Responses to Government consultation on Insolvency Framework

Earlier this year, we brought you a summary of proposals put forth by the Insolvency Service designed to improve the corporate insolvency regime in England and Wales and rescue viable businesses. The Consultation took place from May to July 2016 and responses to the proposals have now been published. We have summarised the responses from insolvency professionals and interested parties below.

A full copy of the response document is available here.

  1. A three month moratorium to provide companies with a ‘protected grace period’ to consider how to rescue the business.
    67% of respondents welcomed the introduction of a moratorium period as a means of encouraging directors to take action to tackle financial difficulties. However, further safeguards for creditors were recommended, including a reduction in length of the moratorium period (e.g. to only 21 days) to reduce the risk of abuse.
  2. Provision to require essential suppliers to continue supply to financially distressed companies on existing terms.
    Although over 50% of respondents agreed this would assist business rescues, this proposal was considered by some to be too ‘debtor-friendly’. Respondents urged more clarity on what would be classed as an ‘essential contract’ and 69% felt that insufficient safeguards had been offered for suppliers. The report concludes that the Government has noted the concerns raised and will keep this proposal under consideration.
  3. A flexible restructuring plan combining elements of CVAs and schemes of arrangement, with a ‘cram down’ of dissenting creditors.
    Respondents were generally supportive of a restructuring plan that could be binding in the face of opposition from minority creditors. However, the responses favoured adopting a new restructuring plan altogether, as opposed to an extension of the existing CVA. The Government had proposed that the new plan should be limited to 12 months in length; however a number of respondents preferred a more flexible period depending on the particular circumstances. Interestingly, of the four proposals put forth, this was the only proposal that was considered by more than half of respondents to offer sufficient protection for creditors, notwithstanding the ‘cram down’ provision.
  4. Exploring options to encourage rescue finance, including the potential to grant security interests for lenders which could take priority above, or ranking equal to, prior charges.
    This proposal is essentially a revival of a Government proposal made in 2009, which was not pursued at the time due to negative feedback. This time, the majority of respondents (73%) also disagreed with this proposal. Some commented that a lack of finance rarely prevents rescue of a genuinely viable business, while others were concerned that changes in the order of priority would negatively impact on lending and could lead to an increase in the cost of borrowing.

When the proposals were first published, we commented that a number could be criticised for being anti-creditor and favouring distressed businesses. The responses to the proposals largely appear to accord with that view.  The extent to which any of the above proposals are taken forward, in light of the feedback to date, therefore is unclear. We will watch out for any further news and report accordingly.

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