About the new rules – there’s good news and bad news…

October 11th, 2018

The accountancy world has been agog at the new insolvency measures that are being proposed by the Government following a consultation process that ended in August. Well, OK, not agog exactly. Accountants are rarely agog about anything although they do occasionally raise an eyebrow! Well, eyebrows are certainly being raised about the proposed new measures published recently by the Insolvency Service (here).

The reason for the raised eyebrows is partly because some of the ideas are quite ground-breaking when viewed against current legislation and partly because they are a bit difficult to interpret. That’s OK, our expertise in insolvency matters can interpret them for you. But I can tell you now that there is both good news and bad news in this new approach.

The good news for companies that are in difficulty is that the changes will make it more likely that some of them can be rescued or restructured by introducing a 28-day moratorium period – a breathing space in which the directors can look for new investment, for example, without the creditors taking them to court. That period will be overseen by someone like me (a licensed Insolvency Practitioner) to ensure that any disposal of assets or asset-backed refinancing plan is legal, sensible and has a reasonable chance of securing survival.

That is theoretically good news for creditors, too, as it potentially means that more of them are likely to get more of their money back (although they may have to wait a bit longer to get it).

Companies will also be given the time and opportunity to restructure their debts. This is similar to the US Chapter 11 Bankruptcy Code but, again, the restructuring plan will have to be fair and equitable to creditors and be realistic. When you hear about a company in the United States “seeking protection from creditors under Chapter 11” that is what this is all about and it is an attempt to balance support for a potentially viable company with the interests of its creditors.

At the same time, there are new measures to make sure that directors act in the best interests of their companies. There will be new powers for the Insolvency Service to investigate directors of dissolved companies, enhancements to existing antecedent recovery powers in formal insolvencies and the ability to disqualify directors of holding companies who unreasonably sell insolvent subsidiaries.

There is other good stuff, too, such as requiring that bosses explain to shareholders how the company can afford to pay dividends and financial commitments such as investments and pension schemes. I have on many occasions delved back into the history of an insolvent company to find the directors conjuring dividends for themselves out of, apparently, thin air and depleting funds that would otherwise have paid creditors.

It’s not all good though. New rules will prevent suppliers from terminating contracts just because a company is going insolvent. Great if you are the insolvent company, not so good if you are the supplier (or the supplier’s advising accountant) where common sense is telling you to pull the plug. I can see all kinds of difficulties in making this work. When is a contract not a contract? How can you tell when a supplier is stopping supplying you just because you are in an insolvency process (as opposed to 20 other reasons that a supplier could give)? How do you physically make a supplier carry on supplying?

Corporate insolvency has always been a complex business. These proposed new rules will change the landscape somewhat and may lead to more positive outcomes for struggling companies and their creditors. But one thing is certain – it’s still complex.