The move to a model similar to the USA’s chapter 11 process for UK businesses heading towards insolvency could have serious consequences for creditors, a trade body has warned.
The Chartered Institute of Credit Management (CICM) also believes that such a move, proposed recently by the government, could have a huge impact on cashflow for SMEs and thousands of small businesses within the supply chain.
While the new government proposals do not seek to support failing businesses without any hope of recovery, the ability to distinguish the ‘good’ from the ‘bad’ will be almost impossible to determine and the system open to abuse, the CICM warns.
The warning comes from Philip King, chief executive of the CICM in response to a review of the corporate insolvency framework being undertaken by Insolvency Service (IS).
A central plank of the proposals is the creation of a new moratorium, which will provide companies with “an opportunity to consider the best approach for rescuing the business whilst free from enforcement and legal action by creditors.
“The proposed moratorium would last for three months, with the possibility of an extension if needed.”
King said this shift towards a US-style Chapter 11 is fraught with danger, and that the government’s promise that “ a moratorium is not intended to allow failing businesses merely to buy time with creditors when in practice there is no realistic prospect of a rescue or compromise being reached…” may ring hollow to credit professionals.
“Viewed positively, this is a 90-day window for a company to work with a supervisor to turn the business around, save jobs, and secure a long-term future,” King added.
“Looked at another way, it is 90 days in which the less scrupulous can fritter away assets whilst being ‘untouchable’, to the serious detriment of creditors and the stability of the supply chain.”
The CICM chief is also concerned about the proposed extension of firms that can be defined as ‘essential’ suppliers: “Again while we understand the logic of preventing ‘ransom’ payments or changes to terms, the flip side is that a wider number of firms may later be caught out should the business ultimately fail.”
In the foreword to the consultation, business secretary Sajid Javid stated: “Whether it’s a kitchen-table start-up or massive multi-national, nobody ever wants to see a company in trouble. But, sometimes, insolvency is unavoidable.
“And should the worst happen to a business, we have a duty to give it the best possible chance to restructure its debts and return to profitability while protecting its employees and creditors.”
The consultation, available here, is open until July 8.