Encouraging company rescue - a consultation

ACCA is pleased to comment on some of the specific proposals put forward in the above consultation document. ACCA represents over 120,000 qualified accountants, some 150 of whom are licensed insolvency practitioners who have a direct interest in the plans being put forward.

It is to be welcomed that the Government is considering additional ways of facilitating rescue for viable companies. Any idea that might help to improve the prospects of distressed companies and so help them to survive, in one form or another, deserves to be given serious consideration. But any reform which involves the encouraging of new investment must be careful to avoid prejudicing the position of existing creditors who have dealt with the insolvent company prior to it falling into trouble. This would risk destabilising lending practices to companies generally. We suspect that some of the ideas put forward could have that effect and that could in turn have wider and undesirable consequences.

Our comments on specific proposals are set out below:

Proposal A – extension of the small company moratorium provisions to larger companies

A1: The aim of this proposal, namely to provide a means for companies to seek a cheaper rescue option than going into Administration, either instead of or prior to going into a CVA, is worthy of support. But we do not believe that extending the moratorium to larger companies would, in the current form of the moratorium at least, be likely to achieve the desired outcome of increasing the use made of CVAs.

A2: Experience to date shows that very few moratoria have been applied for by the small companies that are currently entitled to use it. This does not suggest that the moratorium procedure itself is currently considered by companies and insolvency practitioners to be a decisive factor in determining whether a CVA may be a practicable or desirable route for a company to take: the attitude of creditors towards any rescue plan, and in particular whether they are prepared to advance more credit towards the distressed company, is in most cases likely to be more relevant to this question. The experience to date of the use made of moratoria must also make it doubtful whether the situation would be any different should the range of eligible entities be expanded.

A3: The exposed position of the nominee during the moratorium is a material factor in the low current use made of the procedure. Under the rules, the nominee's actions can be challenged by the company or by any other interested stakeholder. This right of challenge continues even after the moratorium has ended, and can lead to claims being brought against the nominee by the company or any of its creditors. The exposure of the nominee to liability is despite the fact that, unlike the case in Administrations, the nominee does not enjoy full control of the company in relation to which he is acting. The nominee is accordingly obliged to rely on the directors to provide him with much of the information that he needs for the purpose of carrying out his functions. Unless changes were made to the role and liability of the nominee, we do not consider it likely that there would be any greater willingness on the part of practitioners to be involved with moratoria in relation to larger companies than there currently appears to be in respect of small companies.

Proposal C - Super-priority of rescue finance

C1: Rescue finance already enjoys a measure of privileged treatment in Administrations. We do not consider that the merits of enhancing this privileged treatment justify the overriding of existing arrangements which have been freely entered into between lenders and companies.

C2: The proposal seems to be based on the assumption that improving the priority of post-Administration finance will of itself make such finance more likely to be made available. This must be a matter for speculation. It must be equally arguable that, should a rescue plan be sufficiently attractive, lenders will always be prepared to consider supporting it in accordance with their industry commitment to supporting viable business rescue plans.

C3: The risk inherent in this proposal is that, by improving the position of lenders in the post-insolvency period, this could affect their decisions as to whether to lend to companies which are not yet in an insolvency procedure and which might, with support, avoid insolvency completely. Lenders might calculate that it would be more in their interests to lend to companies that were already insolvent than to those that were struggling to stay afloat. This could have the wholly undesired consequence of increasing the number of companies that become insolvent. We suggest attention might be better directed at improving the position of unsecured trade creditors in the period preceding formal insolvency.

Proposal D – the creation of new secured charges in administrations

D1: The consultative document suggests that, under this reform, the practitioner would have to be satisfied, before granting new security rights, that the interests of existing fixed charge holders would be adequately protected. But assuming any new rights would rank after existing fixed charges, the attractiveness of those new rights in rescue terms would be questionable. Given also that the new fixed rights would have priority over floating charges, holders of the latter would almost inevitably see their interests adversely affected, as would any other creditor affected by the overriding of a negative pledge. Both would equally inevitably appeal against any attempt by an IP to create new priority security rights. Such actions could be time-consuming and expensive for the practitioner and detrimental to the cause of maintaining good relations with major creditors. Again, the proposal on this matter would further weaken the position of unsecured trade creditors.