On the horizon: Insolvency and restructuring in 2020 (part 1)
10 January 2020
In many ways, 2019 felt like a year of contrasts: nothing changed, and everything changed. Economic growth was positive but subdued, while the expected Brexit date of 29 March passed without any fanfare, and notably without any exit from the EU; the 'do or die' date of 31 October similarly ended in extension rather than substantive change. However, the General Election result in mid-December has made it more likely that 2020 will see some of the changes which were postponed throughout last year.
Despite legislative deadlock, there were still numerous insolvency and restructuring issues which saw movement in 2019 - see our 2019 round-up for more details. Below are some of the issues R3 will be working on in 2020, on our members' behalf, to ensure the market, legislative and regulatory environment for the insolvency and restructuring profession remains as positive as possible. There are so many topics to list that we have decided to split this post in two – read part 2 here.
Corporate insolvency framework reform
As the way we do business changes and adapts, the insolvency and restructuring framework needs to keep up, pushing on with the package of reforms the Government previously consulted on, initially in 2016. With the UK maintaining its 14th place in the latest World Bank 'Resolving insolvency' rankings, but not climbing up the list, there is an opportunity for the new Government to make a positive impact on the corporate insolvency and restructuring landscape.
R3 has long campaigned for a business rescue moratorium, to prevent creditors from taking enforcement action against a distressed 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, with a licensed insolvency practitioner acting as monitor.
The reform package also includes a new court-based restructuring tool, resembling an existing Scheme of Arrangement, which would allow a company to bind all its creditors, including junior classes of creditors even if they vote against a company's restructuring proposals.
A large Government majority - the first in almost two and a half years - could create some room for progress here.
There have been reforms in recent years to pre-pack administrations (read our guide here for more information), with the creation of the Pre-pack Pool, and changes to SIP 16 to tighten the rules around how businesses are marketed, for the benefit of creditors.
The Government has a 'reserved power' - covering whether or not it will ban the sale of businesses in administration to connected parties - which expires at the end of April, and so we'll soon find out what ministers have decided to do. While it should be mandatory for connected parties to refer their proposed pre-pack purchase to the Pool, R3 believes that connected party sales should not be banned, as they are often the best way to preserve value for creditors' benefit, while the strict insolvency regulation framework acts as a safeguard to enforce the rules, and to encourage best practice.
HMRC as a Creditor in Insolvencies
R3 has been working hard to get the Government to reconsider its plans to make HMRC a 'secondary preferential creditor' in corporate insolvencies, placing it higher in the creditor 'waterfall' than at present. This would mean that from 6 April 2020, certain tax debts owed by an insolvent company or individual (including VAT, Pay As You Earn, and National Insurance contributions) would be repaid to HMRC ahead of debts owed to floating charge holders and unsecured creditors. We believe this will harm many companies' access to finance, and damage the UK's hard-won reputation as a place where business rescue is encouraged. We expect there to be news on the proposals in the forthcoming Budget in March.
Tax abuse and insolvency
As set out in our 2019 election manifesto, R3 is concerned that the Government's proposals for tackling suspected tax abuse through use of insolvency procedures are too broadly drawn, and could harm legitimate and good-faith efforts to rescue businesses. The plans to punish directors of parent companies which sell a subsidiary which then subsequently enters insolvency will, we believe, act as a significant deterrent to business rescue and to entrepreneurialism, making it a safer option simply to shut down a subsidiary rather than hand it to new owners with fresh ideas. We will continue to make our members' views heard by politicians, and to highlight the danger of piercing the corporate veil to the extent proposed. Again, an update in March's Budget is something to look out for.
With the UK's departure from the EU planned for the end of this month, R3 will be on hand to interpret what the terms of our exit mean for the insolvency and restructuring profession - we have an idea already of the baseline of regulation which will be in effect, and will update our members as soon as the contours of the departure agreement are made clear.
Back in 2017, R3 responded to a call for evidence on insolvency practitioner bonding issued by the Insolvency Service. There has not been a great deal to report since 2017, but we are hopeful that the Government will announce its next moves in due course. A consultation has been long-promised, so should be on the profession's radar in 2020.
Insolvency regulation review
Last autumn, the Government's consultation into the future shape of regulation of the insolvency profession closed; read the main points of R3's response here. In essence, we believe that the existing regulatory framework is robust, but - given the profession's position of trust and importance in the UK economy - there are always improvements that can be made, with speed of regulatory processes, consistency in monitoring and enforcement, and the scope of regulation all noted as areas which could bear more scrutiny. The Government's response to the consultation should be published at some point in the coming months.
- Read part 2 of this post here.
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