In May 2016 the UK government published its Review of the Corporate Insolvency Framework - A Consultation on options for reform.
- In November 2016 the European Commission published proposals for a directive on 'preventative restructuring frameworks and second chance for entrepreneurs'.
- Both sets of proposals include, in broad terms, a moratorium against creditor enforcement, preservation of essential supplies, a restructuring or cram down plan, and measures to protect rescue finance.
- Brexit may have taken over the economic and political landscape, but in the meantime other nations are reforming insolvency law in this direction. If the UK does not, does it risk compromising its reputation at the forefront of international corporate restructuring?
It occurred to straightaway that these issues were by no means confined to the new Indian code, but were being considered in various parts of the globe.
We must be aware that on 22 November 2016 the EU produced its proposals for a directive on 'preventive'
restructuring frameworks and second chance for entrepreneurs.
Whilst the UK will, of course, be exiting the EU, certain core issues have been raised by both the EU's consultation and by the UK's Consultation. These include a temporary stay of enforcement proceedings (moratorium), preservation of essential supplies, a new type of restructuring plan or cram down mechanism and protection for interim financing. These issues transcend national boundaries and are as prevalent as ever.
The Consultation suggested a preliminary moratorium lasting up to three months, with the possibility of an extension. This was to be a gateway to a rescue or turnaround, with directors remaining in control, subject to an authorised supervisor or monitor to ensure compliance with entry requirements and fairness to creditors.
Any subsequent extensions would require something concrete, such as the debtor having filed its CVA/Scheme proposals, or formal sanction from the creditors or the court.
Whilst opinion on the duration and the details were somewhat diverse, one feels that a consensus could eventually be reached. The bigger challenge is how to ensure directors would make use of a moratorium responsibly to obtain professional advice and take meaningful steps to address their company's finances whilst there is still time.
The Government proposed to extend essential supplies:
- To the moratorium and to the new restructuring plan
- Beyond the IT and utilities sectors, with what is 'essential' justified by the debtor
The company would designate a certain supply contract as essential, whereupon the supplier concerned would not be able to enforce payment of arrears and would have to continue the supply at the same price, but would be paid for the new supplies in full.
The Government's suggested criteria are:
- The supply being essential to a successful rescue/ongoing viability
- No alternative supply available within a reasonable timeframe at a reasonable cost
- Enough liquidity to meet ongoing payments
- Whether the supplier can objectively justify to the court a refusal to supply
New restructuring plan
Restructurings are becoming ever more complex. CVAs cannot affect secured or preferential debtors without their consent, although at times they have been successful at cramming down landlords. Overall the post-CVA survival rate is thought to be on the low side. Schemes of arrangement work well at the top end of the market, but they cannot cram down dissenting creditors, at least not without an additional assignment of assets and retained debt to a new corporate entity which can be prohibitively expensive. There are also contractual workouts under a standstill agreement without a statutory process.
The Government felt there was a gap in the legislation in the space between a CVA and a scheme, where a flexible restructuring plan could divide creditors into classes for voting purposes but unlike a scheme, cram down a class of, say, junior or mezzanine creditors who are out of the money, even where that particular class votes against the proposals.
If the restructuring plan is to work best, it will need to be fit for purpose; more streamlined than a scheme, but with a wider reach than CVAs.
The final proposals included in the Consultation were designed to encourage rescue finance. The final proposals included in the Consultation were designed to encourage rescue finance.
It is worth noting that the draft EU Directive seeks to encourage and protect interim financing, and to allow member states to grant such financing priority status over unsecured creditors at least.
Yet there is still a certain 'noise' surrounding insolvency reform. There is currently no real reason to believe the EU Directive will not go ahead, albeit modified. Whilst the corporate reforms are still being considered, HM Treasury has launched a call for evidence inviting views on the best design for a scheme to give debt stricken individuals a breathing space of up to six weeks without accruing further interest, charges or enforcement action.