Conservatives propose new US-style company insolvency system

As the economy continues to slow down, it seems likely that more companies will be forced into administration or liquidation.

In a speech to the CBI, David Cameron outlined new Conservative proposals which would create a new fast-track judicial process for distressed companies, as an alternative to administration, based on the best aspects of the American "Chapter 11" system.

With the current UK system, once an insolvency practitioner is appointed to a distressed company, often the sole option is to shut the business down. This causes great problems for employees, directors, shareholders and lenders.

By adopting some of the aspects of the US system, troubled companies would be given breathing space to allow directors to formulate a plan to rescue or restructure the company. This process will be aimed at companies which are fundamentally good businesses, but whose capital structures no longer work in the current economic climate.

Three elements of proposed insolvency reforms

Automatic stay of enforcement

The proposals would introduce an automatic stay of enforcement of debt by financial creditors against the company while the management stays in place and attempts to negotiate a restructuring.

Non-financial creditors, i.e. suppliers and customers, would continue to be paid as the debts fall due, although they would be barred from terminating the contract solely on the grounds that the stay of enforcement is in place. This would allow the restructuring to go ahead without the threat either of insolvency proceedings, or of panicked customers and suppliers terminating their contracts.

The stay would be granted on a short term basis only (a few months), with the possibility of renewal. Where directors or managers had acted fraudulently or incompetently, creditors could require them to be replaced.

Priority funding for distressed companies.

The proposals would provide a priority status for any financier willing to provide ongoing funding for the company post-petition. Unlike in the UK, firms in Chapter 11 in the US are able to raise finance even after they have petitioned for bankruptcy. Lenders would lend them money in exchange for "super-priority" over other unsecured creditors.

Preventing unscrupulous creditors from vetoing desirable restructurings.

Once a company has proposed a restructuring plan, it would be required to submit it to the court, along with any supporting evidence. Any creditor group who disputes the plan would also be able to submit evidence. But once the court and a certain majority of creditors have approved the plan, it would bind all creditors and shareholders.

You can also read Bytestart's guide to Insolvency, Liquidation and Bankruptcy.