Corporate insolvency reforms – new tools for business rescue
20 September 2018
Over the August bank holiday weekend, the Government published
a package of corporate insolvency reforms, setting out the most substantial changes to the UK’s insolvency and restructuring framework since the 2002 Enterprise Act.
The Government’s proposals are based on two earlier consultations: a 2016 consultation on new insolvency tools and procedures, and a 2018 consultation on tools to improve corporate governance. This post summarises the changes that could be introduced based on the 2016 reforms; the 2018 reforms are addressed here
The proposals include: a business rescue moratorium, to give struggling businesses a short ‘breathing space’, which would allow companies to put in a place a turnaround or rescue plan free from creditor action; a new court-based restructuring tool for both solvent and insolvent companies; and new measures to allow companies in a rescue procedure to continue to receive essential supplies.
R3 has campaigned since 2016 for the Government to make progress with the implementation of these new procedures and measures. We think reform is necessary to ensure that the UK’s world class insolvency and restructuring framework retains its international reputation post-Brexit. We’re pleased that the Government is making some progress, and that the Government has listened to many of R3’s concerns about the proposals as they were originally drafted. The Government has adapted its proposals so that they are more workable for the profession, debtors and creditors. There is still however more work to do and R3 will be seeking members’ views on these revised proposals over the coming weeks.
The Government has said that the reforms will be introduced when parliamentary time permits. The most obvious upcoming opportunity to announce new legislation would be the May 2019 Queen’s speech, although given the sheer amount of legislation required to implement Brexit, we may still be waiting for a Bill to introduce these reforms beyond then.
Business rescue moratorium
Effect: The business rescue moratorium will prevent creditors from taking enforcement action against a company for a set period of time. Directors will remain in control of the company and can use the moratorium to plan the restructuring or rescue of their company. The moratorium can have any number of outcomes, including a consensual agreement with creditors, a CVA, the new restructuring tool, or any other insolvency procedure.
Eligibility The procedure will be for solvent companies, with the test being that the company is ‘facing prospective insolvency’. This is aimed at ensuring that the moratorium process is not abused by healthy companies with relatively minor and short term cash flow issues. Companies will have to show that they have sufficient funds to continue to trade and pay suppliers during the moratorium.
Length: The moratorium will last for 28 days initially, extendable by a further 28 days; any further extension must be approved by secured and unsecured creditors, with a threshold of agreement from more than 50% of secured and unsecured creditors required.
: A licensed insolvency practitioner will be put in place as monitor of the moratorium. They will have the power to request any information from the company they may require for the eligibility tests and ensuring the qualifying conditions are met. If the monitor concludes a company no longer meets the qualifying conditions, they will be required to immediately commence the termination of the moratorium, and to notify the court, company and creditors. The monitor will be prohibited from taking an appointment at the company for 12 months after the end of the moratorium in the case of subsequent administration
. The monitor will however be permitted to take a subsequent CVA
appointment, or to advise in relation to the new restructuring tool.
Costs: These will be treated in the same way as an expense in an administration. Where a company exits a moratorium and enters administration or liquidation, any unpaid moratorium costs will have super-priority over any costs of claims in the administration or liquidation. The highest priority will be given to suppliers prevented from relying on contractual termination clauses. Any other costs would rank next, followed lastly by the unpaid monitor’s fees.
New Restructuring tool
Effect: In addition to the business moratorium, the Government has proposed the creation of a new restructuring tool that adopts some of the principles of the American ‘Chapter 11’ procedure. The new tool closely resembles an English Scheme of Arrangement, and will allow a company to bind all its creditors, including junior classes of creditors even if they vote against a company’s restructuring proposals.
The company will propose the classes of and shareholders, according to the creditors’ rights and interests. These terms will be proposed before the court, and should be deemed beneficial to both the company and agreeable to its creditors. Creditors and shareholder may object to the proposed classifications, and the restructuring proposals. Should this occur, the court could decide that the dissenting creditors should be bound by the agreement if proposals will achieve a better outcome for creditors, compared to the next best alternative available to the company.
Eligibility: The new tool, available to both solvent and insolvent companies, aims to encourage early action from company directors to address financial difficulties, and reduce stigma around insolvency.
Length: There is no time limit on the proposed restructuring plan
Oversight: The appointment of a licensed insolvency practitioner will not be required for the new restructuring tool, in order avoid extra costs and allow maximum flexibility. Creditors can request the appointment of a supervisor to oversee the restructuring plan as a condition for their approval of the restructuring plan, but it would not be necessary for the supervisor to be an insolvency practitioner.
An insolvency practitioner acting as an office holder may use the restructuring tool on behalf of the company for which they are responsible.
In its original 2016 consultation on corporate insolvency, the Government proposed reforms to encourage lenders to provide rescue finance to distressed companies. The proposals included changing the order of priority of creditor repayments to give priority to rescue funding, and to allow companies to grant security to lenders over company property that was already subject to a fixed charge.
As indicated in September 2016, the Government has confirmed that it has decided to not pursue the proposed changes to rescue finance, as those responding to the proposal pointed out that the UK has a strong rescue finance market; as such the reforms were deemed unnecessary. Concerns were also raise by various stakeholders that the proposed reforms would adversely affect the general lending market.
R3 supports many of the proposed reforms to the Corporate Insolvency framework, and will continue to put forward the views of its members to the Government.