Winds Of Change: Corporate Insolvency And Proposed Reform

In May 2016 the UK government published its Review of the Corporate Insolvency Framework - A Consultation on options for reform.

In November 2016 the European Commission published proposals for a directive on 'preventative restructuring frameworks and second chance for entrepreneurs'. Both sets of proposals include, in broad terms, a moratorium against creditor enforcement, preservation of essential supplies, a restructuring or cram down plan, and measures to protect rescue finance. Brexit may have taken over the economic and political landscape, but in the meantime other nations are reforming insolvency law in this direction. If the UK does not, does it risk compromising its reputation at the forefront of international corporate restructuring? Changing times

I recently attended an excellent interactive seminar on India's new Insolvency and Bankruptcy Code 2016, which received presidential consent on 28 May 2016 and has been hailed as a great step forward for the existing Indian insolvency and bankruptcy framework. During a lively debate, questions discussed included:

How long should a pre-insolvency moratorium last? What should be the valuation basis for cramming down creditors as part of a rescue? It occurred to me straightaway that these issues were by no means confined to the new Indian code, but were being considered in various parts of the globe.

They arose in this jurisdiction during the UK Insolvency Service's ('Government') recent Review of the Corporate Insolvency Framework - A consultation on options for reform, May 2016 (the 'Consultation') with which I was involved during a brief secondment to the Insolvency Service's Policy Unit in 2016.

Readers will also be aware that on 22 November 2016 the EU produced its proposals for a directive on 'preventive' restructuring frameworks and second chance for entrepreneurs.

Whilst the UK will, of course, be exiting the EU, certain core issues have been raised by both the EU's consultation and by the UK's Consultation. These include a temporary stay of enforcement proceedings (moratorium), preservation of essential supplies, a new type of restructuring plan or cram down mechanism and protection for interim financing. These issues transcend national boundaries and are as prevalent as ever. The potential impact of the proposed reforms raises numerous questions, but there follows a brief discussion of certain key issues and ongoing bones of contention.

Moratorium

The Consultation suggested a preliminary moratorium lasting up to three months, with the possibility of an extension. This was to be a gateway to a rescue or turnaround, with directors remaining in control, subject to an authorised supervisor or monitor ('Monitor') to ensure compliance with entry requirements and fairness to creditors.

Whilst administrations regularly benefit from their own statutory moratorium, the 'small companies' moratorium when putting forward CVA proposals under Sch A1 Insolvency Act 1986 (the 'Act') is understood to be very seldom used.

The Government published its summary of responses in...

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