The UK government has announced[1] major insolvency law reforms that would significantly advance the flexibility required for restructuring financially troubled businesses. The reforms would adopt elements of US Chapter 11, with directors remaining in control throughout the period of a statutory moratorium against creditor claims, but under the supervision of an appointed monitor. The monitor is to be, at this stage, an insolvency practitioner who would in certain cases be permitted to take any subsequent voluntary appointment should the business fail.
This comes in the context of an existing pre-pack review and a review of the UK Insolvency Code of Ethics.
Moratorium leading to an appointment or a plan
The initial period of the moratorium will be 28 days. This can be extended up to a further 28 days by the company, but the monitor must confirm that the qualifying conditions continue to be met. The monitor would then be required to notify creditors of the extension.
A key objective of the government’s proposals is said to be to reduce the costs and risks of restructuring. The existing company voluntary arrangement (CVA) moratorium and its process are restricted to small companies and are said to be burdensome for the insolvency practitioner and involve carrying a risk of personal liability.
A new type of restructuring plan through something similar to a scheme of arrangement would be introduced.
As the government sets out in the consultation document, it expects typical outcomes from a moratorium to be that a company agrees an informal restructuring with creditors, or a company enters an insolvency procedure, either a rescue procedure, such as a CVA, or a liquidation procedure.
During the moratorium the directors would remain in control of the company. Creditors’ interests would be protected through the involvement in the process of an authorised supervisor – a monitor, who would monitor the company’s compliance with the qualifying conditions throughout the moratorium.
The insolvency practitioner monitor would be prohibited from taking a subsequent appointment to the company for only 12 months, and only in the case of administration and liquidation. The monitor will be permitted to take a subsequent appointment in a CVA. The reason for this is that the government does not want to discourage the monitor from facilitating a CVA outcome by prohibiting them from acting as the CVA supervisor.
Also, as the proposals for a new restructuring plan do not feature the role of a statutory office-holder, a monitor would not be prohibited from advising in relation to a restructuring plan once one had been agreed by creditors.
The new restructuring plan procedure
The new restructuring procedure would allow a company to bind all creditors, including junior classes of creditors even if they vote against the plan, through the use of a cross-class cram down provision. Such cram down could be imposed provided dissenting classes of creditors were no worse off than they would be in liquidation. The classes of creditors would be proposed by the distressed company on a case by case basis. For a class to vote in favour, 75% of a class by value, and more than 50% by number, would have to agree to the plan.
The process will therefore closely resemble that for schemes. A restructuring plan proposal will be sent to creditors and shareholders and filed at court. At a first hearing the court will examine the classes of creditors and shareholders as defined by the company. Creditors and shareholders may challenge class formation if they think the company’s classes do not accurately reflect the rights and interests of different classes. If satisfied, the court will confirm that a vote on the proposal may be conducted on a specified date ahead of a second hearing if required. Necessary information would be anything that creditors need in order to make a decision whether or not to support the proposal, with the Government prescribing certain mandatory matters that must be covered in all cases. This may take the form of something like the explanatory statement used in schemes
Importantly, no financial conditions will be set in order to qualify for a restructuring plan. This means both solvent and insolvent companies will be able to propose restructuring plans to their creditors.
Solvent companies also
The government says it believes that allowing solvent companies to address emerging financial difficulties will reduce stigma and encourage earlier action on the part of directors, thereby avoiding value-destructive action of a formal insolvency and leading to better outcomes on the whole for creditors and other stakeholders in a company.
Ipso facto termination clauses
Reversing a long-standing reliance on freedom of contact, the government proposes limitations on ipso facto termination clauses in contracts, “to prevent suppliers terminating contracts solely by virtue of a company entering an insolvency process”. The protections built into the proposals will safeguard creditors from unfair detriment where their contractual rights are interfered with by the effect of a restructuring plan.
Director training
Attention is also given to the duties and responsibilities of directors to “help ensure that creditors, employees and other stakeholders are treated fairly by the directors of ailing companies”.
The proposals include new powers for the Insolvency Service to investigate directors of deregistered companies, enhancements to existing antecedent recovery powers and the ability to disqualify directors of holding companies who unreasonably sell insolvent subsidiaries.
The measures would seek to improve corporate governance by aiming to tackle reckless directors and better protect pensions, small suppliers and workers who lose out when companies fail. Increased responsibilities will be place on decisions to pay dividends, and the provisions of greater access to training for directors and minimum standards for independent board review.
Other UK Contexts
These reforms appear while other matters are under review in the UK – pre-packs, and the Insolvency Code of Ethics.
Pre-packs
The Insolvency Service is in the process of assessing the operation of pre-packs and is yet to conclude or announce its findings. The review is examining whether the pre-pack pool has increased transparency and public confidence in connected party prepack administrations; what numbers of connected party purchasers have chosen not to approach the pool and why; and what is the success rate of the new company where purchasers approached the pool between 1 January 2016 and 31 December 2016. The Insolvency Service provided some initial assessment of pre-packs in its 2017 Review of insolvency practitioner regulation, of May 2018.
Code review
As to the Insolvency Code, the Joint Insolvency Committee (JIC) has consulted on changes to the Code, following its first detailed review since its introduction in 2009. Views were sought from insolvency practitioners and other interested parties on issues concerning referrals, for example, in the changed business environment in which practitioners now operate. These go to challenge existing restrictions based on perceptions of practitioner independence. The UK Code review will now need to take account of the changes proposed by the government in these latest reforms.
[1] Insolvency and Corporate Governance – Government Response, 26 August 2018
