As insolvency laws come under greater scrutiny than ever following high profile collapses, what might come of the review into the framework?
While the seismic changes caused by the EU Referendum vote are quite rightly uppermost in retailers’ minds, the UK Insolvency Service has issued a consultation document reviewing the UK corporate insolvency framework. It is a response to consistent messages from the World Bank which recently put the UK at number 13 in a league table measuring the efficiency of insolvency practices (well behind the USA, Japan and Germany). We have not changed our insolvency laws radically since 1986 and the UK government wants to promote more corporate rescues of viable businesses.
There are four key parts to the consultation:
- Creating a moratorium, for three months or more, protecting the company from creditor actions and enforcement of rights.
- Helping companies to trade successfully during the moratorium, restricting creditors from withholding goods or services.
- Developing a flexible restructuring plan with new powers to cram down certain types of creditor.
- Exploring options for rescue financing.
I wanted to explore how this might affect a typical retail situation.
The moratorium is radical in several respects. The moratorium period – three months – is generally a long time in the life of any troubled corporate. The proposals protect directors from traditional traps such as wrongful trading on condition that creditors are not being harmed further. The independent person overseeing this is called a supervisor whose job is broadly to ensure that the moratorium has the prospect of producing a successful deal with creditors.
“I suspect that most of the high profile retail insolvencies we have seen in recent times would have used this type of moratorium if it were available”
Mike Jervis, PwC
This may look like a CVA under our current laws but there is no creditor meeting and no formal creditor proposal. It affects all creditors, not just those – typically landlords – specified in the CVA. So provided directors can see a clear path to a possible deal with creditors and sufficient cashflow to get to that point why would they not try this route? I suspect that most of the high profile retail insolvencies we have seen in recent times would have used this type of moratorium if it were available.
The proposals contain provisions to enable companies to avoid being held to ransom by dominant suppliers, by saying that companies can apply to court to prevent suppliers from invoking automatic termination clauses and such. The company does not have to pay arrears. Suppliers are generally unable to withhold services during the moratorium.
This would be very frustrating for, say, landlords who would be unable to invoke forfeiture clauses and similar rights, even if rent was in arrears. It would give the company security of tenure. Merchant service providers, who ordinarily enter into new agreements if a company goes into administration, would have to carry on providing facilities to the company. Transport companies may be unable to exercise liens.
“Very rarely are companies saved after an insolvency process. These proposals would improve the experience of trading a retail business through difficulties”
Mike Jervis, PwC
The proposals in the third and fourth parts of the consultation (covering restructuring plans and rescue finance) are deliberately less granular than the first two. The third part appears oriented towards larger situations where there are several classes of financial creditor and the ability of some of them to “hold out” and frustrate the overall deal has long been a lacuna in our law. There may not be that many such instances, but there are certainly some larger retailers with that type of complex capital structure.
The fourth part is very radical and looks for views on the provision of new finance into distressed situations and giving those new lenders priority over existing lenders. No one is in any doubt about what that might do for the provision of customary lending into the heartland of UK corporate.
While some of these proposals may sound familiar, there is no doubting the direction of travel in UK insolvency law. Very rarely are companies saved after an insolvency process. These proposals would improve the experience of trading a retail business through difficulties. They may even drive a deal between a company and its creditors before a moratorium since creditors and suppliers will fear being locked into a process of three months or more. On the other hand, a fear, as with anything new, is the possible abuse of a lightly regulated process by unscrupulous directors or practitioners.
Remember that this is currently just a consultation, but it gives a distinct hint as to the likely direction of travel.
- Mike Jervis is partner, restructuring and insolvency at PwC