Insolvency trade body R3 has made a series of proposals for introducing a new raft of provisions which would create better opportunities for companies to be turned around, with the aim of rescuing more businesses.
The body has called for the introduction of a new ‘business rescue moratorium’ which would help save more companies under severe financial strain. This in turn would save more jobs and provide better returns to creditors.
At present, when a company gets into serious financial problems, there is little protection from creditors whilst a deal to rescue the business is agreed. Instead, a single creditor can petition the court for the company to be wound up, which has the effect of making it difficult, and sometimes impossible, for it to continue to trade whilst a buyer is found or whilst it is rescued as a going concern. This means that a minority of dissenting creditors can cause chaos and potentially hold a company to ransom if it is struggling financially.
In practice, this means that rescue deals have to be worked out quickly and confidentially, to avoid the risk of legal action scuppering a rescue. However, the need for swift and confidential negotiations can lead to concern amongst creditors, particularly unsecured creditors, that any deal done is relatively less favourable to them.
R3 is proposing a moratorium lasting up to 21 days, during which no creditor is allowed to take legal action against the company. This moratorium could be extended for a further 21 days if the court agrees.
During the moratorium, the company would be monitored by a Moratorium Supervisor who would ensure that the directors are operating the company as intended. Crucially, any debts which arise during the moratorium would have to be paid, otherwise the company would need to enter into a formal insolvency procedure immediately.
The proposed moratorium would provide a useful ‘breathing space’ for companies to allow them to formulate viable rescue plans, without unbearable pressure being applied by creditors. Anything that aids business rescue is to be broadly welcomed, however as always the ‘devil is in the detail’ and the procedure would need to be capable of being implemented in a way which balances the different interests of creditors, the company and other stakeholders, without becoming overly burdensome or expensive to operate. Time will tell if the proposals are taken up by the government.