A sea change in UK restructuring?

The UK has long had ambitions to lead Europe in the World Bank table for ease of doing business; ambitions which perhaps take on greater significance as the post-Brexit era looms closer.

The insolvency regime is seen as an area where improvement is needed to ensure viable businesses can be saved. In practice, the UK is generally well regarded as a place to do restructurings and indeed the UK regime is widely accessed by distressed foreign companies. However, the UK’s key strengths are arguably more to do with the sophistication of the market, the creativity of professionals and the commercial pragmatism of the courts rather than the legal framework.

The UK Government has now announced landmark legal reforms which - for the most part – should significantly build on these strengths. Taken together, the Government’s proposals have the potential to move the UK regime closer to Chapter 11 in the US, which is widely regarded as a standard bearer for facilitating corporate turnarounds and avoiding terminal insolvencies.

Most radical is the new restructuring plan, which could be used to disenfranchise out-of-the-money junior creditors and shareholders without the need for a separate enforcement process (subject to various safeguards). There are also proposals to improve the breathing space afforded to companies which are undergoing a restructuring – a ban on the termination of supplies on grounds of insolvency alone, and a moratorium on enforcement actions and legal proceedings.

However, it is not all good news for distressed companies. Responding to criticism raised in the context of recent corporate failures, the Government intends to impose new duties on directors in the context of distressed M&A. The idea is to ensure that group level directors, in deciding whether to sell a distressed subsidiary, must consider the interests of the subsidiary as well as those of the selling group company. The danger is that these duties could make it more difficult for directors to pursue solvent options.

Overall there is much to be welcomed in these proposals, although there is still a lot of detail to be worked out and it remains to be seen when legislation will be brought forward. To find out more, click here to see our client briefing or listen to this Debtwire podcast.