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Out-Law News 2 min. read

UK unveils raft of new measures to help distressed companies

The UK government has published new tools designed to improve rescue opportunities for companies in financial distress and put more emphasis on directors’ duties.

The new proposals are outlined in a government response (82 page / 655KB PDF) to a consultation on insolvency and corporate governance which ran in March this year. The document is also a response to an earlier consultation on broader aspects of insolvency law.

Minister for small business, consumers and corporate responsibility Kelly Tolhurst said the reforms would ensure more companies can be rescued or restructured, that stewardship and transparency are strengthened in large companies, and would increase returns to creditors in insolvency.

For the first time the government intends to bring in the concept of the “debtor in possession” under UK law, whereby a distressed company obtains the benefit of a moratorium on legal action whilst its existing management remains in control of the business.

The measures include a 28-day moratorium period which will allow viable companies more time to restructure or seek new investment to rescue their business free from creditor action. It will be possible to extend this period for a further 28 days, and beyond that if creditors approve the decision or a court order is obtained.

The moratorium period will be overseen by an insolvency practitioner appointed as ‘monitor’ The monitor’s role will be limited to ensuring that the company complies with the requirements of the moratorium and sanctioning disposals of assets outside the normal course of business, as well as sanctioning any grant of new security over the company’s assets.

Companies will also have access to a new restructuring plan procedure, modelled on US Chapter 11 Bankruptcy Code principles, allowing them to restructure their debts.

The moratorium proposal and the restructuring plan proposal are independent of each other and using a moratorium would not be a pre-requisite for seeking creditors’ agreement to a restructuring plan.

The government is introducing rules that will prevent suppliers terminating contracts solely because a company has entered into a formal insolvency procedure, the moratorium period or the new restructuring plan.

The reforms will also impose an inflationary increase to the cap on the ring-fenced pot of money available to all unsecured creditors. This pot, known as the ‘prescribed part’ has remained unchanged, at a maximum of £600,000, since its introduction in 2003.

Insolvency expert Nick Pike of Pinsent Masons, the law firm behind Out-Law.com, said: “The changes outlined today are very significant, and if introduced will be the biggest change to UK company restructuring and insolvency law since the Insolvency Act was first introduced in 1986.

“The government is clearly seeking to ensure that corporates seek assistance as soon as financial problems hit - and the introduction of the debtor in possession concept seeks to encourage this, allowing current management to remain in control, rather than handing over to an insolvency practitioner,” Pike said.

“The detail of what is proposed will be critical- it needs to strike the difficult balance between protecting creditors’ interests on the one hand without stifling innovative ideas for company rescue,” Pike said.

Simultaneously the government is introducing tougher measures to ensure that directors act in the best interest of companies. The Insolvency Service is granted new powers to investigate directors of dissolved companies and to disqualify directors of holding companies who unreasonably sell insolvent subsidiaries.

For example, directors who dissolve companies to avoid paying workers or pensions could face fines or be disqualified from running a business.

The government said there needed to be more transparency around group structures and it is planning to pursue options that will require companies to provide explanations of their corporate and subsidiary structures.

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