Restructuring regime to be radically reformed
The Government has announced plans to introduce new measures to assist with the rescue of viable businesses. The new proposals would provide a formal framework to restructure businesses and strengthen protection for companies and directors while the restructure is negotiated.
The UK Government have announced wide ranging proposals which, if brought into effect, will result in the biggest change to UK insolvency and restructuring procedures since the introduction of administrations in 2002.
The proposals are aimed at contributing to an effective insolvency regime, promoting enterprise and helping to create a business environment that supports growth and employment by ensuring that distressed, yet viable, businesses can be rescued quickly and efficiently.
The proposals, contained within a consultation, have been brought forward in light of international principles developed by the World Bank and the United Nations Commission on International Trade Law (UNCITRAL), recent large corporate failures and an increasing European focus on providing businesses with tools to facilitate company rescue.
The Government proposals looks at four broad areas for reform to improve the efficiency of the rescue and restructuring tools available to companies in the UK:
Creating a new moratorium, which will provide companies with an opportunity to consider the best approach for rescuing the business whilst free from enforcement and legal action by creditors. The proposed moratorium would last for three months, with the possibility of an extension if needed. The moratorium would commence on documents being filed with the court and Companies House and would act as a gateway to all restructuring and insolvency processes.
During the moratorium period the company would remain in the control of directors but under the ‘supervision’ of an Insolvency Practitioner. Directors would also be given protection, subject to certain safeguards, from personal liability during the moratorium period.
During the moratorium creditors would have a general ‘right’ to request information from the Insolvency Practitioner. The Government is considering extending this provision to all insolvency procedures to improve transparency and provide an additional safeguard for creditors.
Helping businesses to continue trading through the restructuring process, including making it easier for companies to maintain contracts that are essential for the continuation of the business. This should make it less likely for companies, particularly micro, small and medium enterprises (MSMEs), to be held ‘hostage’ by key suppliers seeking to profit from a company’s distress, harming the prospects of a fair and successful rescue solution to benefit all creditors.
Companies involved in a restructure would be able to specify their essential suppliers (through a court process) who would not be entitled to terminate or vary contractual terms during the moratorium or a subsequent CVA or administration. The court would only actively consider whether a supplier was essential if the designation was challenged by the supplier.
Developing a flexible restructuring plan, which would enable a rescue plan to bind secured as well as unsecured creditors and introduce a ‘cram-down’ mechanism. Presently, dissenting creditors may, depending on the procedure, have the ability to block a restructuring proposal.
Under a CVA, secured creditors can voluntarily join in a restructuring plan. Where a secured creditor is not part of the CVA arrangement, the company then has to negotiate separate deals with secured creditors. This may undermine achieving an optimal rescue solution and delay the process, increasing the costs of a rescue and putting the company at greater risk of failure.
Under the proposals, a restructuring plan would be imposed on a junior class of creditors even if they vote against the plan, as long as they would be no worse off than in liquidation. The company would be able to determine each class of creditor on a case by case basis, with the classes of creditors being approved by the court. For a class of creditor to be bound by the plan, more than 75% in value and more than 50% in number would require to vote in favour of the plan.
The restructuring plan would require the approval of the court.
Exploring options for rescue financing. Currently, rescue financing is permitted as an expense in an administration procedure, and the Government is seeking to understand the extent to which the law should be reformed to further develop the market for rescue finance.
The proposals include:
- Re-ordering the current priority of administration expenses to encourage rescue finance through the creation of a ‘super-priority’ for rescue finance
- The introduction during administration and debtor in possession rescue of provisions permitting companies to grant security to new lenders over company property already subject to fixed charges, which would rank as a first or equal first charge or an additional but subordinate charge on the property
The proposals being put forward by the Government are broadly welcomed and will tackle some of the barriers to effective restructuring of financially distressed but otherwise viable businesses.
Some of the proposed measures will require further exploration to ensure there are no unintended consequences while other measures may benefit from further development or refinement.
It is disappointing however that the proposals do not contain any measures to tackle the single most problematic issue when restructuring a business - the inherent tension with employment legislation which financially distressed businesses face.
The consultation is open until 6 July 2016.
Views or comments on the proposals are invited to be submitted to firstname.lastname@example.org to assist in formulating the ICAS response.
Consultation documents: A Review of the Corporate Insolvency Framework