At the end of May 2016 the UK Government’s Insolvency Service published a proposal for innovative new legislation to improve the UK’s business rescue culture. A six-week consultation period ended on 6th July. The full consultation document can be found here: Insolvency Service Proposal May 2016
There are essentially four major strands to the proposal:
- A three-month moratorium for businesses facing financial difficulties where hostile creditors are prevented from take any enforcement action. The company would have to satisfy certain conditions to be able to enter such a moratorium and would need to appoint a suitably qualified Supervisor to ensure it meets and continues to meet those conditions.
- The ability to nominate suppliers as “essential” so that they are prevented from terminating those contracts or demanding ransom payments.
- The ability to cram down hostile creditor classes against their will, subject to certain protections. This would prevent creditor classes who are “out of the money” (i.e. who would get nothing in an insolvency) from holding a restructuring to ransom. This is becoming an increasing issue in modern multi-tier complex creditor structures.
- The possibility of allowing lending to a company in a restructuring situation with additional priority. So called super-priority.
This is without a doubt the most significant proposed legislative change to the legislation surrounding insolvency in over a decade and would bring many of the features of the US Chapter 11 process to the UK. Significantly, it would not bring the costs of the US process as each creditor class would not be able to appoint advisors at the expense of the company. The government is actually trying to make this a widely available lower cost approach than current insolvency processes with the intention of making it available to smaller companies and to encourage directors to seek help earlier than they do now.
BM&T is very supportive of this proposal and a copy of our response to the consultation is available on our Press and Publications page. In particular, we like the proposal that Supervisors do not have to be an Insolvency Practitioners (IP) and that IP’s acting as Supervisors will not be able to take any subsequent Insolvency Appointment. This will allow the many highly experienced and qualified turnaround professionals to be involved in what they do best and takes away the inherent conflict of interest in IP’s advising companies pre-insolvency and then taking and insolvency appointment. The ability to cram down creditor classes will also be of great help where appropriate.
The Insolvency Service will respond to the consultation exercise in October 2016 and we await their views. This proposal has the potential to bring a true rescue culture to the UK which could reduce the number of viable businesses that currently find themselves pushed into value destructive insolvency. The devil is always in the detail with new legislation but we truly hope this ground breaking proposal make its way into law in the not too distant future.
David Bryan – Managing Partner & CEO, BM&T
11th July 2016
