On 26 August 2018, the government announced a range of proposed changes to insolvency law. The proposed changes deal with measures aimed at saving companies in difficulty from being wound up or dissolved, and measures aimed at dealing with the fallout from failed companies.
1) Saving Struggling Companies
Distressed companies can currently enter into a range of schemes with the aim of avoiding liquidation. The purpose of these schemes is to give the company some breathing space to deal with its financial problems. They include Administration, Creditors Voluntary Arrangements (CVAs) and Schemes of Arrangement. The government proposes two new schemes in addition to these: a Restructuring Plan, and a Restructuring Moratorium.
In a Scheme of Arrangement (which is similar to a CVA) the company, or an insolvency practitioner acting on its behalf, draw up proposals to keep the company running and at the same time enter into a payment plan with its creditors. In most cases, most creditors will receive less than the full amount.
The creditors vote whether or not to accept the Scheme of Arrangement. If they do not vote in favour, the Scheme of Arrangement will not go ahead. The Scheme of Arrangement must also be approved by the court.
A Restructuring Plan will be similar, but the rules on creditors’ votes will be changed. In a Scheme of Arrangement, there are complex rules to take into account different types of creditors such secured creditors (e.g. mortgage lenders); unsecured creditors (e.g. ordinary trade creditors) and connected creditors (e.g. directors who have lent money to the company). In a Restructuring Plan, the rules will be changed to make a vote in favour more likely. The criteria used by the court to approve the Restructuring Plan will also be changed.
This is a standstill on creditors collecting debts. One of the conditions for a Restructuring Moratorium is that the company must not be insolvent.
If the company later goes into liquidation, suppliers who were unpaid as a result of the moratorium will have greater priority in the liquidation and a better chance of getting their money back.
Suppliers Not to Terminate Contracts
Many contracts contain terms which provide that a supplier can terminate the contract if the customer enters into some form of insolvency regime. The government propose that such terms be made unenforceable, and the supplier is obliged to go on providing goods/services to the distressed company.
The supplier can apply to the court for permission to terminate the contract if continuing will cause undue financial hardship, which is likely to mean that the supplier is at risk of insolvency itself.
Some financial products and services will be exempt. Full details of these have not yet been provided, but the general approach will be that a bank will not be expected to go on lending to a distressed company.
2) Dealing with Failed Companies
Directors of Dissolved Companies
The Secretary of State already has powers to investigate directors of insolvent companies. The government proposes to extend these powers. In particular, they plan to make directors of a holding company responsible if they sell a large subsidiary and the subsidiary becomes insolvent within a year.
Value Extraction Schemes
These are methods used by unscrupulous directors/shareholders to remove money or other assets from a distressed company, to prevent that money or asset going. There are already a range of proceedings which can be brought against directors, shareholders and connected third parties to recover these monies/assets. These include proceedings relating to transactions at an undervalue, extortionate credit transactions and preferences (where the company wrongly paid one creditor in preference to others, often a creditor connected to the director who made the decision to pay). The government proposes a number of changes which will make it easier to bring these proceedings.
The proposed changes largely extend the current insolvency laws and make them more flexible.
The changes which affect suppliers are more novel, particularly the ban on terminating contracts, and suppliers who are not paid under a moratorium being rewarded with increased priority.
If you would like more information on purchasing a business from insolvency why not join our upcoming seminar Breaking Business.
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