Insolvency and Corporate Governance – Reforms Proposed

What are the proposals?

Under the proposed reforms, struggling companies will be given every opportunity to be restructured where they can continue to create value by introducing the following procedures:

• The introduction of a restructuring moratorium – allowing companies in financial distress more breathing space to implement a rescue plan to save the business free from action from creditors.
• The introduction of a new restructuring plan procedure that can be used alongside the moratorium which will provide an alternative option for financially-distressed companies to restructure their debts. One of the more controversial aspects of these proposals is that the court will have the power to bind creditors who do not agree with the plan if it is considered to be in the best interests of all parties involved.
• The introduction of new rules to prevent suppliers terminating contracts on the grounds of a company entering an insolvency process. Currently, it is common for commercial contracts to include provision for automatic termination, sometimes well before any formal insolvency event in order to protect the supplier from exposure to bad debt.  While suppliers will argue that they should not be forced to continue trading with an insolvent company, the debtors would say that they are less likely to succeed in rescuing the business if they are unable to continue trading and dealing with suppliers.  The proposal is that suppliers will need to apply to court for permission to terminate and will have to show that being forced to continue supplying the insolvent company would cause it to become insolvent itself.  For many large suppliers to much smaller owner-managed businesses and SMEs this is likely to be very difficult for them to demonstrate, protecting small companies from being cut off from essential suppliers.  This may however have the effect of causing large suppliers to introduce more rigid supply and credit terms to new and existing customers who they consider to be more at risk of insolvency.

In light of the recent high-profile corporate failures, the Government also aims to offer further protection to creditors, employees and other stakeholders in companies approaching insolvency. The Government proposes to provide new powers to the Insolvency Service and office holders to investigate directors of dissolved companies, enhance recovery powers, disqualify reckless directors and challenge preference payments. These measures will increase the accountability of directors by imposing further responsibilities.

The Government’s plans have similarities to aspects of the US’s Chapter 11 Bankruptcy Code, with the desired effect of ensuring that the UK remains an attractive place to invest and start a business.

Watch this space

These reforms will have practical implications across all sectors, impacting on both sides of the fence in an insolvency situation. The Government has not yet proposed a timescale for implementing the reforms, but we will keep a watchful eye on the position and provide further updates in due course.