Vol 9 (2012) - Issue 1

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The Impact of the Proposed Restructuring Moratorium on Rescue in a Recession Context

Introduction

The Insolvency Service issued a proposal in July 2010 for a 'restructuring moratorium'. The restructuring moratorium would be available to all companies who wish to undertake a Company Voluntary Arrangement ('CVA') or scheme of arrangement (as long as they satisfy the qualifying conditions). The primary purpose of the moratorium is to provide companies with a 'protected breathing space' whilst they restructure their existing debts, protecting them from aggressive creditor action. This article will firstly outline the impact the recession has had upon the United Kingdom economy, before considering the Insolvency Service’s proposal for a 'restructuring moratorium'. The impact the restructuring moratorium might have upon the use of CVAs and Schemes of Arrangement will then be analysed, considering whether it will make the procedures more efficient. The Insolvency Service’s proposal will then be looked at in more depth, considering whether a workable procedure can be developed so that the disadvantages of its implementation do not outweigh the advantages it may bring.


The impact of the recession

During the last decade 'businesses, households and the financial sector have become increasingly indebted'. This dependence on both public and private sector debt meant that the United Kingdom was hit hard by the financial crisis, which began in the April-June quarter of 2008. 850,000 people became unemployed and business investment fell dramatically by more than 25 per cent from its peak. Many banks had increased their debt relative to their capital in the credit boom, increasing their reliance on short term funding; it was this kind of unsustainable increase in risk-taking along with the growth in size, complexity and capacity of the financial network that increased the vulnerability of financial institutions to any disruption in funding markets. As a result of this, on entering the recession, there was a sharp tightening of credit conditions, which led to a decrease in the availability of finance for businesses. As the United Kingdom economy recovers, it is vital to ensure that the supply of finance 'supports rather than constrains … business confidence'.