Encouraging Company Rescue – a consultation
In mid June 2009 The Insolvency Service of England and Wales launched its consultation paper on "Encouraging Company Rescue". The consultation is focused on ways to give "struggling, but viable" companies greater support and better tools to survive the current economic difficulties.
The Insolvency Service makes three proposals:-
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Extending the CVA (company voluntary arrangement) moratorium to medium and large sized companies;
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Introducing a new court-sanctioned moratorium available to all; and
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Providing greater security for repayment of monies loaned post CVA or administration, to allow firms to access funding.
In practical terms, the most significant proposal is the extension of the company moratorium.
Extension of small company moratorium
Where there is a proposal for a CVA which an IP considers has a reasonable prospect of success, it is proposed that medium and large sized companies should be able to benefit from the operation of a moratorium. The same restrictions as to types of company would still apply (as under Schedule A1, paras 2, 3 and 4). The moratorium would also apply to LLPs.
In both administrations and small company CVAs the moratorium allows the administrator or supervisor time to assess the company and formulate proposals for dealing with its liabilities. It prevents creditors enforcing security, repossessing goods and doing diligence against the company. It also prevents landlords from terminating leases.
Benefits of extension
The Insolvency Service notes that at present larger companies will often enter administration to secure the moratorium they need while a CVA is negotiated. A recent example of this is the administration and subsequent CVA of JJB, the large sportswear and sporting goods retailer. Administration is, on the whole, a more expensive process than a CVA due to the longer timescales and the necessity to prepare court documents (which will be greater or fewer depending on the procedure followed).
The extension of the CVA moratorium would give larger companies and LLPs a more viable alternative rescue remedy. In turn, this would discourage the misuse of administration for the sole purpose of taking advantage of the moratorium and make the CVA a more relevant and effective tool.
The Insolvency Service claims that extending the moratorium would benefit creditors, employees, consumers and trade partners. As well as being cheaper than administration, a CVA gives creditors more input as the company must communicate effectively with creditors and reach an agreement which is acceptable to all parties in order for a CVA to work.
One small step…
The advantages then have been clearly set out. Any supposed disadvantages to the extension are expected to be identified by respondents to the consultation. It remains to be seen what the final consensus will be but any downside is likely to be overshadowed by support in favour of the move. Further steps will of course be required before any or all of the proposals are implemented.
The full consultation document can be accessed at http://www.insolvency.gov.uk, along with a summary document for small businesses. The deadline for responses is 7 September 2009.
For further information please contact: Fiona Carlin
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