EHYA insolvency law reform proposals - Part 1
The European High Yield Association has announced refinements to its proposals to the Treasury on insolvency law reform.
Its original submission in April 2007 identified perceived shortcomings of the Enterprise Act reforms:
". . . the administration procedure has not been widely used in distressed situations and, more generally, statutory processes have been avoided.
We believe this occurs for the following reasons:
- despite the best efforts of those in government and elsewhere, administrations and Company Voluntary Arrangements (CVAs) are still perceived in the UK as reflecting corporate failure rather than rescue, which depresses confidence in the business and enterprise value;
- the ability of suppliers and customers to abandon their contracts with the distressed company if it makes a formal insolvency filing discourages filing, and where filing does ultimately occur, the ability to cancel contracts destroys the value of the business; and
- difficulties in obtaining funding in administration impair the company's ability to trade through the proceeding."
The first point above is uncontroversial; a direct remedy to the second by a simple extension of the administration and small CVA moratoria enjoys the support of the City of London Law Society (here), amongst others; and the third point refers to DIP funding (although some might argue that administration is inimical to the concept of debtor in posession).
Under a heading "Facilitating 'out-of-court' restructurings in the UK" then come three suggestions leading to "a call for a court supervised restructuring process":
- An all-encompassing stay on actions should be available to prevent value destruction as this is currently seen as an inevitable consequence of filing for insolvency in the UK. In other jurisdictions, notably the US and France, contractual termination provisions are not enforceable. The current stay deployed by English law does not go far enough in protecting failing businesses and allows customers and suppliers to terminate contractual relations just when their continued commitment is most crucial to the rescue.
- A framework should be created for fast judicial resolution of valuation disputes in restructurings, short of administration proceedings. This will enable practise and precedent to develop in restructuring valuations, thus providing stakeholders with relative certainty of outcome, whilst avoiding the value loss that arises through administration.
- Creditors or shareholders with no economic interest in the revalued enterprise should not be able to block restructurings or force full insolvency proceedings. A mechanism is needed to deal fully with 'out of the money' claims in restructurings.
It is these lightly sketched but far-reaching proposals that are now refined and extended - and will be considered in a subsequent post.
Date: 27th February, 2008
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