Financially-distressed companies get government help

New tools have been launched by the government that are designed to improve rescue opportunities for financially-distressed companies.

The tools are part of new reforms that will also help the government crack down on rogue directors and protect creditors, employees and other stakeholders where companies are approaching insolvency.

These plans are similar to certain aspects of the US’s Chapter 11 Bankruptcy Code and other international regimes, and aim to balance support for a company in distress with the interests of creditors.

Breathing space

One of the measures is a new ‘breathing space’, a moratorium allowing viable companies more time to restructure or seek new investment to rescue their business free from creditor action. There is also a new restructuring plan procedure that will provide an alternative option for financially-distressed companies to restructure their debts.

Other measures

Companies will also be supported through a rescue process by the introduction of new rules to prevent suppliers terminating contracts solely by virtue of a company entering an insolvency process.

Following concerns about some recent high-profile corporate failures, new measures are also being introduced to help ensure that creditors, employees and other stakeholders are treated fairly by the directors of ailing companies.

The Insolvency Service will have the power to investigate directors of dissolved companies, and will be bolstered by enhancements to its existing antecedent recovery powers as well as the ability to disqualify directors of holding companies who unreasonably sell insolvent subsidiaries.

Further insolvency-related tools announced aim to help unsecured creditors through applying an inflationary increase to the cap on the ring-fenced pot of money available to unsecured creditors, called the prescribed part that has remained unchanged since its introduction in 2003.

Corporate Governance

The Government has also introduced measures to improve corporate governance to tackle reckless directors and better protect pensions, small suppliers and workers who lose out when companies go bust.

Following last year’s corporate governance reforms, the Government will raise standards further by:

• requiring that bosses explain to shareholders how the company can afford to pay dividends and financial commitments such as investments and pension schemes
• asking the Investment Association to investigate to see if action is needed to ensure that companies are giving their shareholders an annual vote on dividends
• greater access to training for directors and minimum standards for independent board review

If you would like to discuss these issues with one of our advisers, please contact a member of our Restructuring team.