Proposals for Insolvency Regime Change

The Department for Business, Innovation and Skills has launched proposals for changes to the insolvency regime, including a three-month moratorium from creditor action and a “cram-down” mechanism to stop the blocking of a rescue plan by certain classes of creditor.

Business Secretary Sajid Javid says that “An increasing international focus on company rescue has helped to shift the perceptions of what constitutes best practice” and sees the proposals as an effort to improve the UK’s “already highly regarded” corporate insolvency regime. Indeed, the World Bank has shown that creditors of a corporate insolvency in the UK see more of their money back, faster and at a lower cost than their counterparts in the US, France and Germany. The best results often occur in cases of rescuing insolvent businesses.

The proposals encompass four areas for reform that would be available to any entity that qualifies for an Administration or Company Voluntary Arrangement. Firstly, a three-month moratorium will be available for a restructuring company that can show that it is already or imminently will be in financial difficulty, with no suggested restrictions on the size of companies eligible. The moratorium could be extended by another three months on application and throughout this period creditors would have a general right to request information from the supervising Insolvency Practitioner. The definition of “essential supplies” is broadened in the proposals so that contracts are maintained and smaller companies in distress are not held hostage by key suppliers. Thirdly, there is the introduction of the “cram-down” mechanism, whereby a restructuring plan would be imposed on a junior class of creditor even if they vote against the plan, providing that they would be no worse off than in a Liquidation. Finally, the proposals cover options for the development of the rescue finance market in the UK.

The proposals have been welcomed by insolvency trade body R3, although president Andrew Tate has said that there should be “a 21-day-long moratorium, extendable to 42 days with court approval and insolvency practitioner oversight” adding that the length of the proposed moratorium “could allow companies… to drift rather than sort their problems out”. However, Philip King, chief executive of the Chartered Institute of Credit Management, has warned that the system could be “open to abuse” saying that “looked at another way, it is 90 days in which the less scrupulous can fritter away assets whilst being untouchable, to the serious detriment of creditors”.

If you are a director of a company in financial distress or a creditor of a company facing insolvency, we encourage you to contact us and speak with one of our experienced Practitioners who will be more than happy to provide guidance and advice. An initial consultation is provided free of charge. Contact us.