Insolvency Reforms Announced

In the wake of the liquidation of Carillion, the administration of House of Fraser and a number of high profile CVAs, the Government have announced a number of proposed reforms to the current corporate insolvency and corporate governance frameworks which contain the most significant changes since the 2002 Enterprise Act.

The aim of the reforms is to ensure that companies are given every possible opportunity to be restructured while also ensuring that, where a company is not viable, those in charge of the company act properly and fully discharge their responsibilities. The rights of the distressed company must be adequately balanced against the rights of its creditors and other stakeholders.

The proposed reforms include the introduction of a 28 day moratorium giving viable but financially distressed companies ‘breathing space’ and allowing them to instigate restructuring measures or seek new investment. The company’s directors would remain in control with the support of a supervising Monitor, likely to be an Insolvency Practitioner.

During the period in which the moratorium is in operation, creditors will be prevented from taking action against the company. Crucially secured creditors may feel the greatest impact as, not only would they be unable to take enforcement action during this period, but in many cases, the costs incurred during the moratorium will be met by assets that would otherwise fall within the scope of their security. The proposed benefit for all creditors, however, is that early intervention is likely to enhance the prospects of meaningful recovery, leaving the company in a better financial state than would be the case without a moratorium.

Also of note for struggling companies and their suppliers, is the proposal that the termination clauses in contracts for supply of goods and services on the grounds triggered by the company’s entry into an insolvency process, will become unenforceable. This may have a significant impact on companies within certain industries and may ultimately increase the restructuring options available.

Other proposed reforms include the introduction of measures to strengthen transparency requirements around group structures and shareholder stewardship, and increased powers of insolvency practitioners in relation to the challenge of schemes designed to extract value from financially distressed companies at the expense of its creditors. Additionally the introduction of the power of the Insolvency Service to investigate directors of dissolved companies in a similar manner to the investigations into the conduct of directors of insolvent entities currently in place have also been proposed.

While the proposed reforms will undoubtedly have an effect on struggling companies and their directors, they are ultimately intended to strengthen the business environment, increase confidence and maintain the reputation of the UK as a fair, transparent and dependable place to do business.