The Government has today published its response to The Insolvency Service's "Encouraging Company Rescue" consultation that ran between June and September this year.

The consultation canvassed views from financial, legal, accounting and insolvency professionals about proposals to reform the UK's insolvency and restructuring regime. More than 50 responses were received.

The proposed reforms can be broadly summarised as:

  • CVA Moratoria proposals: extending the existing CVA moratorium currently available to small companies to medium and large sized companies, and introducing a new court-sanctioned moratorium of up to three months, intended to allow companies a period of protection during which they could prepare CVA proposals; and
  • Rescue Finance proposals: the government proposed to introduce a number of reforms designed to facilitate the availability of rescue finance including super-priority for rescue finance advanced in administration, measures to create new secured priority charges in an administration or a CVA, and a limitation of asset-based lending agreements to assets or book debts pre-dating an insolvency event.

As a result of the consultation exercise, the government has decided to proceed with detailed development of the moratoria proposals over the coming months. However, the rescue finance proposals have been put on ice as the government has taken on board concerns expressed by many respondents about the need to balance the potential benefits of rescue finance proposals with the risks they may pose to the stability of institutional lending to businesses in general. Lenders and borrowers alike will welcome this result.

On a positive note, there was broad agreement from the respondents that the UK's restructuring and business rescue regime was standing up well to the challenges of the current economic climate and continued to compare well with its foreign counterparts.

The government highlighted a number of general observations from the responses, including:

" - recognition that although the statutory framework provided by insolvency legislation played an important role, informal processes were likely to be the preferred route for companies seeking to restructure because they stood the best chance of avoiding the stigma of insolvency, thereby preserving value in the business;

- scepticism about the benefits of importing new measures drawn from the experience of other countries with very different histories and systems (a point that CMS Cameron McKenna emphasized in its response); and

- wide support for the suggestion that changes should not be introduced which had the effect of artificially prolonging the life of companies which were not fundamentally viable, and which did not have competent management."

The report also states: "Whilst a minority argued that there was a strong case for the early introduction of reforms, others thought that given the current difficult economic circumstances, and the challenges faced in the financial sector amongst lending institutions, a more cautious approach should be adopted."

It had previously been rumoured that the new reforms were to be rushed through Parliament to be on the statute book by the end of 2009. The more cautious timetable expressed in today's response is to be welcomed, allowing proper consideration of detailed reforms and draft legislation so that pitfalls associated with rushed legislation can be avoided.

The links below will take you to the minister's written statement and a Summary of Responses. The Summary of Responses includes links to the full text of non-confidential responses (including CMS Cameron McKenna's).

Ministerial Statement

Encouraging Company Rescue Government

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 12/11/2009.