Insolvency reforms most significant since 2002

The government’s corporate insolvency announcement in August sets out the most significant changes to the UK’s insolvency and restructuring framework since the 2002 Enterprise Act, says Paul Weber.

October 2018

R3, the voice of business recovery, welcomes the long-awaited announcement (New tools to improve rescue opportunities for financially-distressed companies), and will be analysing the detail over the coming weeks. We will then raise our members’ views, and any concerns, with parliamentarians and the government before legislation is brought forward.

The announcement also included reforms to the corporate governance framework, first set out earlier this year, with a number of proposals specific to the insolvency and restructuring regime.

The corporate insolvency proposals were first announced over two years ago. During that time, R3 has been working very hard with the government, parliamentarians, the business community and the press to keep up the momentum for the reforms, which will be an important part of ensuring that our framework does more to encourage business rescue and remains world class, particularly with Brexit on the horizon.

R3 is particularly pleased to see that the government has backed down on its plans for a three-month business rescue moratorium, reducing it to 28 days (which may be extended). R3 campaigned for a 21-day moratorium.

The reforms include:

Corporate insolvency

• The introduction of a new moratorium to help business rescue. This will give financially distressed companies a period of time when creditors cannot take action against the company, allowing it to make preparations to restructure or seek new investment
• Prohibition of enforcement by a supplier of termination clauses in contracts for supply of goods and services on the grounds that a party has entered a formal insolvency procedure, the new moratorium or the new restructuring plan
• Creation of a new restructuring tool that would include the ability to bind dissenting classes of creditors who vote against it

Corporate governance

• Introduce measures to ensure greater accountability of directors in group companies when selling subsidiaries in distress, but having regard to the concerns that the new measures should not disincentivise rescues or unnecessarily hold directors liable for the conduct of others over which they have no control
• Legislate to enhance existing recovery powers of insolvency practitioners in relation to value extraction schemes which have been designed to remove value from a company at the expense of its creditors when it is in financial distress
• Legislate to give the Insolvency Service the necessary powers to investigate directors of dissolved companies where they are suspected of having acted in breach of their legal obligations

Paul Weber ACA FCCA FABRP from Leigh Adams Ltd is an ICAEW Chartered Accountant and licenced insolvency practitioner, and the chair of the North London Society of Chartered Accountants

Liked this? Read these:

• Reckless directors to pay for business failures
• When marketing is like pouring water through a sieve
• New financial literacy guide launched