Struggling businesses should be given ‘breathing space’ from creditors

BRISTOL, UNITED KINGDOM - NOVEMBER 27:  In this photo illustration pound coins are stacked in front of a twenty pound note on November 27 2008 in Bristol, England. Many UK consumers are feeling the pinch as the financial crisis and economic downturn makes borrowing harder and more expensive and the recession starts to bite.  (Photo by Matt Cardy/Getty Images)

Insolvency trade body R3 has proposed that struggling companies should be given up to six weeks free from creditor pressure to plan a recovery or rescue.

The UK’s insolvency profession believes that the introduction of a ‘business rescue moratorium’ would help save more companies under severe financial strain, saving more jobs and improving returns to creditors.

Phillip Sykes, R3 president, said: “The UK insolvency regime is flexible and effective but it needs a simple moratorium procedure to give companies time to plan when there is a chance of rescuing a business and preventing insolvency. It is too easy for anxious creditors to undermine potential rescues with a winding up petition.

“As a result, rescue deals are arranged quickly and confidentially, which can leave unsecured creditors in particular feeling left out.

“Additionally, faced with losing control of their company when entering an insolvency procedure, directors often wait until it is too late before trying to take decisive action needed to turn their company around.

“A short moratorium gives struggling companies a chance to be open with their creditors and negotiate a way out of their problems in a transparent fashion. Directors would remain in control of their company, with the supervision of a qualified insolvency practitioner. Business rescue usually means more money back for creditors than would be possible following a liquidation, too.

“The UK insolvency regime is already highly regarded, so this is a case of improving rather than replacing what we have already. A moratorium would introduce some positive aspects of the US insolvency regime without also introducing the high costs associated with the US approach.”

Under R3’s proposals, creditors would not be able to pursue debts owed by companies in a moratorium for 21 days. This period could be extended for a further 21 days with court approval.

During the moratorium, companies would be overseen by a Moratorium Supervisor who would ensure the directors are using the moratorium as intended.

Any company could enter the proposed moratorium, including insolvent companies who might otherwise enter a formal insolvency procedure immediately.

The moratorium can be used to put in place plans to restructure a company, negotiate alternative payment terms with creditors, negotiate a Company Voluntary Arrangement, or prepare for an administration or liquidation.

Companies in a moratorium must meet any liabilities created during the moratorium. If they can’t do this, they must enter an insolvency procedure immediately.

“The insolvency regime already includes the moratorium concept, but it can only be used in limited circumstances.  For example, the existing pre-CVA moratorium is only available to small companies and the reporting requirements are so burdensome that it is little-used. The proposed moratorium extends the benefits of the existing moratorium but avoids its shortcomings,” Sykes said.

A European Commission Recommendation on business failure and insolvency published in 2014 called on Member States to introduce a ‘stay’ (moratorium) for struggling businesses. This Recommendation suggested that the stay last at least four months.

“While a moratorium would be a valuable tool, the moratorium period has to be kept short. Four months is too long to ask creditors to wait, and there is a danger that in a longer moratorium a company would ‘drift’ rather than focus on dealing with its problems,” added Sykes.

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