Insolvency reforms: get ready for new restructuring measures

The UK insolvency landscape is changing as the Government moves ahead with plans to improve the restructuring options for distressed businesses

The proposed measures follow a substantial consultation period and confirm the Government’s desire for the UK to retain its reputation as a dependable jurisdiction in which to do business. The Government is keen to provide ‘greater opportunities' to effect corporate rescues and enable more of our companies not only to survive but to thrive’.

The proposals follow some major corporate collapses in the UK and, in my view, seek to introduce measures that may help avert such insolvencies in the future. The Government consulted widely on the proposals, which are made against a backdrop of recent international insolvency developments and also other approaches to restructuring such as ‘debtor in possession’ which characterises Chapter 11 in the USA.

So what are the key proposals and how could the UK’s restructuring regime be about to change?

The restructuring moratorium
The Government proposes to introduce a new moratorium to provide a period of time for companies to consider options for rescue.

The moratorium will be available to distressed companies, but not those which are currently insolvent, giving them a period of time during which creditors (including secured creditors) cannot take enforcement action against the company. The initial period for the moratorium is 28 days, although this is extendable to 56 days.

The moratorium is modelled on the administration moratorium and will be triggered via an out of court filing. A licensed insolvency practitioner would be appointed as a ‘monitor’. Throughout the moratorium period, the directors will continue to run the business. However, the monitor will have certain powers including sanctioning both assets disposals outside of the ordinary course of business and the granting of any new security over company assets during the moratorium period.

The monitor is responsible for ensuring the criteria for the moratorium continue to be met by the company. Importantly, the moratorium must be terminated by the monitor if the company becomes insolvent and is no longer able to pay debts as they fall due.

The restructuring plan
The Government intends to create a new flexible restructuring process which would include the ability to bind dissenting classes of creditors who vote against it.

This cross-class cram down process is a debtor in possession approach and appears to be adopted from the Chapter 11 process.

The restructuring plan process will closely resemble that of the current arrangement procedure scheme. The court will be overseeing the approval of the plan and playing a role in safeguarding creditor and shareholder rights.

Any restructuring plan will be determined in accordance with the specifics of the situation and the position of both the company and the stakeholders. Interestingly, there would be no statutory requirement for a formal supervisor – although creditors could demand such an appointment as a prerequisite for their approval.

Other measures
Alongside these two major developments, the Government is proposing additional measures to improve the corporate insolvency framework. Significantly, it will introduce measures to ensure greater accountability of directors in group companies when selling subsidiaries in distress. 

The Government is also planning to strengthen the UK’s corporate governance framework, as we address in a separate blog from James Eldridge. In addition, as previously highlighted by Christine Francis in ‘Tackling the domino effect of supplier insolvency’, it is also looking at ways to address unfair payment practices and help protect suppliers from the damaging impacts of insolvency.

There’s plenty of detail yet to come on these plans, as the proposals move from consultation response to draft legislation. We’ll be keeping a close eye on developments.

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