This week we have attached an article that is relevant to many of our clients. The issue of keeping suppliers on board when re-structuring is an important one, however suppliers who “blackmail” clients during these times need to be deterred from doing so. Whether a new moratorium will be effective remains to be seen.
The Insolvency Service has confirmed that it will finally tackle termination clauses, under wider proposals to create a moratorium for firms which need debt restructuring.
Termination clauses, whereby suppliers can cancel vital contracts and therefore threaten a firm’s rescue plan, will be looked at as part of the Insolvency Service’s next stage of considering how to create a moratorium.
The Insolvency Service recently published responses from the profession to proposals for creating the moratorium.
The moratorium would provide viable businesses some breathing space, outside of a formal insolvency procedure, to restructure their debts successfully.
While publishing the industry’s response to the moratorium proposals, Edward Davey, the minister responsible for the insolvency regime, said: “There have been suggestions that a greater impact might be achieved by the restructuring moratorium were it also to tackle issues such as termination clauses.”
The minister also confirmed that responses suggested the moratorium could tackle “cram down” mechanisms, to reduce the power of small creditors to block proposals.
He added that there would be further talks with stakeholders to explore the level of support for addressing these issues and “the best way to do so.”
His comments follow a campaign led by the insolvency trade body R3 for a law change to stop suppliers threatening to cancel contracts, thereby preventing them from blackmailing insolvent firms which are trying to engineer a rescue plan.
R3 estimates that around 2,000 more businesses could be saved annually as a result of tackling these practices.
R3 president Frances Coulson said: “R3 has been campaigning vigorously on this issue as part of its Holding Rescue to Ransom campaign to stop suppliers taking unreasonable actions during an insolvency, thus sabotaging any potential rescue.”
The Insolvency Service, while providing a summary of responses to the moratorium plans, said the urgency of the case for introducing it was “not as great as previously thought.”
One of the key elements that will need to be refined is the powers and responsibility of who monitors the moratorium.
Both HSBC and Royal Bank of Scotland told the Insolvency Service that qualifying floating chargeholders should consent to the choice of monitor.
Views were split on whether to have an extra court hearing for the extension of a moratorium to cover the formal approval of a CVA proposal. The vast majority of respondents said the court should grant any extension of a moratorium.
Insolvency Service officials will now refine the moratorium proposals and consider in more detail the issues raised.
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