Radical insolvency review could ensure more retailer rescues
July 05, 2016
While the outcome of the EU Referendum vote is 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 as number 13 in a league table measuring the efficiency of insolvency practices (well behind 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; and exploring options for rescue financing.
Effect on retail
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.
This may look like a Company Voluntary Arrangement (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. 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.
The third part of the consultation is oriented towards larger situations with several classes of financial creditor. The fourth part is very radical and looks for views on the provision of new finance into distressed situations.
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. Share your thoughts in the comment box below or if you want to hear more on this area please get in touch using the following details: