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UK restructuring laws already geared towards business rescue, says government

Out-Law News | 10 Feb 2015 | 12:57 pm | 2 min. read

UK procedures allowing businesses to restructure in order to avoid insolvency already meet EU plans for a more 'rescue-orientated' approach to business failure and insolvency, according to a discussion document published by the Insolvency Service.

The Insolvency Service is seeking feedback from industry on how UK law currently compares to recommendations issued by the Commission in March 2014. The Commission's recommendation set out minimum standards which, if implemented, would rescue viable enterprises in financial difficulty and "give honest entrepreneurs a second chance".

According to the discussion document, UK corporate insolvency laws in particular already meet most of the criteria set out by the Commission. However, the government has asked "industry experts and other stakeholders" for their views on how the UK currently compares against the minimum standards. The call for evidence closes on 17 March.

"The UK government believes in the promotion of entrepreneurship, investment and employment," the consultation document said. "Having an efficient and effective insolvency regime is one of the ways through which the government has sought to achieve this. It helps to create a business environment that supports growth and employment by ensuring that viable businesses that are distressed can be rescued."

"The government believes the UK already has a strong preventative framework, which is aimed at business recovery where possible rather than liquidation. In addition to the many companies restructured upstream of formal insolvency, the UK's administration, company voluntary arrangement and schemes of arrangement procedures help rescue thousands of businesses each year ... UK procedures are generally considered to rescue businesses faster and at lower cost than many other regimes around the world," it said.

The Commission's new 'common principles' for national insolvency regimes were designed to create a coherent national insolvency framework in each member state. Amongst its recommendations, the Commission asked national governments to introduce legislation allowing struggling businesses to restructure their debts at an earlier stage, without lengthy or costly procedures and before formal insolvency proceedings begin. Restructuring plans should be based on increasing the chances of rescuing the business if it is viable, and take account of the interests of both debtors and creditors.

According to the discussion document, the UK regime already offers the necessary flexibility to meet the Commission's new requirements, with many restructuring plans "negotiated outside of formal insolvency proceedings" with the assistance of insolvency practitioners. In addition, court approval of a restructuring plan is not always required, for example in the case of a company voluntary arrangement (CVA). However, EU proposals for a "lengthy stay of individual enforcement" would go against the UK rules, which only allow minimal stays for small businesses and companies that announce their intention to appoint an administrator, it said.

In addition, the Commission's recommendation removing the distinction between secured and unsecured creditors when voting to adopt a restructuring plan unless to the detriment of other creditors would be a shift away from the existing UK regime, the document said. For example, unsecured creditors have to be in favour of a CVA; while a majority of creditors in each class must be in favour of a scheme of arrangement.

Justice ministers from across the EU backed a proposed new Insolvency Regulation, which would introduce a more 'rescue-orientated' approach to cross-border insolvencies, at the end of last year

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