Insolvency Review could have unintended consequences for creditors

The Chartered Institute of Credit Managers (CICM) has issued a warning following publication of responses to the Review of the Corporate Insolvency Framework. The publication has prompted fears from the credit community that failing businesses may now be disproportionately protected at the expense of their creditors.

Philip King, Chief Executive of the Chartered Institute of Credit Management (CICM), expressed particular concern that the Government is “failing to look at the detail in favour of accepting a majority view.”

 Opinions were sought in four key areas of proposed reform: the creation of a new Moratorium period for financially distressed companies; provision to require essential suppliers to continue to supply to a financially distressed company on existing terms; creation of a ‘new restructuring plan’ – a company rescue vehicle that would enable a ‘cram down’ of classes of dissenting creditors; and measures to encourage ‘rescue finance’.

 Two thirds of respondents who commented on the Moratorium proposal agreed in principle that the introduction of a pre-insolvency temporary Moratorium would facilitate business rescue. There was similar support for the broad objective of helping businesses to continue trading through the restructuring process.  There was support too for the proposal that a restructuring plan which could be made binding in the face of opposition by a minority of creditors would be a valuable addition to the Insolvency Framework. Stakeholders provided a range of valuable perspectives on how the new plan might operate in practice. 

 In terms of the Rescue Finance proposal, most agreed that a lack of finance rarely prevents the rescue of viable businesses; the existing framework does permit rescue financing, and there is currently a market for rescue finance.  But King, speaking for the CICM, said that there was a danger that compelling arguments for and against the various proposals were in danger of being ignored: “We maintain our position that a move to a new model similar to Chapter 11 for UK businesses heading towards insolvency could have serious, unintended consequences for creditors, cashflow and thousands of small businesses within the supply chain.”