On 23 September the Insolvency Service published responses to its "Review of the Corporate Insolvency Framework consultation" which in May had suggested four key changes to the UK’s corporate insolvency regime:
- a new (single gateway) three-month moratorium applicable to all existing restructuring procedures (notably administrations and CVAs);
- new preservation of contracts rules to help businesses continue trading during a restructuring;
- a new "restructuring plan" procedure (which would bind both secured and unsecured creditors and include a "cram-down"); and
- statutory terms governing the availability and priority (on an insolvency) of rescue finance for failing businesses.
In this article we review the restructuring industry's responses (including those of Dentons) and predict what this might mean for future reform.
The rationale for reform
Recently the World Bank ranked the UK behind both the US and some European countries when comparing how debtor-friendly its restructuring rules and procedures are. With Brexit, the need for the UK to remain attractive to new businesses is all the more important. Therefore, the government is keen to push ahead with any reforms that will improve the UK's competitiveness as a debtor-friendly jurisdiction. However, the government will now feel pressure, following the responses, to abandon some proposals. As with so many similar reforms, the devil is in the detail.
What does the industry think of the proposals?
Single gateway moratorium
While there was support for an initial (temporary) moratorium for all insolvency procedures (achieved by a simple court filing), clearly most felt the proposed creditor safeguards needed detailed drafting and thought. Many, like Dentons, thought the moratorium period should be short to reduce the risk of abuse, with the most common length suggested being 21 days. Views were mixed on whether the same insolvency practitioner could supervise both the initial moratorium and the later insolvency. In our view, the professional integrity of a licensed insolvency practitioner would be enough to ensure independence and proper practice. So, we would be in favour of keeping the same officeholder throughout to save valuable time (as well as cost) and preserve the valuable business knowledge of the incumbent officeholder.
Preserving essential contracts
The Insolvency Service has sought to draft new provisions that would enable the court to keep in place and supervise, during a restructuring, "essential contracts" that a supplier could otherwise terminate. It is clear there are now as many questions as answers with this proposal. Our own view was that new legislation is unlikely, of itself, to increase the rate of business rescues. The current system of leaving such matters to commercial negotiation already works reasonably well. There would clearly be an adverse impact on trade credit insurance which we, and many other respondents, were concerned about. Some thought financial services contracts should be expressly excluded from the proposals. Nor would, in our view, the proposals work well, as currently drafted, when dealing with merchant acquirer arrangements. Similarly the impact on debtors with cross-claims or rights of set-off have not been considered. While some questioned how the proposals would translate when dealing with international suppliers (or those with production difficulties themselves), others rejected them out of hand as just being too debtor-friendly. Under the consultation proposal, the court would have a central role in the process and the supplier would be able to challenge the decision in court. As the final blow, respondents questioned whether the courts would have the requisite resources to deal with the potential increased workload. The Insolvency Service has now stated that it has "noted stakeholder concerns, and will continue to consider the matter".
A new restructuring plan
There was clearly some support (though still only 41%) for the introduction into the current insolvency regime of a new procedure called a (simple) "Restructuring Plan". This Plan would be in addition to schemes of arrangement already under the Companies Act 2006 and could be made binding in the face of opposition by a minority of creditors. While 22% of respondents felt the Plan could work within the existing Company Voluntary Arrangement (CVA) regime, Dentons felt it should be an alternative to, but not a replacement of, CVAs and schemes of arrangement. The majority agreed with the principle that a court-approved "cram down" should be possible in some circumstances, with some respondents even suggesting that shareholders be included in the cram-down.
It is clear from the responses that the industry feels there is already an existing framework in place that fosters a successful, established market for financiers to provide rescue finance to struggling businesses. Many, like Dentons, were concerned that any changes made to the existing order of priority on an insolvency would have a negative impact on the lending environment by increasing the cost of borrowing. Our previous Bank Notes article (New proposals to develop the rescue finance market: new beginnings, or an old chestnut?) discussed this issue further.
The Moratorium, which we expect to see at the top of the government's wish list to be implemented when Parliamentary time allows, with possibly the new restructuring plan coming a close second.
Rescue finance provisions will almost certainly be dropped from any future draft legislation. We suspect that any detailed provisions giving the court supervisory powers to preserve essential contracts (other than in the most general terms) will be too.
The European Commission has now launched its own proposals for an EU-wide restructuring directive which mirror many of those in this latest UK consultation. On a Brexit this would no longer have direct effect but might make the government want to push all the proposals through in the UK (even the unpopular/unworkable ones) to keep in step with Europe.
Law stated as at 6 December 2016.