Why holding the doors open for struggling businesses can also be best for creditors
The UK insolvency regime plays a crucial role in our economy, and is one of the most effective in the world.
It gives lenders and businesses the confidence to lend and trade, safe in the knowledge that, should things go wrong, debts will be settled in a fair and speedy manner.
According to the World Bank, following a company insolvency, creditors in the UK see more of their money back, faster and at a lower cost than their counterparts in the US, France, and Germany.
Often, the best results for creditors come through rescuing an insolvent business. A business that returns to financial health can pay back more than a business that closes its doors.
On top of this, rescued businesses mean rescued jobs and a limit on the ripple effect business failure can have on customers and suppliers.
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Unfortunately, business rescue attempts can be easily disrupted. Once they hear a business is in trouble, concerned creditors may petition for it to be wound up rather than risk waiting for an attempted business rescue that may not work.
Suppliers can also thwart a rescue by charging higher prices or asking for a one-off payment before supplies are continued.
Potential problems like these put a premium on speed and discretion when rescuing a business. As a result, the rescues of insolvent businesses are often performed quickly through tools such as pre-pack administrations.
But this can leave creditors feeling left out of the loop, even if they end up in a better position than they would have been had the business simply failed.
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What is needed is more time and space for business rescue.
With this in mind, the government is consulting on giving insolvent or near-insolvent companies a three-month moratorium from creditor action while rescue plans are put in place. During this time, a struggling business can plan a rescue and keep creditors informed without worrying about a winding-up petition.
The consultation also includes proposals that would allow businesses in a rescue procedure to continue to pay for supplies on the same terms as they did pre-insolvency.
The proposal for a moratorium is very welcome. R3, the UK’s insolvency trade body, proposed its own, very similar, version of the moratorium just last month and has been campaigning for changes to the rules on supplying businesses in a rescue procedure since 2010.
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While the government’s proposal is positive, there are one or two potential sticking points. For example, the proposed moratorium is too long. R3’s own proposal was for a three-week moratorium with a potential three-week extension.
The longer the moratorium is, the harder it is to fund the business, the easier it is for things to go wrong and for creditors to lose money, and the more frustrated creditors might become.
It is important that a moratorium is palatable to creditors. It would be a shame if moratorium legislation ended up damaging confidence in the insolvency regime.
Still, a moratorium is an excellent opportunity for boosting business rescue – and in turn, getting a better deal for creditors.