranked highly in the World Bank’s ‘Doing Business’ rankings in terms of speed of resolution of corporate insolvencies and the amount of monies returned to creditors.

 

In the consultation, the government outlines four main proposals to which it sought responses. These consisted of: a three month (extendable) moratorium; a potential ‘new’ 12-month restructuring tool which involves some sort of cramdown for secured creditors; an extension of ‘essential suppliers’; and questions around super-priority funding.

 

Overall, R3 welcomed the focus on restructuring and business rescue in the consultation as it reflects the increasing focus of the profession. However, we are concerned that, as drafted, many of the government’s proposals won’t achieve their objective of increasing business rescue.  We are particularly worried about the lack of balance between the rights of debtors and creditors. We understand that the measures would impose restrictions on creditor rights in an effort to encourage business rescue, but we believe that they do not include sufficient safeguards to balance the loss of these rights. And from our discussions with a number of creditor representative bodies, we know that we’re not alone in these concerns.

 

While we do support the government’s plan for a moratorium we have considerable concerns about its proposed three-month length and supervision.

 

R3 launched its own proposal for a business rescue moratorium back in April, which called for a 21-day breathing space from creditor action, which could be extended either with the issue of a CVA proposal or by applying to a court for a further 21-day extension. This is a far more appropriate and fair length of time to ask creditors to wait, and will encourage businesses to focus on executing a swift rescue plan.

 

When it comes to the role of supervisor, the consultation’s recommendation was that they have ‘relevant expertise in restructuring’. This is too ambiguous a description, leaving question marks around what would qualify as ‘relevant experience’ and who decides whether the supervisor possesses it?

 

We believe, as do many of the other organisations who responded to the consultation, that given the expertise needed, licenced insolvency practitioners are the only suitable option for a supervisor. It’s crucial that the supervisor protects the interest of creditors, and not just the company in the moratorium.

 

These proposals were particularly disappointing in light of the work R3 has done with the Insolvency Service and regulatory bodies in tackling the problem of ‘ambulance chasers’ in the past. We do not want to see unqualified advisors given an opportunity to put businesses at risk for their own gain.

 

The government also needs to outline the responsibilities of the supervisor position, and to ensure that these responsibilities are not too onerous or vague as to make the moratorium unworkable. This is the case with current moratorium legislation which is why it is not widely used, and not considered a useful tool for the profession.

 

The consultation also included proposals relating to the extension of essential supplies, and while we’ve supported, and in fact led, campaigns on this in the past, we believe that the government’s new proposals would negatively impact on creditors.  As drafted, the measures may not increase business rescue but could instead increase the cost and litigation involved in insolvency processes instead. R3 also has practical concerns with the proposal and with the amount of risk to which it would expose suppliers.

 

Requiring a supplier to continue supply on its usual terms may create hardship for the supplier itself. And in most cases, there is little a company in a moratorium can do to force an ‘essential supplier’ to continue to supply if they chose not to. If a supplier was to challenge its status as an ‘essential supplier’ both sides would incur litigation costs.

 

The government has also put forward a new restructuring tool. Whilst R3 believes it could be useful, it’s unclear what demand there is for it and we’re concerned about the potential for abuse, particularly within the SME market. In order to ensure sufficient safeguards, if the tool is introduced we do not think it should be available for small and medium-sized businesses. The proposed two-stage court hearing is appropriate for those large businesses seeking to restructure but given that the UK’s court system is already over-burdened, we believe a specialist insolvency court should be introduced.

 

R3 believes some proposals in the consultation may be useful, such as the moratorium (provided it has an appropriate length and supervisor). However, we believe that the rescue finance proposals are unnecessary. The proposal is designed to fix a problem that doesn’t exist as there is currently no shortage in rescue finance availability for viable businesses in distress.

 

When asked what changes would have the most positive impact on the UK’s insolvency regime, R3’s members expressed limited enthusiasm for the government’s proposals. Asked to pick the top three proposals which would have the most significant, positive impact on business rescue, 28% supported the moratorium proposals, 15% the ‘essential supply’ proposals, 13% the measuring tool and 10% rescue finance proposals.

 

On the other hand, there was much more support for making changes to existing procedures and a change in attitude from the government. Suggestions for more engagement from government departments (such as HMRC) during the business rescue, and efforts by the government to encourage struggling companies to seek earlier advice were supported by 65% of respondents. R3 also encourages the government to focus on improving existing business rescue tools, such as CVAs.

 

While it was disappointing that so little time – just six weeks – was made available for the profession and other stakeholders to consider such far-reaching proposals, we do hope the government takes on board the feedback that we provided and ensures the implementation of any new measures have sufficient safeguards and will in practice be useful tools for encouraging business rescue.