Insolvency trade body R3 has proposed the introduction of a 21 day moratorium for struggling companies to provide Directors with a chance to try and rescue their business.
There are already many available options for businesses when they are struggling, such as CVAs and Business Turnaround Advice. There are also currently provisions in place for moratoriums, but these are only available in limited circumstances. The broader proposed scheme will provide businesses with an opportunity to have a close examination of their business and recovery options, without undue pressure from their creditors.
The proposed moratorium would last for a period of 21 days, and an Insolvency Practitioner would be appointed as a Moratorium Supervisor. After the initial 21 days have elapsed, the moratorium could then be extended, either by applying to the court for a further 21 day extension, or by the IP issuing a CVA proposal.
During the 21 day moratorium, directors will remain in control of the Company. The Company’s suppliers would not be allowed to withdraw or amend their supply terms during this period. The Company would be obliged to meet all debts which are accrued during the moratorium; if it is unable to do so, the Company would be obliged to enter into a formal insolvency procedure.
The underlying principal behind the proposal is to allow businesses the opportunity to put a rescue plan into place, without being rushed into a procedure which may not necessarily be the best course of action. Philip Sykes, the president of R3, stated “A key reason for this [proposal] is that anxious creditors can disrupt business rescue plans by petitioning to have a struggling Company wound up. This is understandable given creditors want to protect their own financial interests, but it can put directors under pressure.”
The proposed scheme is similar to “Chapter 11” rules in the United States. James Hurley, Enterprise Editor at The Times, reports that Chapter 11 “is sometimes criticised for its complexity and associated costs”, but Mr Sykes stated that his proposal would introduce some of the benefits of the American scheme, without the associated costs.
At present, some rescue deals can leave Company creditors feeling “out of the loop” due to their confidential nature. Melanie Leech, Chief Executive of the British Property Federation, warned “At the very least, proper safe-guards would have to be put in place to ensure that property owners and other creditors are not prejudiced by having to forgo their contractual and statutory rights against a business that might not even be insolvent, whilst all the time the directors remain in complete control”.
“R3’s proposal will be considered during a government consultation next month.
As part of R3’s proposal, an IP would be required to supervise the moratorium. This would certainly be advisable, as it would ensure that the moratorium was being used as a genuine attempt to rescue the business, rather than simply an attempt to stall the inevitable. With so many business rescue options available to Companies, a period of time to allow Directors to seriously consider their options without receiving creditor pressure is a sensible idea. It will be interesting to see what the result of the government consultation will be.”
Andy Platt, Director of Focus Insolvency Group
For further information about the scheme, you can read R3’s proposal in full here.