Greenfield Recovery shared with The Gazette how creditors and debtors will be affected by recent government's proposals aimed at improving business rescue opportunities for financially distressed companies.
The government’s recent consultation into corporate governance and insolvency has led to an announcement of an overhaul of the insolvency regime.
New tools have been proposed to assist companies struggling with business debt and give more options for business rescue.
The aim is to give every opportunity for companies to be rescued, while ensuring appropriate protections for creditors. The initial proposals to achieve this are as follows:
A new moratorium procedure will be introduced to assist with business rescue. This will also prevent secured creditors from taking any action against the company. The moratorium would initially last for up to 28 days, with the ability to extend and be overseen by a ‘moratorium monitor’.
It is proposed that the moratorium only be available to companies that are not already insolvent, to avoid misuse of the procedure to delay an inevitable insolvency. The proposed monitor will also need to determine that a rescue is more likely than not.
R3 has campaigned for some time to introduce such a procedure, and welcomed the announcement, saying that this rescue tool will give businesses in distress breathing space from creditors, to put in place a plan to deal with debts and try to avoid insolvency.
It will be interesting to see how often this procedure is used, given the onus on the insolvency practitioner to confirm the qualifying conditions.
It is worth noting that there will be no statutory regime for the fees of the monitor, which will be a contractual matter between the monitor and the company. Any unpaid expenses of the moratorium will have super-priority if the company subsequently enters an insolvency procedure.
It is intended to prevent suppliers from enforcing termination clauses when a company has entered a formal insolvency procedure, the new moratorium, or new restructuring plan (further below). This is likely to give much more opportunity for businesses to continue to trade while assessing if they can be rescued.
This may be unwelcome for suppliers, but they will still retain the ability to apply to court to enforce such clauses.
New restructuring plan
A new, court-led restructuring plan is to be introduced, which will have the ability of binding dissenting creditors. Such cramdown could be imposed, provided dissenting classes of creditors would be no worse off than they would be in liquidation.
The new procedure will closely resemble current schemes of arrangement. It will require 75 per cent in monetary value of creditors within each class, and more than half of the total value of unconnected creditors, to approve the proposal. The working assumption is that the voting provisions will be the percentage of those creditors who vote – thus mirroring the rules on CVA proposals – although the consultation document isn’t clear on the point.
Classes of creditors will be proposed by the company and examined by the court. In general, dissenting classes of creditors will need to be repaid in full before junior classes receive any distribution. There will be an exemption to this rule if it is necessary to achieve the aims of the restructuring, and it is just and equitable in the circumstances.
Along with these tools to assist with business rescue, new reforms will be introduced to protect creditors’ interests in the circumstances of company failure.
Directors of dissolved companies
The Company Directors Disqualification Act will be amended to give the Insolvency Service powers to investigate directors of dissolved companies. These proposals will stop the expensive and time-consuming process of restoring companies to the register to investigate the directors.
Additional powers are to be granted to insolvency practitioners in relation to value extraction schemes, which may involve a change to the provisions on extortionate credit transactions. A further change is to align the provisions relating to transactions at an undervalue and preferences so that insolvency may be presumed where the transaction is made to a connected party. This should make more preference claims easier to recover.
The government also intends to introduce new measures to ensure that directors consider the interests of stakeholders when entering into a sale of a financially-distressed subsidiary.
The reforms appear to be quite wide-ranging, and some provisions are intended to deal with some of the large failures that have been recently publicised. Overall, they appear to favour distressed companies rather than creditors, and if the rescue provisions are successful and reduce failures of viable businesses, this may be good news for creditors in the long run.
Of course, the company will still have to obtain creditor support for the new restructuring plan, which is not a forgone conclusion, and the proposals are balanced by the new investigative powers put out for consultation at much the same time.
Authored by Greenfield Recovery. First published Nov. 2018 in The Gazette.