Insolvency regime reform - what is your view?

Practical Law UK Legal Update 3-386-5253 (Approx. 6 pages)

Insolvency regime reform - what is your view?

by PLC Restructuring & Insolvency

Consultation on company rescue procedures

The Government's budget of 22 April 2009 included an announcement of a consultation on business rescue procedures. The consultation paper, Encouraging Company Rescue, was subsequently published on 15 June 2009. The stated aims are to get UK businesses through the global economic downturn to emerge stronger and more successful on the other side.

The Department for Business, Innovation and Skills (BIS, formerly BERR) wants to make the UK the best place in the world to start and grow a business. Supporting viable companies when they are struggling, it says, helps preserve jobs and livelihoods, and gives companies that may be suffering at the moment, more opportunities to improve their financial position and to prosper in the future.

For more on the proposals, see Legal update, Government launches consultation on reform of UK insolvency procedures.

The key proposals

The extension of the existing CVA moratorium provisions to all companies.

Under schedule A1 to the Insolvency Act 1986, only small companies can obtain a moratorium against creditor action whilst creditors consider company voluntary arrangement (CVA) proposals. The Government proposes to extend this to all companies. (For more on the present regime, see Practice note, Company voluntary arrangements (CVAs): Optional moratorium).

The creation of a general moratorium for distressed companies.

The Government proposes that any company that cannot pay its debts as they fall due may apply to court for a moratorium to prevent creditors from taking action against it. The moratorium would initially last for 42 days, but the company could apply for an extension. The maximum duration of the moratorium would be three months. Unlike the existing moratorium provisions, the company need not have finalised its CVA proposals when it applies for the moratorium. An insolvency practitioner, however, must consider that a CVA is reasonably achievable and the company must hold the meetings of creditors to consider the proposals during the moratorium period.

Allowing the repayment of “rescue finance” in priority to all other expenses of a company administration.

The finance costs of credit incurred by an administrator in attempting to rescue a company in administration will rank in priority to all other expenses of the administration process. The obtaining of such credit will override any negative pledges in existing finance documentation that would otherwise block the fresh lending (for more on negative pledges, see Practice note, Perfection and priority of security: Negative pledges). The proposal would appear to be a move towards a US-style "debtor in possession" approach to corporate insolvency, where debtor in possession funding (or DIP financing) is commonplace. Subscribers to PLC's US service have access to more information on this topic in PLC US Finance, Practice note, Bankruptcy: The Chapter 11 Process and PLC US Finance, Practice note, DIP Financing: Overview

Allowing a company in CVA or administration to create fixed charges over company assets to secure "rescue finance".

In addition to allowing the creation of fixed charges over unencumbered assets, under the proposals companies in CVA or administration would also be able to create fixed charges on already secured assets (provided that the company has no unsecured assets available). The newly created charges could rank either alongside existing security, subordinate to it or even in priority to the charges of existing lenders. The insolvent company would require the consent of the existing lenders to the creation of the new charges or, if unable to secure that consent, could apply to the court for an order overriding the lender’s objections.

Restricting the application of floating charges and asset based lending (ABL) agreements to assets acquired before insolvency.

The Government proposes that assets created by an insolvent company after an insolvency event, such as book debts, will not be caught by existing floating charges or ABL facilities, but instead be available to fund trading. For more on ABL agreements, see Practice note, An introduction to asset finance.

Comments

Will the proposals meet the governments objectives? What will be the effect on companies and their creditors and employees? How will the role of insolvency practitioners be affected?

Leading practitioners share their views on the current proposals, below. To add your comment, click here.

Extending the existing CVA moratorium provisions to all companies and creating a general moratorium for distressed companies.

For the response to the consultation of the European High Yield Association (an affiliate of SIFMA), click here.

