Source and aims of the proposals
Following the announcement in this year’s budget, the Insolvency Service published a consultation paper on 15 June 2009 entitled “Encouraging Company Rescue” which contains proposals for changes to the UK’s corporate insolvency procedures.
The proposals are aimed at facilitating company rescues in order that the maximum economic value is rescued from companies that get into difficulties and that the knock-on effects of company insolvencies on their creditors are minimised in terms of saving jobs and providing a better return to creditors.
What are the proposals?
- Extending the existing CVA (company voluntary arrangement) moratorium to larger companies Currently only small companies1 can seek the protection of a statutory moratorium on creditor action while approval is sought for a CVA. The moratorium lasts 28 days, extendable to 3 months with court consent.
- Creating a new court-sanctioned moratorium for companies in financial difficulties Under this proposal, a company could apply to court for a moratorium of 42 days, extendable to a maximum of 3 months. The court would need to be satisfied that, among other things, there is a reasonable prospect of a CVA being approved by the creditors. This second proposal differs from the first proposal in that under this second proposal, the company need not have finalised its CVA proposals at the time that it applies to court for the protection of a moratorium.
- Giving “super priority” to the funding costs of an administration ahead of all other expenses of a company’s administration This would put the repayment of administration funding at the very top of the expenses to be met out of floating charge realisations, as opposed to the current position where such rescue finance ranks equally with other liabilities arising out of contracts entered into by the administrators and certain liabilities to employees whose contracts are adopted by the administrators.
- Allowing a company in a CVA or administration to create fixed charges to secure rescue finance This proposal, if implemented, would enable an insolvent company to create charges over unencumbered assets as well as assets that are already secured, notwithstanding negative pledge clauses. Such new charges could rank alongside, subordinate or even in priority to any existing charges. An existing secured creditor’s consent would be needed but, if consent was not forthcoming, the company could apply to court for an order overriding any objections. The relevant officeholder would need to show to the court that he or she is satisfied that, among other things, the interests of the existing fixed charge holder are ‘adequately protected’.
- Restricting the application of floating charges and asset based lending agreements (“ABL”) to assets acquired before insolvency The final proposal is that assets acquired by a company as a result of its trading on after entering administration or having a CVA approved, such as book debts, will not be caught by existing floating charges or ABL arrangements and will instead be available to secure rescue finance.
Footnote 1: A company which satisfies at least two of the following requirements: annual turnover of not
more than £6.5m; balance sheet of no more than £3.26m; and no more than 50 employees.
What are the next steps?
The consultation period ends on 7 September 2009. Decisions taken in light of the consultation will be published along with a summary of the responses.
According to the consultation paper: “The Government will consider the responses received and whether it is necessary to legislate on this matter when Parliamentary time allows”. Anecdotally, we understand that the Government is keen to change the law as soon as possible.
