UK Restructuring Proposals
The Insolvency Service has issued a consultation paper proposing four main changes to UK insolvency legislation. The focus is aligned to the Government’s stated objective “to make Britain the best place in the world to start and grow a business”.
- The introduction of an automatic stay and standalone moratorium
- The ability to continue “essential contracts”
- A new cram down procedure
- Options for rescue finance
The changes take from the US Chapter 11 model and follow several European countries moving down a similar route. We briefly comment on each of the proposals below.
Automatic and standalone moratorium
The proposals envisage a 3 month moratorium which could be extended. Directors would remain in control of the company with some supervision from an insolvency practitioner or a solicitor or accountant chosen by the debtor company. The moratorium would prevent the enforcement of security and could, in theory, be obtained without approval of the secured creditors.
Continuing “essential contracts”
In the moratorium the company will be given the right to designate some contracts as “essential contracts” and these would not be capable of termination or being varied during the moratorium and any subsequent CVA or administration. This extends the statutory restrictions for key supplies of utilities and IT contracts to other “essential contracts” chosen by the company.
A new cram down procedure
The consultation puts forward a cram down restructuring process which would allow all creditors (including secured) to be bound into a restructuring plan with the ability to impose a plan on junior secured creditors even if they vote against. The test will be that they would be no worse off than in liquidation. Although something similar can already be achieved by combining Schemes of Arrangement and CVA’s it is proposed that this tool would have the ability of facilitating more restructurings and hence the survival of more companies. Any restructuring plan would require court approval and also be open to challenge by disenfranchised creditor groups.
The key debate, which already exists in many pre-packs and schemes of arrangement, will be valuation and what is the right comparator analysis. The proposals indicate the benchmark should be against a “liquidation” value but in the context of fairness it could, in certain situations, be more appropriate to use some form of going concern valuation.
Options for rescue finance
The ability to use rescue finance, repaid as an expense of administration, already exists. The proposals are considering a reasonably big move to allow rescue financing to come in and for the company to be able to grant security to those new lenders over company assets already subject to fixed charge security. Critically the new lenders could jump ahead of any current secured lenders, although it is envisaged there are some safeguards to current lenders.
“Overall we welcome proposals which provide better prospects for companies to restructure outside of a formal insolvency process. However, the proposals appear to shift the power away from secured creditors as there would be no requirement to notify or seek their consent to a moratorium, junior secured creditors can be crammed down and the rights of fixed charge lenders may be significantly eroded by debtor in possession funding taking priority. Therefore we believe proper safeguards would need to be in place for secured lenders to ensure the proposals would not impact new lending and go against the stated aim “to make Britain the best place in the word to start and grow a business”.
Phil Bowers, Partner, Restructuring Services