Government consultation on Insolvency Framework

Government consultation on Insolvency Framework

The Insolvency Service has begun a consultation on essentially four proposals designed to improve the corporate insolvency regime in England and Wales by enabling the rescue of viable businesses. These proposals are applicable to all businesses which otherwise may enter administration or a company voluntary arrangement (CVA) i.e. a rescue (as opposed to terminal) process.

  • A three month moratorium (capable of extension) under the supervision of a licensed insolvency practitioner to provide companies with a ‘protected grace period’ to consider how best to rescue the business without the threat of creditor enforcement action - the directors would retain control of the company and creditors would be entitled to request information from the ‘supervisor’ IP during this period.
  • Assistance for companies trading through the restructuring process by preventing essential suppliers from seeking to profit from the distressed situation - companies would designate certain contracts as ‘essential contracts’ which would then be incapable of termination or variation for the duration of the moratorium, administration or CVA. By court order, key suppliers could be compelled to continue to supply on existing terms despite any contractual rights of termination that may have otherwise been triggered. These proposals are in addition to the existing protection afforded in relation to utilities and IT contracts. 
  • A flexible restructuring plan limited for no more than 12 months, whose effect would combine both elements of CVAs and schemes of arrangement – it would bind all creditors, including secured creditors and is tabled to contain a ‘cram down’ provision which would impose the plan upon junior classes of creditors even if they do not vote in favour of the plan, provided that they would not be worse off than they would otherwise be if the business entered liquidation.
  • Exploring options for rescue funding, including a consultation on whether companies ought to be able to grant security interests during a rescue process which could take priority above, or ranking equal to, prior charges.

The full consultation paper is available here, and responses are due by 6 July 2016. 

The above proposals have already been criticised for being anti-creditor and affording too much protection to a distressed business. However, where a company is able to continue trading through a rescue mechanism, as opposed to being forced to enter liquidation (perhaps due to creditor pressure), returns to creditors may ultimately also be improved.

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