On Sunday 26 August the UK Government confirmed its intention, when Parliamentary time permits, to introduce radical proposals to reform insolvency law. The moves, announced in “Insolvency and Corporate Governance – Government Response”, proposes the introduction of a new moratorium to give viable, but financially distressed companies breathing space to address their problems. Echoing America’s “debtor in possession” Chapter 11 regime, a company’s management will remain in office and, perhaps most significantly, secured lenders will be prevented from enforcing their rights for the duration of the moratorium. By filing papers with the courts with the support of a supervising Monitor (a licensed insolvency practitioner, though in time, other professionals may be authorized to act as Monitors), a distressed corporate can prevent all enforcement action, initially for 28 days, extendable once without consent for a further 28 days and thereafter for a further period, but at that stage, only with the consent of 50 percent of secured creditors and 50 percent of unsecured creditors – or the permission of the court. Various safeguards will prevent abuse: throughout the period of the moratorium, the company must continue to meet its obligations as they fall due, and any sanctions against directors deemed to have behaved dishonestly or recklessly must be addressed.
The biggest change is likely to be felt by secured creditors, who can currently take enforcement action without the involvement of the court and can dictate the identity of any appointed administrator. Not only will they be prevented from enforcing their security but also, in many cases, the costs incurred during the moratorium will be borne by assets that would otherwise fall within their security net. The proposed upside for all creditors, however, is that early intervention is likely to promote business rescue, leaving the secured creditor’s borrower in a better financial state than would be the case without a moratorium. The devil will, as ever, be in the detail, but one notable point is that the UK Government has decided not to introduce super-priority rescue finance along the lines seen in the US, meaning that secured creditors will not be left out in the cold. Their continued support and possibly the provision of further facilities to trade out of current difficulties is likely to be the key to success. Business rescue will move more towards carrot-style negotiations between management and creditors and away from the threatened stick of creditors enforcing their rights.