"The extension of the small company moratorium to medium and larger companies which may not be sufficient to guarantee greater use of it. The overwhelming reason why so few CVAs are currently processed (only 500-600 per year) is that business owners leave it too late to seek help and it therefore becomes harder to persuade creditors that the company is in a fit enough state to be saved. What we really need is a change in business culture and while this will take time, one step the Government could take is to launch an awareness campaign that makes clear seeking advice early is ultimately the best was to stave off administration or liquidation.

During the moratorium period, the insolvency practitioner proposing the CVA is responsible for monitoring whether the company has sufficient cash to trade through the moratorium, without control over how the company is run. This situation acts as a disincentive for IPs to apply for a moratorium which leaves companies vulnerable to enforcement action from creditors while the CVA is being put together.

Perhaps introducing 'safeguarding' in the form of a truncated administration which would last for a finite period of 30 days, would provide a solution free from the disincentives of liability to the IP or risk of creditor action."

Steven Law, Vice President of R3 and Partner, Ensors Chartered Accountants

Allowing the repayment of "rescue finance" in priority to all other expenses of a company administration.

For the response to the consultation of the European High Yield Association (an affiliate of SIFMA), click here.

"Proposals that are intended to facilitate corporate rescue, where appropriate, are welcomed. However, the proposed changes need to be viewed with caution, particularly from the standpoint of a secured lender. The proposal that providers of new funding may take security that would have priority over security for existing financing arrangements, in particular, is potentially very difficult for lenders.

The protection to be afforded to existing lenders (which requires a court order approving the granting of new equal first or first ranking security if the lender's consent is not forthcoming) will only give an element of reassurance if there are clear guidelines explaining what would be considered "adequate protection" for an existing fixed charge holder and if the circumstances in which such an order could be granted are sufficiently limited. As always, the devil will be in the detail. Our understanding of the current proposals is that, despite what has been said regarding safeguarding the position of existing lenders, existing lenders do have reason to be concerned."

David Handy, Partner, Addleshaw Goddard LLP

"Rescue funding for struggling business is vital, but it has to be done very carefully because if you allow ‘leap-frogging’ over existing secured creditors, you undermine confidence in the entire bank lending system. This may cause banks and other lenders to demand greater security or charge higher interest rates on normal business lending.

US Chapter 11-style proposals are still being touted as a 'magic bullet' for failing companies but the reality is that proposals such as super (or absolute) priority funding does not fit naturally within the UK regime. Chapter 11 is notorious for its high level of costs, and the majority of Chapter 11 plans fail to be implemented, based on figures for 2008. Moreover, the UK insolvency regime is currently outperforming the US in terms of speed with which it deals with troubled businesses and returns to creditors"

Steven Law, Vice President of R3 and Partner, Ensors Chartered Accountants

Allowing a company in CVA or administration to create fixed charges over company assets to secure "rescue finance".

For the response to the consultation of the European High Yield Association (an affiliate of SIFMA), click here.

For the response of the Association of British Insurers (ABI), click here. The comments of the Loan Market Association are available here.

"A simpler alternative could be to make changes to eligibility criteria of the existing Enterprise Finance Guarantee scheme. Companies are required to show they are ‘financially viable’ which can be hard when they need additional funds in the first place. Being more flexible on this criteria could open the gate to more businesses receiving this help."

Steven Law, Vice President of R3 and Partner, Ensors Chartered Accountants

"The loss of the protection that a negative pledge would usually afford a lender is a factor that it seems to me a lender will take into account in determining the pricing of any new facility, including to companies who, at that time, are showing no signs of potential financial difficulty. Further upward pressure on the pricing of facilities is unlikely to be welcomed by borrowers at this time, given the current economic climate in which they are trading and the changes in the pricing of facilities that have become apparent (for other reasons) in recent months."

David Handy, Partner, Addleshaw Goddard LLP

End of Document

Also Found In

Resource ID 3-386-5253

Law stated as at 08-Jul-2009

Resource Type Legal update: archive

Jurisdictions

England
Wales