Proposals for new legislation to restructure and save businesses

stressed businessman 2 Huffington PostAll too often when a business gets into financial difficulties the odds are heavily stacked against it being able to restructure and survive and, equally, many directors leave it far too late to call for help.

The important question is why?

We would argue that it is the very nature of current legislation that uses insolvency procedures to tackle problems where the word “insolvency” is such a toxic term. The process deters directors from seeking help and they view meeting an insolvency practitioner as being like a visit to an undertaker, rather than seeing a doctor. They tend to only seek help once they have lost all confidence in the business and assume it can no longer be saved.

In the changed financial landscape since the crash of 2008, creditors have increasingly sought to get to the head of the queue for being paid and there has been a rise in the use of hold-out or ransom strategies. Examples are landlords refusing access to serviced offices or wifi when there are rent arrears, bailiffs seizing key assets over rates arrears and creditors applying for Winding-up Petitions in the courts as a means of debt collection.

It is therefore encouraging that the Government is consulting on proposals to improve the process of helping companies in financial difficulties and shifting the emphasis decisively towards rescue and recovery.

So what is being suggested?

The Government is proposing to introduce a three-month moratorium to prevent enforcement or legal actions by creditors and allow a breathing space for rescue plans to be prepared and considered. This would allow businesses to continue trading during any restructuring and include measures that ensure continued supply of essential goods or services without being held “hostage” by suppliers.

It is also proposing measures to bind creditors to a rescue plan and introduce a “cram-down” mechanism to prevent a minority of dissenting creditors from blocking the plan. This would level the playing field between unsecured and secured creditors, where currently secured creditors can wield disproportionate power in their own interests.

We would argue that any new legislation should be seen as being entirely separate from the current insolvency options.  It would allow directors of a struggling business to make a simple application to the courts early and easily, thereby allowing time to develop a realistic restructuring plan that would be in the business’ interests while also protecting creditors.

To avoid abuse, the new process would be overseen by independent professionals where the proposals are considering who these professionals might be. We believe that such professionals should have turnaround experience and be qualified accountants, lawyers and turnaround professionals. We would also argue that those insolvency practitioners who do this work should be excluded from taking a formal insolvency appointment so as to avoid any conflicts of interest.

These proposals, if introduced following consultation, would, in our view re-balance the process of helping struggling companies and encouraging directors to seek help much earlier and that such help should be free from the fear of it being tainted by the word “insolvency”.

Hopefully this welcome initiative will result in more businesses surviving, being able to trade their way back to stability and eventually growth, thus improving the returns to creditors and saving jobs.

(picture courtesy of Huffington Post)

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