R3 weighs up proposed changes to insolvency rules

Proposed changes to the corporate insolvency framework previously outlined by ministers have received a cautious welcome from the insolvency trade body R3.

As part of efforts to bolster company rescue and see a greater amount of money returned to creditors, the Government has set out a number of key reforms.

Probably the most interesting of which is the proposed introduction of a US Chapter 11-style moratorium for insolvent companies.  The principle would be that a company could apply for shelter from legal action whilst it investigated recovery or refinancing options.

Personally, I feel some sort of restructuring process is welcome but the challenge, as always is getting the balance right between the interests of creditors and the company.  In this respect there were a number of areas where the consultation did not quite hit the mark.

It is suggested that control of the company is left with the directors rather than an independent party, thus making it a softer (and cheaper) approach than an administration.  However, there are no additional controls or obligations placed on directors to act properly during that period.

Furthermore whilst a professional is required to oversee and past comment on the application it is not proposed that this role should be limited to Insolvency Practitioners.  I appreciate that I am biased in this but it does appear to me that IPs are those best placed to make a judgement call on whether the moratorium is likely to achieve its goals, it is after all what we do for a living.

Of course all of this may be moot as political changes recently may mean that finding legislative time for these tweaks to a system which is already amongst the best in the world might not be top of the list of priorities for Theresa May’s new government.

Of more concern to IPs will be the potential loss of the European Rules governing insolvency regimes through-out Europe, as part of Brexit.  These rules have proven incredibly powerful and we have made use of them on a number of occasions.

In summary the Rules allow us to exercise our rights, in insolvency proceedings, anywhere in Europe and gain the automatic support of that jurisdiction.  We have had cause to use this a number of times over recent years with everything from dealing with a branch of a company based in France to selling a bankrupt’s holiday home in the south of Spain.

Without these rules we will be required to fall back on international agreements such as UNCITRAL from the United Nations or the general principle of comity, where overseas courts merely try to be helpful to each other but neither of these have the same streamlining effect that we have become used to.

We will have to wait and see whether we get new legislation on either or both of these areas but in the meantime we have the long awaited re-write of the Insolvency Rules to look forward to.

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