On 26 July 2010, the Insolvency Service issued proposals for a new type of short-term restructuring moratorium. The moratorium would be available through a court-based process to companies with a viable business and the general support of creditors. The proposed moratorium could have the potential to encourage more companies to view the UK as an attractive jurisdiction for restructuring.
What are the proposals?
The main features are:
- The moratorium would last three months, extendable in certain circumstances.
- Throughout the moratorium, the directors would remain in control (similar to a debtor in possession under US Chapter 11).
- To be eligible the company would have to show there is a reasonable prospect of reaching a compromise or agreement with creditors, and that it is likely to have enough funds to continue running the business during the moratorium.
- The company must not be a subsidiary of a company whose centre of main interests (COMI) is outside the UK but within the EU, and which is being wound up under proceedings recognised by the EC Regulation on Insolvency Proceedings (the EIR) or the Cross-Border Insolvency Regulations 2006.
- The company must be eligible for either a company voluntary arrangement (a CVA) or a scheme of arrangement (a Scheme) and not be subject to a winding-up petition.
Who are the proposals aimed at?
The moratorium would help a company that has a viable core business but needs to restructure to avoid future financial distress or insolvency. Currently only “small companies” can benefit from a moratorium without a prior administration (which can destroy value). Small companies are those with at least two of the following: a turnover of less than £6.5 million per annum; a balance sheet total of less than £3.26 million; fewer than 50 employees.
A company with many creditors and a complex debt structure faces significant challenges in reaching a compromise with creditors. The risks and costs of doing so can impact negatively on the business. The proposed moratorium could provide breathing space to negotiate and agree a compromise, without the risk of creditors exercising self-help remedies and while minimising significant collateral damage. Larger, more complex companies taking advantage of the moratorium are also likely to have a cross-border element to their business or corporate structure, with creditors and assets located abroad.
Could foreign companies benefit from the proposed moratorium?
In theory, yes. Any company could potentially benefit from the proposed moratorium if it is eligible for a CVA or a Scheme.
Under the Insolvency Act 1986, the following types of foreign company may propose a CVA:
- an EU registered company; and
- a company registered outside the EU but having its COMI in an EU member state other than Denmark.
Under the Companies Act 2006, a company that is “liable to be wound up under the Insolvency Act 1986” can propose a Scheme. The Insolvency Act enables an “unregistered” company, such as a foreign company, to be wound up. The courts have enabled overseas companies to use Schemes successfully to undertake restructurings.
In practice, the proposed moratorium unfortunately has no bite to prevent foreign creditor action against assets abroad. For the restructuring moratorium to be worthwhile it will need to have extra-territorial effect.
Recognition abroad: dealing with hostile foreign creditors
Currently, the statutory moratorium, which takes effect when a company enters administration, is immediately recognised across Europe because, under the EIR, administration is listed as a recognised procedure. Courts in other jurisdictions (including the US) also recognise the statutory moratorium under the adoption locally of the UNCITRAL Model Law on Cross-Border Insolvency (the Model Law). In certain other countries, the principle of comity aids insolvency practitioners who travel abroad to protect assets. There is therefore a history of the statutory moratorium being exported successfully.
Will the proposed moratorium encourage more restructuring tourism to these shores?
For companies with creditors based abroad this will depend on whether the proposed moratorium also becomes a recognised “insolvency proceeding” under the EIR or the Model Law.
Without this extra-territorial recognition, the companies the Insolvency Service is hoping to help are likely to consider the proposals have little to offer them. Large UK companies will be wary of a moratorium that does not protect against their foreign creditor base. European companies either based in the UK or contemplating a COMI migration will also have little incentive to use the new procedure. The ever-increasing numbers of restructuring tourists are already well catered for by administrations, CVAs and Schemes.
The consultation period ended on 18 October 2010. The Government will now consider the responses received and whether it is necessary to legislate on this matter when Parliamentary time allows.
Stakeholders will be able to follow developments on these proposals following the consultation on the Insolvency Service website at www.insolvency.gov.uk.