DATE PUBLISHED: 28 Sep 2018 LAST UPDATED: 17 Mar 2021

The Future of Insolvency and Restructuring

The government’s recent announcement for reforms to the restructuring and insolvency systems appear to be more beneficial to debtors.

Although the exact timings of implementation are vague the main changes appear to be as follows:

1.Greater accountability for directors – a new responsibility to directors of parent companies selling a subsidiary, if the subsidiary were to enter insolvency proceedings within 12 months of the sale. Directors will not be liable if they had
reasonable belief at the time of sale that the new stakeholders would be in ‘no worse’ position than if it had been placed into a formal insolvency process.

Instances of directors dissolving companies to avoid certain liabilities will be closely scrutinised, and the disqualification process will be extended to include former directors of dissolved companies to facilitate an investigation of their conduct.

2.Prohibiting suppliers from terminating contracts on the grounds of insolvency – this will be the new general rule, although a supplier can apply to the court for an exemption if they can establish that continuing to supply would have significant adverse effect on their own business.

3.New moratorium procedure – a new moratorium will be available to all solvent companies to give them time to consider restructuring options, companies must continue to pay their debts when they fall due. A monitor (a licenced insolvency practitioner) will determine on a balance of probabilities a company’s prospect of agreeing an arrangement with its creditors. The monitor cannot take an administration or liquidation appointment with the company for 12 months but can act as the nominee or supervisor of a subsequent company voluntary arrangement.

The monitor must agree to any disposals by the company outside of its ordinary course of business. An initial 28 day moratorium period is extendable by the monitor for a further 28 days (and can be extended further if approved by more than 50% of secured creditors by value and more than 50% of unsecured creditors by value). Creditors may object to the moratorium at any point of its duration through the court.

4.New standalone restructuring procedure – solvent and insolvent companies can propose a standalone plan of restructuring to their creditors, the court will be heavily involved in approval of proposals; which creditors and shareholders can submit counter-plans. As it would be similar to the current scheme of arrangement (SoA), SoA case law will be applicable.

The new procedure will allow for a cross-class clampdown of dissenting creditors, which adopts a variation on the Absolute Priority Rule. A dissenting class of creditor must be satisfied in full before a more junior class receives or retains anything under the restructuring plan. However, the court may approve a plan which departs from this absolute priority approach where it concludes as follows: (a) it is necessary in order to achieve the aims of the restructuring, (b) is just and equitable in all the circumstances, and (c) at least one class of creditors who will not be paid in full has voted in favour of the plan.

An official overseeing the plan will not be required in every case and there will be no maximum period over which the plan must be implemented.

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