I welcome new insolvency proposals – albeit with a few observations

Share

Share on linkedin
Share on facebook
Share on twitter

new insolvency proposals shift the balance towards rescueThe Government has at last published its proposals for changes to the insolvency regime after launching a consultation in March 2016.
The new insolvency proposals have been described as akin to the USA’s Chapter 11 system and have been broadly welcomed for the extra support they should provide to help businesses in financial difficulties to restore their fortunes rather than collapsing with often-catastrophic consequences for employees, suppliers and creditors.
Not only that but they also incorporate other Government initiative, to tighten up on scrutiny of directors and on corporate governance.

The new insolvency proposals – main elements

The insolvency proposals include the introduction of a moratorium, initially 28 days from filing papers with the courts. This is intended to allow viable companies more time to restructure or seek new investment to rescue their business free from creditor action. This would be supervised, most likely by an insolvency practitioner (IP). The proposals would only apply to businesses that are not already insolvent. While it isn’t yet clear how this will be different from the existing CVA Moratorium, it is hoped that it will be used where the CVA Moratorium has rarely been used due to the onerous obligations on a supervising IP.
Continuity of supply will be protected under the proposals with the introduction of a prohibition on terminating supply contracts to allow businesses to continue trading through the rescue and recovery process. This sounds similar to the historical essential service supply provisions but in practice was difficult to apply. It ought however to be useful as a tool for challenging ransom demands, in particular for dealing with service suppliers.
Creditors must be kept fully informed of the rescue proposals, which must also be filed with the court, and they and shareholders will be able to challenge them.
Approval of proposals will be based on classes of creditors that can also be defined although any who feel they are disadvantaged can be challenged.
For a class vote in favour of the proposal, 75% of a class by value (of the overall debt), and more than 50% by number must agree to the plan for it to be approved. This sounds similar to the existing class system in a Scheme of Arrangement.
Like existing CVA and Scheme of Arrangement proposals, once approved the proposal becomes binding on any dissenting minority.
In order to provide further protection for employees and other stakeholders the insolvency proposals also seek to enhance the Insolvency Service’s powers to investigate directors and will require directors to demonstrate how the pension pot and salaries can be covered before dividends can be paid. This makes sense as there is no such provision for CVAs.

Some observations

It is a welcome sign that Government is paying attention to businesses and their difficulties rather than posturing after high profile company failures.
The new proposals differ little from those in the 1982 Cork Report that followed a major review of UK insolvency law chaired by Sir Kenneth Cork. While that report led to the Insolvency Act 1986, its rescue proposals were significantly watered down as have been those for most of the subsequent reforms of insolvency legislation. My concern is that lobbying by IPs of the latest proposals will also result in them being watered down, indeed IPs have already established themselves as the main actors.
I would suggest that the term ‘insolvency’ contributes hugely to the demise of companies in difficulties such that I believe the proposals should be used to reform the Companies Act 2006.
Insolvency procedures work well when a company ceases to trade however they do not work well as turnaround or rescue procedures.
The Scheme of Arrangement as a Companies Act restructuring procedure is what needs updating, indeed may of the new proposals are similar. I accept Schemes have not adopted for use by smaller companies but this is easy to overcome by having templates to remove the existing dependency on those few lawyers who are familar with such restructuring. I would even advocate that IPs should run Schemes or the new proposals as revised Schemes since their existing software helps reduce the cost of administering creditors.
I am however concerned that rescue procedures ‘require’ the involvement of IPs. There are other professionally qualified people who might have more experience or at least have a greater interest in the saving of businesses.
My concern is that the new proposals become like CVAs where all too often it is in the interests of an IP that a company considering a rescue fail, or for them that a CVA proposal be rejected, or a CVA fail where failure means they can be appointed as administrator or liquidator. Indeed few IPs have believed in CVAs and I suspect few really believe in rescue and almost no IPs have ever run companies in a CVA.
In view of my comments the role of IPs needs to be carefully considered if the new proposals are to work.