A proposed shakeup of the UK’s corporate insolvency regime will impose a three month freeze on legal action against stressed businesses who are investigating rescue options. In addition to this moratorium, measures have been suggested to help businesses to continue trading through the restructuring process. The intention is that this will prevent struggling companies being held to ransom by key suppliers, and will also assist in developing flexible restructuring plans. The proposal would make rescue schemes binding, even on secured creditors.
Sajid Javid, from the Department for Business, Innovation and Skills, who proposed the scheme, said: "The UK’s corporate insolvency regime is already highly regarded. But with the business world becoming ever-more fast-paced and complex, it is time to ask ourselves whether - and how - the system can be improved. To remain at the forefront of insolvency best practice we also need to ask what a 'good' regime looks like in 2016. An increasing international focus on company rescue has helped to shift the perceptions of what constitutes best practice; the UK needs to reflect this if our businesses, investors and creditors are to remain confident that the best outcomes can be achieved when things go wrong."
While practitioners have welcomed the moratorium proposal, Andrew Tate, president of insolvency practitioner trade body R3 warned: "It’s very important that any moratorium is practical. It should be short, to make it easier to fund and to limit the burden on creditors, and there should be a licensed insolvency practitioner in place to look after creditors’ interests".
He considered the three month freeze to be too long and recommended a 21-day-long moratorium, extendable to 42 days with court approval and insolvency practitioner oversight. Mr Tate considered that this would be long enough for a company to implement a rescue plan and bring its creditors on board. He added, "a longer moratorium increases the risk of harm to creditors and could allow companies in the moratorium to 'drift' rather than sort their problems out."
However, these changes came too late for Liverpool firm First Stop Legal Services (trading as GT Law). Its Swiss investors are owed £4m and despite being secured, are only likely to recover 12% of that debt. Unsecured creditors have collectively made claims of around £580,000. They are set to recover just 14.4p in the pound.