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A Review of the Corporate Insolvency Framework: A Lawyers’ Perspective
Ian Fox, Partner, Rachel Anthony, Partner, Neil Griffiths, Partner, Will Gunston, Partner, and Farrington Yates, Partner, Dentons UKMEA LLP, London, UKOn 25 May 2016, the Insolvency Service published a consultation paper aimed at reforming the UK’s corporate insolvency regime. It has now collected responses from various interested parties, including Dentons.
In this article, Dentons partners Ian Fox, Rachel Anthony, Neil Griffiths, Will Gunston and Farrington Yates consider the proposals. They look at how they would work in practice and they identify some key issues and omissions in the current plans.
The overall impetus of the proposed changes is for the UK to remain at the forefront of insolvency best practice. They aim to ensure businesses, investors and creditors remain confident of the best outcome when faced with financial difficulty, and to give a company the best possible chance to restructure its debts and return to profitability while also protecting employees and creditors.
The consultation suggests:
(a) creating a new (single gateway) 3-month moratorium against creditor action while a business develops a restructuring plan;
(b) ensuring preservation of 'essential supply contracts' during an insolvency procedure to enable businesses to continue trading in a restructuring;
(c) making restructuring plans bind both secured and unsecured creditors and introduce a 'cram-down' so a majority of creditors can bind the rest to a restructuring plan; and
(d) developing further the rescue financing market, in particular whether to allow companies to grant security interests (during administration and other rescue processes), which could have priority (super-priority) over existing security (including prior fixed charges). This would be subject to creating some safeguards for existing secured creditors. Part of this suggestion considers whether to allow rescue financing to take priority over administration expenses.
This has led to the consultation being called 'Chapter 11 in the UK'. Interestingly, the US underwent its own review of the Chapter 11 restructuring mechanism with the ABI Commission to Study the Reform of Chapter 11 producing some ideas for reform in 2014 because of some perceived difficulties in how Chapter 11 works in practice. The consultation as drafted, however, seeks to add bolt-ons to the existing UK framework rather than proposing a complete overhaul to copy Chapter 11.
This article considers each of the consultation areas, with practical commentary and opinion from Dentons partners.
Introducing a preliminary moratorium for all types of UK corporate insolvency procedure
In principle, we think this is a welcome and overdue development, particularly for restructuring procedures that do not already have a built-in moratorium (schemes of arrangement and CVAs for companies that do not qualify for the small companies moratorium). In a prospective administration, a preliminary moratorium would offer the directors a final opportunity to avoid a formal insolvency process, and while it is unlikely this is the government’s aim, we do not think that a preliminary moratorium should be a compulsory gateway before starting an administration procedure when the circumstances require that step immediately.
How would it work?
The consultation proposes that directors would present a filing to court to get relief for a business. Creditors could try to dissolve the moratorium if they felt their interests weren’t being protected.
We think that it would be impractical and unnecessarily burdensome for the directors to have to seek court sanction for the preliminary moratorium. An 'out of court' filing, similar to how we appoint administrators under paragraph 14 or 22 of Schedule B1 to the Insolvency Act 1986, would be familiar to insolvency professionals (including the proposed supervisor who will presumably need to confirm his or her consent to act).
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