We have now waited almost 12 months for signs of change since the results of a joint Treasury and Department of Trade and Industry working paper were published, entitled Company Rescue and Business Reconstruction Mechanisms. Although not having the most instantly engaging of titles, the paper did at least address the issue of whether the insolvency laws in the UK were too creditor-friendly and too hostile to debtors.
One year on (and several drafts of the Insolvency Bill later), we are still waiting. Many of the questions raised in that initial review appear to have gone unanswered, despite pronouncements from the Government earlier this year, of “turnaround”, a new rescue culture encouraging enterprise and tolerating honest failure.
The new Insolvency Bill, which is due to come into effect shortly after its second read-ing at the end of October, unfortunately falls far short of expectations. Why should the UK’s insolvency regulation appear to be so punitive to debtors compared to what might be regarded as a far more enlightened approach taken in the US, which encourages continued trading?
Moratorium
One of the key questions raised in the review was whether a distressed company should have a right to go to court to obtain a moratorium while it seeks to agree a voluntary arrangement with its creditors, with a view to trading out of its financial difficulties. The Insolvency Bill does introduce such a right, but in a form that many believe does not go far enough and will be of limited application. To qualify, a distressed company must meet two of three criteria: turnover of no more than £2.8 million; gross assets of no more than £1.4 million; or fewer than 50 employees. Only small businesses need apply.
While the London approach, which was devised by the Bank of England as long ago as 1990, promotes a framework for lenders to assist a borrower in financial difficulty and not to rush to appoint receivers, many borrowers do not have confidence in this arrangement.
For the majority of companies there remains no guarantee that a secured lender will not appoint receivers under its floating charge security and sell the business before the management team have had an opportunity to apply to the courts to seek a moratorium. When a receiver is appointed, the receiver only has the secured lenders’ interests in mind. The receiver does not have to have regard for other creditors or the business itself.
