90-Day Moratorium for Distressed Firms would be ‘Unfair to Creditors’

shutterstock_290649785A government consultation on whether to introduce a new moratorium to give failing companies a period of up to 90 days free from creditor pressure has now closed. The insolvency trade body R3, which backs the introduction of a shorter 21-day moratorium, has said it believes such a protracted moratorium would be unfair to creditors.

If it comes into force, the moratorium would bring the UK’s insolvency regime in line with the Chapter 11 bankruptcy regime in operation in the US. However, R3 has argued that the proposed protections are too long and would not give creditors the protection they need.

Why are there calls for a moratorium to be introduced?

The introduction of a moratorium would give distressed companies a specified period of time free from creditor pressure. This would give insolvent companies the breathing space they need to properly plan and put in place an appropriate company recovery or rescue.

Under R3’s proposals, failing companies would have an initial period of 21 days free from creditor pressure. This could then be extended by a further 21 days with approval from the court. While the moratorium is in place, distressed companies will be overseen by a moratorium supervisor, who will be responsible for ensuring the moratorium is used for the reasons intended.

Appropriate use of the moratorium includes:

• Negotiation of alternative payment terms with creditors;
• The consideration and implementation of plans to restructure the company;
• The negotiation and proposal of a company voluntary arrangement (CVA);
• The preparation of the company for formal insolvency procedures such as administration or liquidation.

While the moratorium is in place, the struggling firms will be responsible for the payment of any further liabilities they create. If they are unable to meet the costs of these liabilities, they will have no choice other than to enter a formal insolvency procedure immediately.

Why is a 90-day moratorium too long?

The insolvency trade body R3 welcomes the introduction of a moratorium as a window for businesses to save jobs and secure their long term futures. However, it feels that a period of 90 days could be used by unscrupulous directors to hide away assets to the detriment of its creditors and the supply chain as a whole.

Speaking on behalf of R3, Andrew Tate, the trade body’s president, said: “A moratorium on creditors pursuing debts can be necessary to give a company time to put a rescue into place, but this would impinge creditor rights. Any moratorium needs safeguards to protect creditors and prevent abuse, but the protections proposed by the government are not strong enough.

“A shorter moratorium than proposed by the government and a supervisory role carried out by a properly regulated and experienced individual would help provide the safeguards the moratorium needs.”

Simple steps to boost the effectiveness of the insolvency regime

As well as the introduction of the 90-day moratorium, a number of other changes have been tabled to boost the effectiveness of the insolvency regime. This included the widening of the definition of ‘essential supplies’ to assist distressed businesses. The two other proposals included the development of a new restructuring plan to increase the options available to insolvent businesses, and increasing the availability of rescue finance.

However, Tate suggested that there were a number of other simple steps that could be taken to boost business rescue. He argued that company voluntary arrangements (CVAs) could become an even more effective business rescue tool if the government, as a creditor, did more to support businesses and their proposals. He also wants more to be done to encourage struggling businesses to seek advice as soon as they identify a problem.

 

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