Vol 8 (2011) - Issue 6

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‘Double, Double, Toil and Trouble; Fire Burn and Cauldron Bubble’

In the years leading up to the financial crisis there was a global supply of cheap money, offering easy borrowing. It was this that developed the culture of companies relying on debt finance and having low equity ratios. In the UK the credit bubble burst in 2008 and at this time the line from William Shakespeare’s play Macbeth came to mind: ‘double, double, toil and trouble; fire burn and cauldron bubble’ which sets the stage for the tragedy that is about to unfold. Clearly, the UK government recognised that the burst of the credit bubble would result in widespread financial difficulties for the debtors and the government intervened in an attempt to limit the tragedy. In addition to the quantitative easing, the UK government is desperately aiming to avoid the collapse of large numbers of companies and they are seeking to do this by: assisting companies with the repayment of their tax liabilities; encouraging banks to lend; and encouraging the restructuring of companies.

It has been well reported that there are in excess of 300,000 companies in the UK that have a deferred payment arrangement in respect of their tax liabilities with HMRC and this was a policy the government was able to implement immediately. In addition to HMRC supporting companies through the financial crisis, by deferring payments, there has also been a notable reduction in the number of winding up petitions presented by HMRC, which illustrates further leeway given to companies by the government if they do not make a payment when due.

Since the bursting of the credit bubble, the UK government has placed and continues to place pressure on the banks to lend to struggling companies: a project that has become commonly known as project Merlin. Project Merlin is an agreement that was reached early this year between the government and the UK’s four largest banks: HSBC, Barclays, Royal Bank of Scotland and Lloyds Banking Group. The banks have, amongst other things, committed to making more credit available in 2011.

The third intervention by the government that I have identified, which highlights its attempt to limit the tragedy is: its approach to encourage restructuring, as is evident in the government’s proposals for a restructuring moratorium. This article will focus solely upon: the UK government’s approach to encourage restructuring and the reasons why the main stakeholders are currently more likely to choose to restructure rather than liquidate.

The UK governments approach to encourage restructuring

In July 2010 the government commenced a consultation of a proposal for a new restructuring moratorium, with the objective of legislating to provide more options for companies to restructure, as it was recognised that the refinancing of debt obtained by the highly leveraged companies over the coming years could be a significant challenge. The proposed restructuring moratorium is not a formal insolvency process, and if implemented it will enable more companies to negotiate and implement a restructuring deal outside of a formal insolvency procedure.

The proposed restructuring moratorium is aimed primarily at the larger companies, or should I say the estimated costs of obtaining such a moratorium would prohibit smaller companies from using this process. As currently drafted it proposes to provide a 3 month court sanctioned ‘breathing space,’ to viable entities to allow them the opportunity to achieve a consensual restructuring without the risks and costs associated with restructuring, outside a formal insolvency procedure. As it is currently proposed, the salient proposals are as follows:

– There is an eligibility criteria, which proposes to make certain categories of companies ineligible, for example financial institutions. It is also proposed to prohibit company’s that are subject to a winding-up petition.

– There are qualifying conditions which include: that it has a viable business; its creditors are prepared to support a restructuring of debts and it is likely to have sufficient funds to carry on its business during the moratorium.

– The company will remain under the control of the directors during the moratorium period.

– Debts incurred during the moratorium period would have a 'super-priority' status in any subsequent insolvency process.