More insolvency reform - surely not, haven’t we had enough of that recently?

As if we didn't have enough to cope with at the moment post Brexit, the Insolvency Service announced on 25th May the commencement of a consultation document entitled “A review of the Corporate Insolvency Framework”. Those of us in the insolvency profession often feel that we are inundated with change at the moment on many areas, notably director disqualification, pre pack administrations and fee structures. However, this review, if it proceeds into law, could change the whole dynamic of insolvency law. Through this document, the government is consulting on four proposals designed to improve the existing corporate insolvency regime. The intention is to enable more corporate rescues of viable businesses and ensure the insolvency regime delivers the best outcomes and thus for the United Kingdom to remain at the pinnacle of insolvency best practice It is possibly driven by a recent World Bank survey which placed the UK behind its European and international counterparts in the World Bank league tables (yes they exist just like football tables).This status is important to our politicians as they seek to ensure that the UK remains a great place to do business (and that may be more important than ever at this time). Ironically, this consultation came at a time when other EU countries were amending their insolvency legislation and there is an ever increasing call for closer harmonisation of insolvency laws within the EU. Thus, facing pressure to amend its insolvency procedures, the UK has, once again, turned to its old friend (?) the United States of America for inspiration. Post Brexit this may have been a wise choice! The proposals are:
  • the introduction of an automatic and stand alone moratorium on legal action.
  • the continuance of ‘essential contracts’.
  • the creation of a flexible restructuring plan including cram down provisions.
  • rescue finance being made more readily available.
Clearly for creditors involved in the enforcement process, it is the first of the four proposals that could have the most far reaching consequences for them, and the one that has caused the most debate. In essence, it will create a new moratorium on creditor action to provide companies with an opportunity to consider the best approach for rescuing the business lasting for up to three months, with the possibility of an extension. The rationale is clearly that it would provide debtors with time to negotiate a restructuring without the threat of individual creditors taking precipitous individual action. The key features which are relevant for creditors to consider are:
  • the moratorium would commence when the company files the relevant papers at court (there would not be a court hearing to sanction the moratorium).
  • when the company enters the moratorium, the arrears owed to creditors would be frozen, but the business would be obliged to meet ongoing trading costs and debt obligations during the moratorium.
  • the company must be able to show that it is likely to have sufficient funds to carry on its business during the moratorium, meeting current obligations as they fall due as well as any new obligations that are incurred . This is to ensure that no existing creditors are worse off.
  • creditors would have the right to apply to court during the first 28 days of the moratorium only.
  • directors will be protected from liability for trading a company through a moratorium period provided the qualifying conditions continue to be met.
  • the three month period can be extended with the consent of all secured creditors and over 50% of unsecured creditors by value.
  • the procedure is overseen by a “Supervisor”, who will probably be an Insolvency Practitioner, but could also be a solicitor or accountant.
Some may see this as very similar to a limited process that currently exists for “small” companies via a Company Voluntary Arrangement, but it is actually much wider in scope. Without doubt, this moratorium will give the company a strong right against creditors who will find their position frozen for three months (and potentially longer). Is this tipping the balance too far in favour of the debtor? Many creditor groups would argue that it is. There is a risk that in a number of situations, it may be putting off the inevitable and just delaying the ultimate liquidation to the frustration of creditors who are left “hanging on” without any final resolution. Interestingly, the three month period is considerably longer than the 21 days (extendable to 42 days) proposed by the insolvency industry body, R3.That body felt that a shorter period created the right balance between a company in trouble seeking protection and the rights of creditors. Their current President, Andrew Tate, said: “A moratorium on creditors pursuing debts can be necessary to give a company time to put a rescue plan into place, but this would impinge creditor rights. Any moratorium needs safeguards to protect creditors and prevent abuse, but the protections proposed by the government are not strong enough. A shorter moratorium than proposed by the government and a supervisory role carried out by a properly regulated and experienced individual would help provide the safeguards the moratorium needs. The restructuring tool also needs better safeguards to prevent abuse.” So, does this proposal strike the right balance or not? My fear is that it does not deal with the issue of directors failing to act quickly enough or to act or take advice when it is too late. This is a common cause of corporate rescue failure. The Government’s intention is that this extended moratorium will provide a distressed business essential time and breathing space to consider its options for rescue at an earlier stage, but it still depends on the director being proactive with knowledge of the position and taking advice at the appropriate (that is early) time. Further, the implementation of the three month moratorium proposal may see a rise in the number of court applications requesting permission to bring proceedings against a debtor during this time. This is particularly so given that, under this proposal, a creditor will only have the first 28 days of the three month period to bring proceedings. In such applications, it will be interesting to see how the balancing exercise and criteria will be applied. Will matters be considered from a debtor or creditor perspective in terms of policy? Time will no doubt give us the answer. It will also be interesting to see how creditors react to the new moratorium regime and seek to protect their position in different ways, for example, asking for more personal guarantees initially or being more aggressive in their collection methods at an earlier stage. The three months moratorium proposed, with the possibility of an extension, may feel like a long, almost unfair, period of time to creditors of companies in distress. They may be in serious need of cash flow too! It is also important to remember that the new proposals are intended to include secured creditors. They, in particular, may feel frustrated as any enforcement provisions in the security granted in their favour cannot be actioned during this time. Isn’t that the basis of taking security? During the moratorium it is proposed that creditors would have a general right to request information from the instructed insolvency practitioner or other relevant professional. The overarching aim of the moratorium is to achieve transparency (a key word in the insolvency industry at the moment) whilst options are fully explored, to try and avoid the common cry from the creditor that they are left in the dark in the insolvency process (a situation seemingly exacerbated by the pre pack administration regime). As stated above, this extended moratorium is only one of four proposals in the consultation document. Whereas the other three may not impact as much on the enforcement industry, the essential supplies proposals, and others, could lead to significant extra workload for the UK court system, which is not set up to deal with a large amount of insolvency work, and is creaking under other pressures at the moment in any event. This is a real cause of concern to those of us who work in this area. The UK’s insolvency regime has historically developed through an out-of-court basis in many areas, and many involved in it think that the government should not seek to challenge that framework by some of these proposals. So what does all this mean for the judgment creditor who wants to pursue enforcement of his judgment? Well, we may find out quite soon as the consultation lasted for only six weeks and the feedback is currently being analysed. Life never stands still for very long in the professional world, does it?

Article author

Stephen Allinson - Solicitor and Licensed Insolvency Practitioner is a Consultant for Shoosmiths LLP and pursues many other projects in the legal, insolvency and credit fields. Stephen is also a Non-Executive Board Member of The Insolvency Service and also the Chairman of the Joint Insolvency Examination Board (JIEB).In addition, he is a member of the Legal and Technical Committee of the Civil Court Users Association, and a Director of The Money Charity and the Churches Mutual Credit Union. His latest book “Enforcement of a Judgment “was published by Sweet and Maxwell in January 2016. stephen.allinson@shoosmiths.co.uk

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