East Midlands companies ‘need more breathing space’
Struggling companies should be given up to six weeks free from creditor pressure to plan a recovery or rescue, according to the Midlands branch of insolvency trade body R3.
The region’s insolvency professionals believe that the introduction of a ‘business rescue moratorium’ would help save more companies under severe financial strain, safeguarding more jobs and improving returns to creditors.
R3 Midlands chairman Chris Radford, a partner at Gateley in Nottingham, said: “The UK insolvency regime is flexible and effective but it needs a simple moratorium procedure to give companies time to plan when there is a chance of turning a business around. Currently, it is far too easy for anxious creditors to undermine potential rescues with a winding up petition.
“The result is that rescue deals may be arranged quickly and confidentially, which can leave unsecured creditors, in particular, feeling left out.”
R3 Midlands believes that a short moratorium gives struggling companies a chance to be open with their creditors and negotiate a way out of their problems in a transparent fashion. Directors would remain in control of their company, with the supervision of a qualified insolvency practitioner.
Under R3’s proposals, creditors would not be able to pursue debts owed by companies in a moratorium for 21 days. This period could be extended for a further 21 days with court approval.
During the moratorium, companies would be overseen by a Moratorium Supervisor who would ensure the directors are using the time period as intended. Any company could enter the proposed moratorium, including insolvent companies who might otherwise enter a formal insolvency procedure immediately.
The proposed ‘breathing space’ could be used to put in place plans to restructure a company, negotiate alternative payment terms with creditors, negotiate a Company Voluntary Arrangement (CVA) or prepare for an administration or liquidation.
Companies in a moratorium would have to meet any liabilities created during the period. If they are unable to do this, they must enter an insolvency procedure immediately.
Chris Radford continued: “The insolvency regime already includes the moratorium concept, but it can only be used in limited circumstances. For example, the existing pre-CVA moratorium is only available to small companies and the reporting requirements are so burdensome that it is scarcely used. The proposed moratorium extends the benefits of the existing one, but avoids its shortcomings.”
A European Commission recommendation on business failure and insolvency published in 2014 called on member states to introduce a ‘stay’ (moratorium) for struggling businesses, with the suggestion that it last for at least four months.
Radford added: “While a moratorium would be a valuable tool, the time period has to be kept short. Four months is too long to ask creditors to wait, and there is a danger that in a longer moratorium a company would ‘drift’ rather than focus on dealing with its problems.”
