A review of the Corporate Insolvency Framework - a consultation on options for reform

​A review of the recent proposals made in May 2016 by The Insolvency Service in its paper entitled "A Review of the Corporate Insolvency Framework - A consultation on options for reform".

The Insolvency Service has recently closed its consultation on potential insolvency law reform. The consultation period was truncated to six weeks from the normal 12 week period for no apparent reason, and the proposals appear to a personal crusade by the former Business Minister Sajid Javid. The proposals are ill thought out, inconsistent and seem to be aimed at fulfilling a political agenda rather than an obvious economic need. The Impact Assessment which accompanies it is light on detail and hard facts and much of the background evidence referred to does not support the proposed reforms. Of particular concern for such major reforms, The Insolvency Service estimates that less than 20 companies a year will use the new proposed processes.

In outline, the proposals include:

  • A new moratorium on creditor action lasting three months, binding on all creditors, including those holding security.
  • Suspension of directors’ liability for wrongful trading during the moratorium.
  • The appointment of a “supervisor” who would “keep an eye” on the moratorium and on any restructuring proposals. The supervisor would have limited powers and even more limited duties. A supervisor could be an insolvency practitioner, accountant or solicitor with suitable restructuring experience.
  • An ability in the “restructuring” plan for cross class cram down, including the ability of unsecured creditors to bind a dissenting secured class of creditor, as long as it could be demonstrated that secured creditors would be no worse off than in a liquidation.
  • The ability for a company to designate contractual counterparties as “essential suppliers”. Such a designation would result in them being unable to terminate contracts on grounds of insolvency; this might include providers of working capital facilities.
  • Rescue finance on one or all of the following bases:
    • super priority over all expenses and costs of the moratorium
    • the grant of security even where there is a negative pledge in favour of other secured creditors, and
    • the grant of first ranking security, provided existing secured creditors were “adequately protected”.
  • Trading during the moratorium should, at the very least, be on a “cash flow” positive basis. However, the proposals talk about creditors being no worse off if the moratorium fails. This would require trading to be sufficiently profitable to cover all costs and expenses, including professional fees, without recourse to realising uncharged assets or those which are subject to floating charges.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.